TheCorporateCounsel.net

October 19, 2021

Check out the Deep Dive with Dave Podcast!

In the latest Deep Dive with Dave podcast, John and I talk about the topics we cover in the September-October 2021 issue of The Corporate Counsel. I take us on a test drive of the SEC’s many new testing-the-waters provisions and John covers the Staff’s latest comments on non-GAAP financial measures.

– Dave Lynn

October 18, 2021

That’s a Wrap! Our 2021 Proxy Disclosure & Executive Compensation Conferences

It was great to be a part of our 2021 conferences, which took place Wednesday through Friday of last week. We had a great lineup of speakers, and I really appreciated the opportunity to speak with Renee Jones, the Director of the Division of Corporation Finance, about all of the projects going on in Corp Fin at the moment. If you missed the conferences, be sure to sign up to check out the archives so you can be ready of the upcoming annual reporting and proxy season.

I would like to thank Liz for all her efforts organizing and hosting the conferences, the talented CCRcorp staff who made this great event happen and the Markeys team who made the virtual event run so smoothly, as well as all of the members who participated in the conference. I am already looking forward to next year’s event!

– Dave Lynn

October 18, 2021

SEC Reopens Comment Period on Clawback Rule Proposal

One of the topics that I discussed on the SEC All Stars panel at Friday’s 18th Annual Executive Compensation Conference was the SEC’s reopening of the comment period on the Dodd-Frank Act mandated clawback rule proposal. The two big issues from the reopening release that I discussed at the conference were the Commission’s questions about little “r” restatements and the determination of when the three-year lookback period runs.

The Commission acknowledges in the release that the proposed definition of an accounting restatement would not require a recovery where an issuer’s previously issued financial statements are required to be restated in order to correct errors that were not material to those previously issued financial statements, but would result in a material misstatement if: (i) the errors were left uncorrected in the current report; or (ii) the error correction was recognized in the current period. One of the commenters in the original comment period noted that such “little ‘r’ restatements” would allow an issuer to potentially avoid application of the clawback provisions. So now the Commission is asking whether “an accounting restatement due to material noncompliance” should include all required restatements to correct an error in previously issued financial statements – including little “r” restatements – and solicits comment on that approach.

Also, for purposes of triggering the three-year lookback period, the proposed rules would establish the date on which an issuer is required to prepare an accounting restatement as the earlier of:

  • the date the issuer’s board of directors, a committee of the board of directors, or the officer or officers of the issuer authorized to take such action if board action is not required, concludes, or reasonably should have concluded, that the issuer’s previously issued financial statements contain a material error; or
  • the date a court, regulator or other legally authorized body directs the issuer to restate its previously issued financial statements to correct a material error.

Some commenters expressed concern that the “reasonably should have concluded” standard adds unnecessary uncertainty to the determination. The Commission now asks about removing that “reasonably should have concluded” standard and possibly changing the formulation as to the timing of the trigger for the three-year lookback.

All indications are that the Commission hopes to act on this rulemaking in the near term. The comment period is open for 30 days from publication of the release in the Federal Register.

– Dave Lynn

October 18, 2021

DOL Proposes Rule Allowing ERISA Fiduciaries to Consider ESG Factors

Last week, the Department of Labor released a proposed rule that would amend the DOL’s investment duties regulation with respect to the consideration of ESG factors in the selection of investments for retirement plans that are subject to the ERISA. The proposal also would amend the proxy voting rules under ERISA. As this Sidley memo notes:

The Proposal represents a significant change from the prior administration’s fiduciary rule relating to ESG investing, which is now subject to a nonenforcement policy by the DOL.” The current rule requires that plan fiduciaries consider only “pecuniary factors” in making investment decisions, and does not reference anything regarding ESG factors. The new DOL proposal would remove the concept of “pecuniary factors” and states that “a prudent fiduciary may consider any factor in the evaluation of an investment or investment course of action that, depending on the facts and circumstances, is material to the risk-return analysis.

The proposal includes several ESG factors as examples of the facts and circumstances that can be considered if material to the risk-return analysis. The DOL proposal would also make a number of changes to the proxy voting and exercise of shareholder rights provisions applicable to ERISA fiduciaries. Comments are due by December 13, 2021.

– Dave Lynn

October 15, 2021

Today: “18th Annual Executive Compensation Conference”

Today is our “18th Annual Executive Compensation Conference” – Wednesday & Thursday were our “Proxy Disclosure Conference.” Both conferences are paired together and they’ll also be archived for attendees until next August. If you missed the Conferences this week, but want to purchase access to the archives, we’ll have a link available soon on this page to do that. Here’s more info for people who are attending:

How to Attend: Follow the agenda tab to enter sessions and add them to your calendar. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here’s today’s agenda. If you have any questions about accessing the conference, please contact Victoria Newton at VNewton@CCRcorp.com.

