Earlier this month, the SEC extended the deadline for its controversial climate change disclosure proposal. Thousands of comments have been received so far. While most of the late-landing letters have come from individuals, there have also been thoughtful comments along the way that examine the SEC’s rulemaking authority and the impact on smaller companies.
CII’s May 19 letter to the SEC, penned by General Counsel Jeff Mahoney generally supports the basic disclosure requirements in the commission’s March 21 proposed rule on “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” but also recommending changes to the proposed initial compliance dates and to the threshold for the proposed footnote disclosure on climate-related metrics and impacts. Overall, CII supports the SEC’s proposed disclosure requirements on climate-related risks, Scope 1 and Scope 2 emissions, and Scope 3 emissions with certain accommodations for companies.
Among other changes, CII is urging the SEC to extend the compliance date for climate disclosure by at least one year. It supports the proposal to include financial footnote disclosure about climate-related metrics – but not the “bright-line” 1% threshold. Rather, CII supports a more traditional “reasonable investor” materiality test.
CII supports the provisions of the proposal that would require disclosure about board oversight of climate-related risks, the potential & actual impact of material climate-related risks, scenario analysis, and emissions disclosure. For Scope 3 emissions, CII suggests a liability safe harbor, an exemption for smaller companies, and other accommodations to ease the corporate compliance burden. The comment letter also suggests extending the compliance date for the proposed attestation requirement.
We are closely monitoring the proposal – and we’re wading through the practical disclosure & process implications so that you aren’t caught flat-footed when your directors and investors ask about your plan. If you haven’t already bookmarked the transcript from our April webcast with Sidley’s Sonia Barros, Travelers’ Yafit Cohn, NuStar Energy’s Mike Dillinger, and our own Dave Lynn & Lawrence Heim, head over there now. This conversation wasn’t just a review of the proposal – we discussed what you need to do now to prepare for final rules as well as investor demands.
If you aren’t already a member with access to that guidance, sign up now and take advantage of our “100-Day Promise” – During the first 100 days as an activated member, you may cancel for any reason and receive a full refund! You can sign up online, by calling 800-737-1271, or by emailing sales@ccrcorp.com. Make sure to also check out our new membership resource, PracticalESG.com, for comprehensive & practical guidance to goal-set, measure & disclose progress on climate and other E&S issues.
On its “submitted comments” page, the SEC has recorded more than 8100 form letters in response to its climate disclosure proposal – plus a hefty number of bespoke, thoughtful letters. Lawrence has predicted that we’ll hit 10k before the extended June 17th deadline. I’ll owe him five bucks if he’s right!
Who’s with me on this wager? Please participate in this anonymous poll to share your guess of where we’ll end up:
The universal proxy rules go effective in only 3 short months – August 31st, 2022. A recent article from The Activist Investor explains how the rule could significantly decrease activists’ costs to conduct a proxy contest. That means that companies & boards will be facing more threats and more distractions, and navigating proxy contest responses in a dramatically altered landscape. Now is the time to prepare.
In our webcast earlier this year, Goodwin Proctor’s Sean Donohue, Gibson Dunn & Crutcher’s Eduardo Gallardo, Sidley Austin’s Kai Liekefett and Hogan Lovells’ Tiffany Posil suggested tactical steps that companies should take in advance of the compliance date. Make sure to take a spin through the transcript if you haven’t already. Kai also emphasized that:
“We have an entire business that is functioning as profession second guessers, and they will be coming for you once they see an opening. So, you need to get ready for it and the universal proxy is just another reason to get ready for shareholder activists.”
We’ve posted memos about the final rule in our “Proxy Cards” Practice Area, and we explained the steps that companies need to take to comply in the November-December ‘21 issue of The Corporate Counsel newsletter. More analysis is available in our “Proxy Fights” Practice Area on DealLawyers.com. John has also blogged about the difference between “proxy access” and “universal proxy” – a key point.
