As you face down the new Item 402(v) disclosure requirements for your 2023 proxy statement, join us tomorrow on CompensationStandards.com for a 3-hour special session, “Tackling Your Pay Vs. Performance Disclosures.” This is a 3-part, 3-hour special session that will cover:
1. Navigating Interpretive Issues – we are already getting lots of questions in our Q&A forum about how to apply the new rules, and we know that new issues are arising daily. Hear practitioner guidance and any SEC updates that you need to know – from Sidley’s Sonia Barros, Compensia’s Mark Borges, WilmerHale’s Meredith Cross, EY’s Mark Kronforst, and Morrison Foerster’s Dave Lynn – including what you’ll need to tell your board and executives.
2. Big Picture Impact – how will the disclosure mandate affect say-on-pay models and shareholder engagements? This session will provide context and pointers for bolstering executive compensation & compensation committee support during proxy season – featuring ISS Corporate Solutions’ Jun Frank, Morrison Foerster’s Dave Lynn, and SGP’s Rob Main.
3. Key Learnings From Our Sample – attendees of this event will get first access to our sample disclosures, prepared by Mark Borges and Dave Lynn. Hear “lessons learned” from their drafting effort that will guide you through your own process and jump start your disclosures. Mark & Dave will be joined by Gibson Dunn’s Ron Mueller and Fenwick’s Liz Gartland for this discussion.
If you’ve signed up to access this event, you’ll access the video stream tomorrow by clicking through where indicated on the event page and entering the email address that you used to register. If you have any questions, please email our Event Manager, Victoria Newton, at vnewton@ccrcorp.com.
This event is available at a reduced rate of only $295 for anyone who is already a CompensationStandards.com member or who registered for the live or on-demand version of our “Proxy Disclosure & 19th Annual Executive Compensation Conferences.” You can still register online today for the “special session” and get the CompensationStandards.com member rate. Beginning tonight, you can register by emailing sales@ccrcorp.com, up until 12:30 pm Eastern tomorrow.
For non-members, the cost to attend is $595. You can register online if you sign up before 4pm Eastern today (after that, email sales@ccrcorp.com… you can sign up as late as 12:30 pm Eastern tomorrow).
If you’re not yet a member, try a no-risk trial now. We’ll be continuing to add practical guidance on this topic to CompensationStandards.com as disclosure hurdles & consequences come to light – such as this great podcast that Dave already taped with Gibson Dunn’s Ron Mueller about “first impressions” of the rule, emerging interpretive issues, possible pitfalls, and more.
All that to say, a CompensationStandards.com membership be an essential ongoing resource if you are involved with pay vs. performance. Plus, our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. Register for the “special session” here if you are a non-member and didn’t attend our Conference.
As a bonus, you also can still get the discounted special session rate if you sign up for on-demand access to the Conference archives, which you can do by emailing sales@ccrcorp.com. The practical guidance that was provided at these events will help you navigate shareholder activism, executive compensation, ESG disclosures, compensation committee responsibilities, and more in 2023.
Snow is in the forecast here this week, which is a reminder that annual report season will soon be upon us – and it’s time to start assessing whether you need to update your risk factors. This 14-page memo from White & Case gives color on 10 macro developments that may affect your risk factors this year:
1. Market Conditions
2. Inflation & Interest Rates
3. Covid-19 Impact
4. ESG Issues
5. Ukraine Conflict
6. Cybersecurity
7. Supply Chain Disruptions
8. Human Capital & Labor Issues
9. Regulatory Developments (e.g., the Inflation Reduction Act)
10. Trade Sanctions
The memo goes on to give 4 important drafting reminders – e.g., avoiding hypotheticals. For additional practical tips on that front, see our article from the January-February 2018 issue of The Corporate Counsel newsletter on “Best Practices for Drafting Your Risk Factors” – and our “Risk Factors Disclosure” Handbook. Also see the memos we’ve posted on “Risk Trends” in our “Risk Management” Practice Area. If you don’t already have access to these resources, email sales@ccrcorp.com.
Korn Ferry & Gibson Dunn recently published this survey of board evaluation practices in the S&P 500, based on public disclosures. Anthony Goodman, who leads Korn Ferry’s Board Effectiveness Practice, shared these highlights from the 440 companies that provided details in their proxy statements:
– 60% are evaluating individual directors, not just the board or its committees
– 53% are using interviews as part of the process, rather than relying purely on surveys
– 32% use a third party evaluator either annually or periodically
While individual director evaluations appear to be getting more common, Anthony notes that it’s rare for them to yield constructive feedback for directors. Using independent evaluators to conduct interviews can help overcome that challenge – and make it more likely that the board & individuals receive candid, nuanced & actionable feedback.
Right now, the survey concludes that the lack of feedback could be hampering the usefulness of board evaluations: only 23% of companies disclosed that they made changes as a result of the evaluation.