How to Watch Archives: Members of TheCorporateCounsel.net or CompensationStandards.com who have registered for the Conferences will be able to access the conference archives on these sites using their existing login credentials beginning about a week after the event, and unedited transcripts will be available to these members on TheCorporateCounsel.net and CompensationStandards.com beginning about 2-3 weeks after the event. If you’ve registered for the conferences through CCRcorp but are not a member, we will send login information to access the conference footage and transcripts on TheCorporateCounsel.net or CompensationStandards.com.

How to Earn CLE Online: Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.

John Jenkins

October 15, 2021

BlackRock’s Voting Change: Not Such a Big Deal?

Liz blogged last week about BlackRock’s decision to give certain institutional investors the option to vote the shares they hold through BlackRock’s index funds. She also addressed what BlackRock’s decision might mean for public companies. This “Transactional Delights” blog echoes some of Liz’s thoughts, but also raises the possibility that this change may not end up being that big of a deal. Here’s an excerpt:

So, what are some of the potential outcomes of BlackRock allowing its clients invested in its index funds a voting choice? My initial thought is that the cost of proxy contests could go up if there are more beneficial owners to solicit votes for because it might be more difficult from a collective action standpoint to line up all the votes you might need, whether its for a dissident slate of nominees to the board (shareholder activism), or ESG proposals regarding the company in question. Two questions that come to my mind when thinking about this are:

– A lot of the substance behind the ESG hype comes in the form of ESG shareholder proposals and BlackRock has been pretty bullish on embracing ESG principles, what does this portend for the future with BlackRock giving up its voting power?

– How soon after institutional will retail get this ability?

Putting those questions slightly to the side, why might this not be as big of a deal as I think it is? Well, I’m not sure how you can entirely underplay 40% of $4.8 trillion, but, one practical point and a key question to all of this is – do BlackRock’s institutional investors actually want the vote? And furthermore, does retail (no announcement made yet on this) want the vote?

The blog says that the willingness of so many institutional investors to rely on proxy advisors like ISS means that many aren’t likely to be real keen on voting the shares held in BlackRock’s index funds. While the blog doesn’t answer the question that it poses about whether retail investors want the vote, the traditional apathy of retail investors suggests that they probably aren’t all that interested either.  Of course, the blog also notes that given the size of BlackRock’s holdings, the ability of its investors to vote their shares will likely be an important strategic consideration in many proxy contests..

My guess is that BlackRock probably has reached the same conclusion about the interest of most of its index fund investors in pass-through voting. But regardless of whether index fund investors actually vote their shares, their ability to do so gives BlackRock something to point to in response to growing concerns about just how much of the world’s corporate equity it owns, and may be part of its strategy to fend off regulatory actions intended to address those concerns.

By the way, this CLS blog points out some interesting fine print in BlackRock’s announcement:

Did BlackRock bury the lede? Consider the following fine print: “BlackRock will determine eligibility criteria under this program based upon . . . financial considerations, including the decision to lend securities.” In an era of rock-bottom management fees, lending shares to short sellers is an important source of revenue for the fund industry. The message is clear: For BlackRock, shareholder empowerment only goes so far. When the price is right, BlackRock will trade away its clients’ votes for short sellers’ cash.

Check out Liz’s recent post on our “Proxy Season Blog” for more on this aspect of BlackRock’s voting policy change.

John Jenkins

October 15, 2021

Financial Reporting: So, You Bought Some Crypto – How Do You Account for It?

Digital assets are becoming an increasingly popular investment for public companies.  But once you buy them, you need to account for them properly – and this FEI Daily blog says that involves fitting a square peg into a round hole:

Since there are no Generally Accepted Accounting Principles (GAAP) in the United States specific to digital assets, a company that invests in digital assets may end up applying accounting guidance that was not written with digital assets in mind. Many popular digital assets, including Bitcoin, Bitcoin Cash, Litecoin and Ethereum, inherently provide no contractual rights to cash or other assets to the holder. Unlike investment companies or broker-dealers that qualify for specialized accounting, operating companies transacting for the first time need to apply other standards to account for digital asset investments. Cryptocurrencies such as Bitcoin would typically be accounted for as indefinite-lived intangible assets under U.S. GAAP.

Often, rather than taking direct responsibility for securing private keys associated with digital assets, companies may involve a third party, such as an exchange or custodian. Involvements with third parties require an additional level of analysis to understand whether a company owns the digital assets (and they are just being custodied by the third party on the company’s behalf) or whether instead the company has a contractual receivable or other right from the third party that is tied to the value of a digital asset but does not represent current ownership of the digital asset itself. This analysis should involve an evaluation of the contractual agreement(s) between the company and the third party, as well as relevant laws, regulations and legal precedents. The form of the interest can impact the accounting.

Because of the complexities associated with these investments, the blog recommends companies pay close attention to the corporate governance, accounting and internal controls issues associated with them, and offers some specific suggestions on each of these topics.

Since the existing rules are so opaque, it isn’t surprising that the WSJ recently reported that companies are asking FASB to step in and provide additional clarity on how to account for digital assets.