If you aren’t already a member of our sites, sign up now and take advantage of our “100-Day Promise” – During the first 100 days as an activated member, you may cancel for any reason and receive a full refund! You can sign up online, by calling 800-737-1271, or by emailing sales@ccrcorp.com.
The universal proxy rule will change tactics for activists & companies. The investor resource The Activist Investor is exploring the ramifications with a collection of articles and other information. In this article, Michael points out that the SEC rule doesn’t directly address the situation of multiple activists – leaving companies & challengers to sort that out in the trenches. He notes:
The rule is silent on the critical elements of how the UPC will apply to proxy contests with more than one activist investor. Without further guidance from the SEC, companies and activists may handle these situations in dramatically different ways.
We see three such critical elements:
– The proxy card contents and format
– Notifications among the activists and the company
– Reference in proxy statements to information about director nominees.
The article goes on to outline ways this might play out, in the absence of SEC guidance:
We can easily envision situations in which a company wishes to comply strictly with the SEC rule. If the SEC doesn’t require something, then (conveniently!) it won’t do it.
It might notify each activist only of the company’s nominees, since that’s all the rule requires. Each activist would then have an incomplete proxy card.
Or, a company may list all activist candidates together, alphabetically as the rule prescribes. This will likely confuse shareholders, and perhaps prompt them to vote for company nominees.
We can also envision situations in which one activist wishes to avoid ceding any advantage to another activist. Then, one activist might want to not list director nominees from another. Or, one activist might refer shareholders to proxy materials only for the company, and not for other activists.
This is just a start. Resourceful companies (and activists) can no doubt think of other ways that creative interpretation of the new rule will confound multiple activists that nominate director candidates at a company.
The SEC hasn’t given indications that it will provide additional guidance on this rule before the August 31st effective date. It may wait to see what issues actually materialize and how companies & activists respond. Remember that if you encounter a sticky situation, you can use our “Q&A Forum” to get thoughts from the securities law community.
Here’s something Lawrence blogged last week on PracticalESG.com (if you’re not already subscribed to Lawrence’s updates, which are focused on cutting through all the ESG noise to provide practical takeaways to companies, sign up here):
Yesterday I recorded a podcast with Chris McClure, the National Head of ESG Services at Crowe, about fraud in ESG (that podcast will be available to members soon). Only after that did I see the New York Times article about Wells-Fargo allegedly conducting fake job interviews: “Black and female candidates are sometimes interviewed after the recipient of a job is identified, current and former employees say.”
The article discusses allegations made public by Joe Bruno, a former executive in the bank’s wealth management division.
… Mr. Bruno noticed that often, the so-called diverse candidate would be interviewed for a job that had already been promised to someone else.
He complained to his bosses. They dismissed his claims. Last August, Mr. Bruno, 58, was fired. In an interview, he said Wells Fargo retaliated against him for telling his superiors that the “fake interviews” were “inappropriate, morally wrong, ethically wrong.”
Wells Fargo said Mr. Bruno was dismissed for retaliating against a fellow employee.
Mr. Bruno is one of seven current and former Wells Fargo employees who said that they were instructed by their direct bosses or human resources managers in the bank’s wealth management unit to interview “diverse” candidates — even though the decision had already been made to give the job to another candidate. Five others said they were aware of the practice, or helped to arrange it.
These claims are similar to those levied in 2019 against the National Football League (NFL) and three of its teams by Former Miami coach Brian Flores, who is Black. From a Sports Illustrated piece on the matter:
It was clear from the substance of the interview that Mr. Flores was interviewed only because of the Rooney Rule [NFL teams must interview two minority candidates when looking for a team’s next head coach], and that the Broncos never had any intention to consider him as a legitimate candidate for the job. Shortly thereafter, Vic Fangio, a white man, was hired to be the Head Coach of the Broncos.