That seems low, but it’s important to keep in mind that there are a variety of reasons why companies might not spell out changes that resulted from the evaluation process – so a lack of disclosure doesn’t necessarily prove that changes aren’t happening. Yet, there are ways to make the board’s efforts at “continuous improvement” more transparent. Anthony suggests describing:
– An overview of the process
– Key takeaways
– Updates on the key takeaways from prior year evaluations
As outlined in this Cozen O’Connor memo, the Fifth Circuit heard oral arguments in late August for the lawsuit that challenges the SEC’s approval of Nasdaq’s board diversity rule, which we’ve blogged about a few times. While we await the outcome of that case, Nasdaq has also filed notice that it is extending its program to provide eligible companies with complimentary board recruiting services – and the updated terms for this service are immediately effective. Here’s more detail:
Nasdaq is proposing to extend its program, described in IM-5900-9, providing Eligible Companies (as defined in IM-5900-9) with complimentary board recruiting services. The rule currently requires Eligible Companies to request services by December 1, 2022; as revised that deadline would be extended to December 1, 2023. Nasdaq also proposes to make clarifying changes to reflect the approval of Rule 5605(f).
Under Nasdaq Rule 5605(f)(7), the earliest that a Nasdaq listed company will need to explain why it does not have at least one Diverse director (as defined in Nasdaq Rule 5605(f)(1)) is August 6, 2023; and the earliest it will have to explain why it does not have at least two Diverse directors is August 6, 2025.
Earlier this fall, John blogged that the Division of Enforcement had gotten something it has coveted for quite some time – an insider trading case involving senior executives allegedly misusing a Rule 10b5-1 plan. Bloomberg reported last week that the SEC is looking to add to that tally, using data analytics. Here’s an excerpt:
The Justice Department and Securities and Exchange Commission are using computer algorithms in a sweeping examination of preplanned equity sales by C-suite officials, according to people familiar with the matter. Investigators are concerned that some people are manipulating the stock-sale programs, which are intended to shield executives from misconduct allegations by letting them schedule transactions in advance and on preset dates.
The article says that the agencies are preparing to bring “multiple cases,” following information requests that were made earlier this year, and that at least one company has disclosed that it received subpoenas about a former executive’s trading activity under a Rule 10b5-1 plan.
If the SEC successfully uncovers violations, it may use those findings to refine & support final rules that restrict the use of prearranged trading plans, as proposed last year. The securities law community has expressed concern that, as proposed, the rules would be a departure from insider trading law and should be targeted more closely to address demonstrable abuses. If the investigations come up empty, the Commission may still adopt the rules using data it has already relied on – and may also keep looking for violations.
Insider trading is just one of the many topics that the SEC’s Enforcement Division is focused on right now, according to a PLI speech last week from SEC Chair Gary Gensler. He noted that all of this activity has added up to massive fines & penalties:
In the fiscal year that just ended on September 30, 2022, we filed more than 700 actions. We obtained judgments and orders totaling $6.4 billion, including $4 billion in civil penalties.
This Reuters article says that’s a record level of collections for the agency. Gensler also had a message for securities lawyers:
You also have a role as gatekeepers in upholding the law.
For instance, today’s event takes place in the State of New York, where the state courts describe the role of attorney as a position of duty, trust, and authority, conferred by governmental authority for a public purpose.
We want you to succeed in meeting these standards of rectitude.
When lawyers—or other gatekeepers, like auditors and underwriters—breach their positions of trust and violate the securities laws, we will not hesitate to take action.
During the recent fiscal year, for example, we charged an attorney for his role in an unregistered, fraudulent securities offering, and we suspended him from practicing before the SEC as an attorney.
We also are litigating an action against an attorney for his alleged role in a would-be pump-and-dump scheme. In addition to other remedies, we seek an injunction to prohibit him from providing legal services regarding securities offers or sales.
These examples may be just a couple of bad apples, but they serve as a reminder to “Just Say No” to any sketchy propositions. Chair Gensler also noted that the SEC has been pursuing auditors and underwriters, in some of the largest and/or first actions of their kind.
Late last week – one day after Vanguard announced a pilot program for retail investors in certain index funds to have a greater say in proxy voting – BlackRock issued this update on its “Voting Choice” program that was launched last year and expanded this summer.
The update – which was accompanied by a letter to clients & corporate CEOs from BlackRock CEO Larry Fink – says that about 25% of eligible assets are participating. That’s consistent with the participation rate that I blogged about in June. Here’s what else is new:
1. Extension of the voting policies clients can choose from: Participating clients in global SMAs and eligible pooled vehicles can now select one of seven Glass Lewis proxy voting policies, including an upcoming global policy, the Glass Lewis Governance-Focused Policy. These options are in addition to seven Institutional Shareholder Services (ISS) policies that have been available since the launch of BlackRock Voting Choice on January 1, 2022. This broader array of policy choices enables clients to choose a policy that more closely aligns with their investment views and preferences.
