Yesterday, the SEC announced that it is reopening the comment period again on the Dodd-Frank Act mandated compensation recovery rulemaking – an unusual second reopening after the SEC reopened the comment period on that rulemaking just last October. The proposed rules, which would direct the exchanges to adopt listing standards mandating the adoption of compensation recovery policies by listed companies, were originally proposed by the Commission in 2015.
The announcement and reopening release were accompanied by a memorandum prepared by DERA Staff. Specifically, the DERA memo discusses the increase in voluntary adoption of compensation recovery policies by issuers; provides estimates of the number of additional restatements that would trigger a compensation recovery analysis if the rules were included all required restatements made to correct an error in previously issued financial statements; and discusses some potential implications for the costs and benefits of the proposed rules.
One of the big issues raised by the last reopening was the possibility of including “little r” restatements as a trigger for clawing back compensation. In the memo, DERA estimates that that “little r” restatements may account for roughly three times as many restatements as “Big R” restatements in 2021, after excluding restatements by SPACs. The memo notes that the potential inclusion of “little r” restatements may increase both the benefits and the costs associated with the proposed rules.
The reopened comment period will run for 30 days following publication of the reopening release in the Federal Register.
Paul Munter, the SEC’s Acting Chief Accountant, issued a statement yesterday that focused on auditor independence. In the statement, Munter explains the auditor independence requirements in Rule 2-01 of Regulation S-X, discusses OCA’s approach to consultations on auditor independence issues, highlights some recurring issues and addresses the importance of auditors maintaining an ethical culture with respect to auditor independence.
The Statement offers some valuable insight into auditor independence issues. It is very important for companies and their counsel to understand the issues and the process, because companies have a lot at stake when an auditor independence issues arises. The nightmare scenario arising from an auditor independence issue is that a company may ultimately have to dismiss the auditor or the auditor must resign, and then the company will have to go out and engage a new auditor to re-audit the company’s financial statements. Munter notes that OCA engages in a dialogue with auditors, registrants and audit committees on auditor independence issues.
The recurring issues highlighted in the Statement include taking an inappropriate “checklist” approach to auditor independence, the proliferation of non-audit services and business relationships and the use of increasingly complex business arrangements and practice structures by accounting firms.
Over the past two months, some Senate Republicans have been circulating a discussion draft of the JOBS Act 4.0, which collects several legislative proposals geared toward facilitating capital formation. The discussion draft follows a request made in February 2021 by U.S. Senate Banking Committee Ranking Member Pat Toomey (R-PA) for legislative proposals to increase economic growth and job creation by facilitating capital formation. That request gathered 35 submissions with more than 150 legislative proposals from a wide variety of bipartisan organizations and stakeholders. The comment period on the discussion draft of JOBS Act 4.0 ended last Friday.
Title I of the draft legislation includes provisions that would encourage companies to be public, including modifying the emerging growth company definition to extend the benefits afforded to EGCs, repealing the conflict minerals, mine safety, resource extraction, and pay ratio disclosure requirements from the Dodd-Frank Act, permitting companies to choose semiannual rather than quarterly reporting, regulating advice from proxy advisory firms, adjusting the Rule 14a-8 submission thresholds and encouraging the creation of venture exchanges. Title II includes various legislative initiatives to improve the market for private capital, Title III addresses retail investor access to investment opportunities and Title IV includes provisions for improving regulatory oversight by the SEC.
It is hard to say whether this legislation will advance in Congress in some form, particularly given that many of the contemplated provisions are not likely to gain much support from Democrats. Even if the legislation does not make it far, it is at least encouraging to see that capital formation and the burdens on public companies are still topics that are being considered in Congress.
Last week, the UK government announced that it will “revamp the UK’s corporate reporting and audit regime through a new regulator, greater accountability for big business and by addressing the dominance of the Big Four audit firms.” Similar to the circumstances that led to the Sarbanes-Oxley Act in the United States 20 years ago this summer, the UK government is reacting to a series of recent corporate meltdowns. The announcement notes:
The Financial Reporting Council (FRC) will be replaced by a new, stronger regulator – the Audit, Reporting and Governance Authority (ARGA) – with tougher enforcement powers and funded by a levy on industry. Work on this has already begun, with the Business Secretary today acting to enable the regulator to ban failing auditors from reviewing large companies’ accounts.