Fraud is making quite a splash in ESG as pressure to meet DEI and other ESG goals increases. I’ve written about fraud many times before and Chris echoed those thoughts and more. Keep a look out for my podcast with Chris, where he talks about the problem and offers ideas on solutions. I’ll announce its availability soon. Members can also refer to our checklist on Internal Controls for E&S Information and our E&S Data Validation Guidebook.
Even further, using DEI data to set goals and reporting on progress is the topic of the third & final PracticalESG.com DEI workshop – this Wednesday May 25th from 1:00pm – 2:30pm Central time. To attend this critical event for free, register here.
When I was recounting all of the significant anniversaries in 2022 earlier this week, I definitely forgot a big one – the Sarbanes-Oxley Act! I hope all of the Sarbanes-Oxley fans out there will forgive me for that oversight.
The law was enacted July 30, 2002 in response to the major corporate scandals of the early 2000s, and it changed everything about the way public companies comply with their reporting obligations and govern themselves, as well the way auditors conduct their audits and interact with the companies they audit (under the supervision of the PCAOB). I was actually not at the SEC at the time when Sarbanes-Oxley was enacted – I was on the “dark side,” working on a number of the above-referenced scandals. I rejoined the SEC in 2003 when implementation of Sarbanes-Oxley was in full swing, which was definitely a very interesting time to work at the agency.
There is one aspect of the Sarbanes-Oxley Act legacy that I think is worth revisiting now that we are going on 20 years into living with the Act, and that is the certification process. As we all know, the Sarbanes-Oxley Act imposed certification requirements on CEOs and CFOs in Sections 302 and 906 of the Act. The legislative purpose behind Sections 302 and 906 of the Sarbanes-Oxley Act was to enhance investor confidence in the quality and reliability of periodic reports by compelling CEOs and CFOs to take a more active role in the disclosure processes of public companies through individual responsibility for the accuracy and completeness of periodic report disclosures.
What many companies have done to support their Sarbanes-Oxley certifications is to implement a process of sub-certifications that compel responsible individuals throughout the organization to provide certifications that the CEO and CFO can rely on to provide their own certifications with the periodic report. Neither the statutory provisions of the Sarbanes-Oxley Act, nor the SEC’s implementing rules, specify any requirement that sub-certifications be executed by responsible individuals within a public company as a means to support the certifications signed by the CEO and the CFO. Further, the SEC has not provided any substantive guidance on the use of sub-certifications as part of a public company’s overall disclosure controls and procedures.
Sub-certifications can serve as important evidence supporting the executive’s state of mind. This evidence would be particularly important if the government were to pursue a criminal case based on the executive’s certification, which would require the DOJ to prove the executive “willfully” signed a certification “knowing” that the report did not comply with the SEC’s requirements. It is more difficult for the government to prove such an allegation if the executive was told that the report did in fact comply with the applicable requirements through the sub-certification process. The more specific the sub-certifications are, the more helpful they are for this purpose.
Remember that sub-certifications are not a substitute for implementing, utilizing and periodically evaluating effective disclosure controls and procedures and internal control over financial reporting. If used properly as part of a disciplined disclosure process, sub-certifications can serve the purpose of reinforcing effective disclosure controls and procedures and internal control over financial reporting, while promoting a corporate culture of compliance. Sub-certifications can sometimes be perceived negatively as a means for the CEO and CFO to transfer responsibility for the company’s SEC filings to subordinate employees, rather than taking responsibility themselves.
I think the 20th anniversary is a good opportunity to take another look at your sub-certification process. Some question you could ask are as follows:
1. Are the appropriate individuals within the organization providing sub-certifications?
2. Are the individuals taking the steps necessary to appropriately provide the sub-certification, or are they treating it as a pro forma process?
3. Can the sub-certification process be streamlined in any way to increase its effectiveness and enhance to protections that are sought through the process?
4. Is the sub-certification process appropriately integrated with the company’s overall disclosure controls and procedures and internal control over financial reporting?
5. Does the disclosure committee, or another appropriate governance body, periodically review the sub-certification process?
