ESG is at the forefront of board agendas, regulatory agendas, enforcement agendas, and shareholder agendas. Yet, it’s very difficult to get useful information about what real-world steps to take to make progress, to measure results, and to validate the data needed to support disclosures. Join our lineup of experienced practitioners virtually on October 11th for candid, practical guidance – in these sessions:
– ESG Hot Topics: Forewarned is Forearmed
– Carbon Accounting Risks: Offsets, Disclosures & More
– ESG Litigation & Investigations: Are You at Risk?
– ESG’s Employment Law Landmines & How to Avoid Them
– DEI Trends in the Midst of Rapid Change
– Your ESG Team: Candid Board & Staffing Considerations
Question: Would the staff of the Division of Corporation Finance or the Division of Trading and Markets consider a future or forward contract that permits cash or physical settlement to be “intended to be physically settled” and therefore excluded from the definitions of “swap” and “security-based swap” if, at the time the parties enter into the contract, the underlying securities cannot be legally transferred, or the transfer of the underlying securities is restricted by contract?
Answer: No. In Release 33-9338, the Commission stated that the analysis as to whether sales of securities for deferred shipment or delivery are intended to be physically settled is a facts and circumstances determination. However, the Commission also stated in Release 33-9338 that the purchase and sale of the underlying securities occurs at the time when the parties enter into the contract, and that the determination of whether an instrument is a swap or security-based swap should be made prior to execution, but no later than when the parties offer to enter into the instrument. To the extent that at the time of sale the securities underlying a future or forward contract could not be legally transferred, or the transfer of the underlying securities would be restricted by contract, the staff of the Division of Corporation Finance and the Division of Trading and Markets would not consider the contract to be “intended to be physically settled” for purposes of the definitions of “swap” and “security-based swap.”
Accordingly, for the staff to conclude that a sale of securities for deferred shipment or delivery is intended to be physically settled, it is a necessary prerequisite that at the time the parties enter into the contract (i) the offer and sale of the underlying securities must be registered in compliance with Section 5 of the Securities Act or an exemption from registration must be available with respect to the underlying securities, and (ii) any applicable contractual provisions restricting the transfer of the underlying securities must be satisfied or otherwise waived. [June 9, 2022]
Swaps and derivatives were heavily scrutinized following the 2008 financial crisis and the Dodd-Frank Act. This article from the July-August 2013 issue of The Corporate Counsel newsletter describes some of the resulting requirements.
As I mentioned earlier this week, our October Conferences are approaching fast. For all of the reasons that I previously mentioned, you do not want to miss our Conferences this year. We will be launching the “1st Annual Practical ESG Conference,” which will provide critical insights at a time when ESG and climate change is top of mind for all of us. We will of course also have our annual “Proxy Disclosure & Executive Compensation” Conferences, which feature a packed agenda of important topics and outstanding speakers. Sadly, no puppets are slated to appear. Suffice it to say, with all that is going on right now at the SEC and in the executive compensation, corporate governance and ESG realms, you need to clear your calendar for the week of October 10th and sign up for these Conferences today.
Early Bird Rate – Act Today!: We are offering a special Early Bird Rate to attend these critical Conferences. Register by the end of today, Friday, June 10th to save on your registration fees. Sign up online, email sales@ccrcorp.com, or call 1-800-737-1271 to secure your spot at our critical 2022 Conferences.
Over the course of this year, I have been taking a walk down memory lane and looking back on 15 years of contributing to CCRcorp publications and programs. Today that journey is done, as I celebrate my 15-year anniversary this month. It has been quite a ride, and I look forward to many more years of sharing my knowledge and experience with you through these fine publications and programs.
I was very fortunate to have spent 13 of the past 15 years traveling around the country with my favorite conference companion, Marty Dunn. During that time, Marty and I were fixtures at the annual “Proxy Disclosure & Executive Compensation” Conferences, serving on substantive panels and doing our comedy routine. We had a great run!
To honor my favorite conference companion, I want to share with you this tribute to Marty that was shown at our 2020 “Proxy Disclosure & Executive Compensation” Conferences. It is a compilation of Marty in his element at the Conferences over the years, entertaining the audience and sharing his deep knowledge of the securities laws. I think my favorite clip from this tribute is Marty’s “PEP Talk” from one of the Conferences several years ago, which was a very personal reflection on trying to remember to celebrate the good things in life. Marty’s remarks serve as a great reminder to us all that life goes by way too fast, and once in a while we should take a moment to enjoy it and celebrate the good times. Today, I celebrate all of the good times that I had with Marty.
While my favorite conference companion is no longer with me at the conferences, I feel like Marty is still there in spirit. I often find myself thinking “what would Marty say?” when speaking at a conference, because he always seemed to find the right approach to deliver the content in an entertaining way. While it will never be the same without him, the best I can do is to continue to honor his legacy at all of our Conferences to come.
As this Cadwalader blog notes, this week the Senate Banking Committee unanimously approved the nominations of Jaime Lizárraga and Mark Uyeda for the open seats on the Securities and Exchange Commission. Approval by the Committee means that these nominees will now advance to the Senate for a confirmation vote, which has not yet been scheduled. The bipartisan support for the two candidates in the Senate Banking Committee bodes well for the upcoming confirmation vote.
SEC Chair Gary Gensler generated a lot of headlines with a speech that he gave at the Piper Sandler Global Exchange Conference on Wednesday. Gensler outlined the SEC’s work in six areas of the equity markets: (i) minimum pricing increment; (ii) national best bid and offer; (iii) disclosure of order execution quality; (iv) best execution; (v) order-by-order competition; and (vi) payment for order flow, exchange rebates, and related access fees.
One of the most controversial topics Gensler discussed was order-by-order competition, and on this issue Gensler noted that he has asked the Staff to make recommendations for the Commission’s consideration around how to enhance order-by-order competition, which could be through open and transparent auctions or other means, unless investors get midpoint or better prices. Changes in this area could compel brokers to route retail investors’ orders to buy or sell stocks into auctions, rather than to “wholesalers” as is often done today.
While it seems that the SEC is always looking at market structure regulations, the meme stock debacle from last year and other significant developments have once again put the spotlight on the market structure issues that Gensler highlighted in his speech.
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.