For the first time, the largest private companies – not just those listed on the stock exchange – will come under the scope of the regulator, reflecting the impact they have on the wider economy.
Further, the UK government notes that in an effort “to curtail the unhealthy dominance of the ‘Big Four’ audit firms, FTSE350 companies will be required to conduct part of their audit with a challenger firm.” ARGA will also be given the the power to force big audit firms keep their audit and non-audit functions operationally separate.
A recent WSJ article notes that a growing number of shareholders are voting against the ratification of auditors at annual meetings. While the ratification of auditors is nonbinding, pushback against a company’s auditors can put companies in a difficult place when considering the engagement post-meeting. The article notes that “about 3.8% of investors voted against the ratification of S&P 500 companies’ auditors this year through May 19, almost triple the proportion of a decade earlier, according to research firm Audit Analytics, and up from 3.1% last year.”
While the numbers are pretty small and we have not seen any situations where there was majority support against the ratification of the auditors, any pushback above the 1% level could be seen as potentially problematic. The usual topics of audit quality and non-audit services seem to top the list of investor concerns.
Our Conferences always deliver expert guidance in a fast-moving, engaging format – plus invaluable course materials in the form of speaker “talking points” – so that you and your directors aren’t caught flat-footed by new expectations. You can also revisit all of the practical guidance with the on-demand archive that will be available until July 2023 at no extra cost.
I am pleased to announce that I will be interviewing Renee Jones, Director of the Division of Corporation Finance, who will discuss all of the initiatives that Corp Fin is working on that will affect your disclosures. As you will see from the agendas for the Conferences, we have an outstanding speaker lineup that also includes BlackRock’s Michelle Edkins, Wachtell’s Leo Strine and Sabastian Niles, WilmerHale’s Meredith Cross, Sidley’s Sonia Barros, Hogan Lovells’ Alan Dye and Martha Steinman, Gibson Dunn’s Beth Ising and Ron Mueller, and many more.
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On October 11, we will be launching our “1st Annual Practical ESG Conference.” I am really looking forward to this event, given how ESG is top of mind for boards of directors, management, in-house counsel and outside advisors. With ESG matters now integral to everything that we do today, you definitely do not want to miss this conference!
Our agenda covers employment law landmines, ESG litigation & investigations, DEI trends, carbon accounting risks, and other critical ESG topics. The registration fee for this Conference can be bundled together with the Proxy Disclosure & Executive Compensation Conferences for an additional discount – and is also subject to an Early Bird Rate that expires this Friday, June 10th.
Sign up online, email sales@ccrcorp.com, or call 1-800-737-1271 to ensure you’re able to face these rapidly evolving issues with confidence.
The SEC’s Investor Advisory Committee is scheduled to meet virtually on Thursday, with an agenda that focuses on several hot topics for investors. The session will include a panel discussion regarding the accounting of non-traditional financial information, a panel discussion regarding climate disclosure, a discussion of a recommendation on protecting older investors and a discussion of a recommendation on funding investor advocacy clinics.
The SEC recently announced several new members of the Investor Advisory Committee:
One of the last vestiges of the paper filing world is (mostly) disappearing. On Friday, the SEC adopted several amendments to the rules governing electronic filing and the use of structured data that were proposed in December 2020 and November 2021. Among those changes is a requirement that Form 144 be filed electronically, eliminating the paper filing option, except in the case of non-reporting issuers.
Form 144 must be filed with the SEC by an affiliate of the issuer as a notice of the proposed sale of securities in reliance on Rule 144, when the amount to be sold under Rule 144 by the affiliate during any three-month period exceeds 5,000 shares or units or has an aggregate sales price in excess of $50,000. A person filing a Form 144 must have a bona fide intention to sell the securities referred to in the form within a reasonable time after the filing of the Form 144.