2. An expansion of investment strategies eligible: In addition to certain institutional pooled funds tracking index equity strategies, certain institutional pooled funds that implement Systematic Active Equity (SAE) strategies are now also eligible for BlackRock Voting Choice. Rather than tracking an index, SAE investment strategies use a forecasting model and an optimization process to select stocks. The expansion of BlackRock Voting Choice to institutional pooled funds using these SAE investment strategies includes eligible clients representing $90 billion as of September 30, 2022, in assets under management in both pooled funds and previously eligible SMAs.
3. Aiming to enable investors in select UK mutual funds to exercise choice in the upcoming 2023 proxy voting season: BlackRock has agreed with Proxymity, a digital investor communications platform, to work together on building a solution that aims to offer pass-through technology to enable investors to exercise choice in how their portion of eligible shareholder votes are cast for the upcoming 2023 proxy voting season. BlackRock and Proxymity will share further details on the collaborative efforts in the coming months.
4. An update on continued client adoption; demonstrating desire for expanded proxy voting choices: Since May of this year, the number of index equity clients newly committed to BlackRock Voting Choice has more than doubled. Despite market volatility, newly committed index equity AUM has increased more than 30% in the past six months to $157 billion as of September 30, 2022, from $120 billion as of March 31, 2022. In total, including SAE, BlackRock equity clients have committed $472 billion as of September 30, 2022 – or a quarter of eligible assets ($1.8 trillion) – to voting their own preferences through BlackRock Voting Choice.
The jury is still out on what this shift in the direction of “pass-through voting” could mean for companies, other than making voting outcomes less predictable and investor influence more dispersed. Over time, we’ll get a better sense for whether this raises the importance of certain proxy advisor policies and whether it calms concerns that the world’s largest asset managers have too much sway.
Rule 15c2-11 governs when dealers are permitted to publish quotations for securities. In September 2020, the SEC amended the rule to prohibit them from publishing quotes when current information about the issuer isn’t publicly available. In 2021, the Staff clarified its position that Rule 15c2-11 applies to fixed income as well as equity securities but provided limited-time relief for fixed income securities that were offered pursuant to Rule 144A. This Ropes & Gray memo says that this relief will expire on January 3, 2023, and that means market practice for private Rule 144A issuers will need to change:
While Rule 144A only requires issuers to make financial information available upon request to holders or prospective purchasers of their securities, beginning on January 4th dealers will no longer be able to publish quotations for debt securities in quotation mediums unless financial statements for and certain other information about the issuer are publicly available (for example, on the issuer’s website). Accordingly, issuers may be required to agree to publish financial statements outside of password-protected datarooms currently available only to bondholders and prospective purchasers so that dealers can continue to facilitate a liquid 144A market.
The memo says that various trade groups are lobbying the SEC and Congress to rescind this requirement, but unless action is taken prior to January 3rd, the market will have to deal with this new reality – which may result in a lot more attention being paid to reporting covenants in Rule 144A deals.
Just a few years ago, the audit market for SPACs was dominated by two non-Big 4 firms, Withum & Marcum (see my 3rd blog here). Boy, have things changed. This Bloomberg Tax article says the Big 4 now rule the roost:
When SPACs became Wall Street’s favorite way to take companies public, the Big Four accounting firms steered clear, leaving audit work to smaller outfits churning out hundreds of fast, cheap audits of the blank-check vehicles.
For those freshly minted public companies that emerged from the boom, it’s been a different story. The largest firms — Deloitte & Touche LLP, PricewaterhouseCoopers LLP, KPMG LLP, Ernst & Young LLP and their affiliates— audit almost two-thirds of the approximately 330 companies that went public through special purpose acquisition companies since 2020 and are still trading today, according to Bloomberg data. EY and its affiliates lead the Big Four in the de-SPAC client market, with 65 companies that went public via SPAC on its roster.
The article explains why the Big 4 have jumped into the fray, but here’s my TL;DR version. Anyway, while the auditors found the streets paved with SPAC gold for a couple of years, the article notes that they now find themselves with a lot of problematic clients on their hands.
In light of the findings laid out in the Bloomberg Tax article, I thought this Audit Analytics blog on the 3rd Quarter IPO market was kind of interesting. In addition, to cataloguing the overall grim IPO environment, the blog says that many of the deals that did get done didn’t involve Big 4 auditors:
Auditor Market Share – All IPOs. Twenty different firms audited the 39 companies that completed IPOs during Q3 2022. Friedman led with seven IPO clients. BF Borgers and Marcum followed with four clients each. Friedman and Marcum merged as of September 1, 2022.
Auditor Market Share – Excluding SPACs. When excluding SPACs, there were 20 firms that audited 31 companies. Friedman led with five clients. BF Borgers, Deloitte, Ziv Haft, and Grassi & Co were the only other firms with multiple IPO clients.
If it’s any consolation to the Big 4, the only unicorn to go public during the quarter, Corebridge Financial, was audited by PwC.