John Jenkins

October 14, 2021

Filing Fees: SEC Adopts Rules Modernizing Fee Payment Process

Yesterday, the SEC announced that it had adopted rules designed to modernize the filing fee process. Those fees are required for registered offerings, tender offers, and M&A filings.  Here’s the surprisingly lengthy 432-page adopting release, and here’s the SEC’s one-page fact sheet. (Guess which one I read.)  This excerpt from the SEC’s press release summarizes the changes:

The amendments revise most fee-bearing forms, schedules, and related rules to require companies and funds to include all required information for filing fee calculation in a structured format. The amendments also add new options for Automated Clearing House (ACH) and debit and credit card payment of filing fees and eliminate infrequently used options for filing fee payment via paper checks and money orders. The amendments are intended to improve filing fee preparation and payment processing by facilitating both enhanced validation through filing fee structuring and lower-cost, easily routable payments through the ACH payment option.

That “structured format” for the filing fee calculation that the press release refers to will take the form of a separate IXBRL exhibit to be included with the filings.  As SEC Chair Gary Gensler noted in his supporting statement, the transition to a structured data format will enable the SEC to automatically detect errors and calculate fee amounts.

It’s worth noting that this rule was adopted by a unanimous, 5-0 vote – which is something we haven’t seen in a long time. Anyway, the new rules become effective on January 31, 2022, and companies will no longer be permitted to pay filing fees via checks and money orders effective on May 31, 2022.

John Jenkins

October 14, 2021

Today: “Proxy Disclosure Conference – Part 2”

Today is the second day of our “Proxy Disclosure Conference” – tomorrow is our “18th Annual Executive Compensation Conference.” Here’s more info:

How to Attend: Once you log in to the Conference Platform, follow the agenda tab to enter sessions and add them to your calendar. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here’s today’s agenda. If you have any questions about accessing the conference, please contact Victoria Newton at VNewton@CCRcorp.com.

How to View Archives & Transcripts: Members of TheCorporateCounsel.net or CompensationStandards.com who have registered for the Conferences will be able to access the conference archives on these sites using their existing login credentials beginning about a week after the event, and unedited transcripts will be available to these members on TheCorporateCounsel.net and CompensationStandards.com beginning about 2-3 weeks after the event. If you’ve registered for the conferences through CCRcorp but are not a member, we will send login information to access the conference footage and transcripts on TheCorporateCounsel.net or CompensationStandards.com.

If you registered for the conferences through NASPP, you will receive access to the video archives from NASPP.

How to Earn CLE Online: Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.

John Jenkins

October 14, 2021

SEC Enforcement: Tougher Penalties & Admissions On The Way?

Over on “Radical Compliance,” Matt Kelly recently blogged about Gurbir Grewal’s first speech as Director of the SEC’s Division of Enforcement, and he says Grewal signaled that the agency will take a harder line on penalties under his leadership:

The SEC’s new director of enforcement delivered his first speech this week, where he outlined a more aggressive use of monetary penalties to deter corporate misconduct and how the SEC will evaluate cooperation and other factors while deciding how large of a penalty to impose.

The speech came from Gurbir Grewal, who took over as head of the Enforcement Division at the end of June. He spoke Thursday at a forum hosted by the Practising Law Institute that nominally was about broker-dealer issues, but Grewal’s remarks on the SEC’s penalty policy are worth any compliance professional’s attention.

The bottom line: Grewal, like other senior officials at the agency, wants to see penalties actually deter corporate misconduct — which could well mean larger penalties than we’ve seen before. “As we evaluate relevant penalty factors, we will also be closely assessing whether prior penalties have been sufficient to generally deter the misconduct at issue,” Grewal said. “Where they have not been, you can expect to see us seek larger penalties, both in settlement negotiations and, if necessary, in litigation.”

The blog points out that Grewal’s comments echo those of Commissioner Caroline Crenshaw, who earlier this year called for the SEC to change its approach to monetary penalties in enforcement proceedings. Grewal also spoke at “The SEC Speaks” conference earlier this week, where he mostly said the same things that every newly appointed Director of Enforcement says. However, this part of his speech jumped out at me:

When it comes to accountability, few things rival the magnitude of wrongdoers admitting that they broke the law, and so, in an era of diminished trust, we will, in appropriate circumstances, be requiring admissions in cases where heightened accountability and acceptance of responsibility are in the public interest. Admissions, given their attention-getting nature, also serve as a clarion call to other market participants to stamp out and self-report the misconduct to the extent it is occurring in their firm.

That suggests that the SEC may seek admissions of misconduct as part of settlements more frequently than in the past. It will be interesting to see how that plays out, because I think that some companies who’d be willing to throw an officer or two under the bus as part of a “neither admit nor deny” settlement may be more inclined to force the SEC to litigate if admissions are going to be required.

Speaking of enforcement, we’ve blogged several times about the SEC’s EPS Initiative – here’s a recent one from Liz – and now, the WSJ has taken notice as well. Sometimes, it’s hard to believe this blog is free, isn’t it?

John Jenkins