In practice, Form 144s are often filed by brokerage firms on behalf of their clients who are affiliates of a public company that are selling securities under Rule 144, so the shift to mandatory electronic filing will likely require some adjustments to their processes. As noted in Chair Gensler’s statement about the rule changes, there will be a relatively long lead time in implementing the changes:
Specifically, the requirement to file Form 144 electronically on EDGAR will commence six months from the date of publication in the Federal Register of the Commission release that adopts the version of the EDGAR Filer Manual addressing updates to Form 144. We currently expect that the Commission would consider adoption of the relevant version of the EDGAR Filer Manual addressing updates to Form 144 in September 2022, and publication in the Federal Register would occur thereafter. We believe this extended transition period will provide sufficient time for broker-dealers to transition clients for whom they prepare and submit Form 144 filings, including time for those clients who do not currently have access to EDGAR to apply for EDGAR access.
Based on past Form 144 filings, the SEC estimates that approximately 12,250 filers would be required to switch to electronic filings on EDGAR, so there are still those out there who opt to submit paper filings.
The SEC noted in the adopting release that it was not taking any action concerning the remaining proposals in the Rule 144 proposing release from December 2020, including the proposal to eliminate the Form 144 filing requirement for the sale of securities of non-reporting issuers and thus necessitating the paper filing carve-out for those situation where the non-reporting issuer does not have an EDGAR page. While the adopting release for the Form 144 amendments notes that the SEC will provide an online fillable form to facilitate filings, there is no discussion of whether this online fillable form will be integrated with the Form 4 online fillable form, as was discussed in the December 2020 proposing release and as we covered in detail in the March-April 2021 issue of The Corporate Counsel.
One interpretive issue that the mandated electronic filing of Form 144 raises is that the Staff has essentially applied a “mailbox rule” to Form 144 in determining whether the Form 144 has been filed “concurrently” with either the placing of a sale order with a broker or the execution of the sale directly with a market maker (see Securities Act Rules Compliance & Disclosure Interpretation Question 136.09). It is unclear how this concept would be applied in an EDGAR world, where most filings transmitted after 5:30 pm eastern time are deemed by the system to be “filed” on the next business day.
The same adopting release that brings us mandated electronic filing of Form 144 also will require the electronic filing of the “glossy” annual report required under Exchange Act Rules 14a-3 and 14c-3. The glossy annual report that is sent to shareholders is required “furnished” for the information of the SEC, which for many years required issuers to mail the glossy annual report to the Commission.
I can recall that when I started in Corp Fin in the mid-1990s, we were inundated with seven copies of each public company’s glossy annual report. There were stacks of the annual reports lining the halls and file rooms because nobody really knew what to do with them. Someone came up with the idea of turning the covers of some annual reports into art work, and I recall them being hung on the wall of the large Corp Fin conference room at 450 5th Street.
The glossy annual report always had a sort of “square peg, round hole” problem with EDGAR because, by its very nature, the report was full of graphic and image material that old-school EDGAR could not handle. The shift to mandatory HTML for EDGAR filings back in 2017 paved the way for EDGAR to now handle more complicated documents, like the glossy annual report.
Back in 2016, the Corp Fin Staff took the perfectly reasonable approach of indicating that it would not object if a company posts an electronic version of its glossy annual report to its corporate website by the due date in lieu of mailing paper copies or submitting it on EDGAR if the report remains accessible for at least one year after posting. This approach seemed to work perfectly fine from my perspective, because as we all know the Staff has computers and they can go to a company’s website and peruse the glossy annual report just as easily as they could access it using EDGAR.
Unfortunately, it seems that the Staff’s interpretive slight of hand was not good enough for the Commission, as it will now require submission of the glossy annual report via EDGAR, while rescinding the Staff’s 2016 guidance. The new requirement will be effective six months after the effective date of these amendments, so just in time for the 2023 proxy season.