6. Do you have a plan in place for when an individual refuses to provide a sub-certification?
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. Today I unearth the most wacky thing I have done with CCRcorp, and that is the forever classic “Sarbanes-Oxley Report.” I had hoped that perhaps the Sarbanes-Oxley Report had disappeared from the Internet sometime during the past 15 years, but sure enough, it is still available in all its wackiness on TheCorporateCounsel.net.
I have a few observations looking back at the bizarre episodes of the Sarbanes-Oxley Report. First, it is very obvious that these episodes were filmed before the invention of the iPhone. For some reason, it looks like we filmed them using a Kodak Brownie 9mm movie camera from the 1950s, but I am certain that we had more recent technology. Second, I am glad in many ways that I got to be the straight man to Billy Broc Oxley, because I probably would not be writing about these episodes today if I had to wear the wigs. Third, I am glad that the episodes are very short. Fourth, these episodes of the Sarbanes-Oxley Report remind me to not take myself too seriously. Finally, the Sarbanes-Oxley Report reminds me of how Broc Romanek was always willing to push the envelope to both educate and entertain our members.
In the latest Deep Dive with Dave podcast, I am joined by Stan Keller of Locke Lord to discuss the SEC’s proposed amendments to Rule 10b5-1. Topics include:
• The historical context for Rule 10b5-1 and its relevance to the proposed amendments
• The potential impact that the amendments could have on the use of Rule 10b5-1
• Suggested changes to the SEC’s approach
SEC Chair Gensler appeared before Congressional committees this week to present the SEC’s fiscal year 2023 budget request. The SEC requests $2.149 billion, an 8% increase over fiscal year 2022.
In his remarks, Gensler noted that the Division of Corporation Finance has shrunk a whopping 19% since 2016. Over that same period, the Division’s workload has grown. Gensler notes that in fiscal year 2016, Corp Fin reviewed filings related to approximately 510 new registrants, while that grew almost fourfold last year, to 1,960.
In addition to seeking resources to support the SEC’s programmatic areas, Gensler also highlighted the need for more technology resources:
The amount of data that the SEC processes has grown by 20 percent annually for the past two years. Further, cyber threats have placed our financial sector on high alert. As technologies evolve, it is important that the SEC’s information technology follows suit.
We continue to need additional resources to support the Commission’s data, cybersecurity, and other IT needs. While our $370 million request for the Office of Information Technology is basically flat with the last two years of spending, in real terms it is up only modestly from FY16. Moreover, for comparison’s sake, JPMorgan spends an average of $1 billion in technology each month.
It is critical that the SEC have additional technological resources to incorporate analytics and machine learning capabilities for our oversight and surveillance functions, protect agency and registrant information, provide data to the investing public, and much more.
Gensler’s remarks also note that the agency has made a separate $57.4 million request to support the build-out and move to a new SEC headquarters. It still feels to me like the SEC just moved to 100 F Street, but I realize that was 17 years ago now!
Noting the striking decline in headcount in Corp Fin that was outlined in Chair Gensler’s budget testimony this week, I see why the SEC seems to be posting a lot of open jobs these days. As anyone who has ever tried to get a job at the SEC knows, the hiring window there tends to open and close randomly. Right now, the window seems to be wide open.
My guess is that the SEC is experiencing the same sort of challenges attracting and retaining talented staff that we are all facing. The war for young talent in the legal profession has pushed compensation to unprecedented levels, and the SEC has no way of competing with that trend. I also fear that, as with so many other organizations, the esprit de corps that the SEC has been long known for has been tested by two years of working remotely due to the pandemic (the Staff is still not back in the office).
Even with all of those challenges, I still think the SEC is a great place to work and well worth considering, particularly if you have already had a few years of law firm experience doing capital markets and public company work. Corp Fin is made up of very talented Staffers that you can learn a lot from, and it is a great way to distinguish yourself in your legal career. I am always grateful for my two tours in Corp Fin, which were truly highlights of my time practicing law. If you ever consider applying to work in Corp Fin, please reach out to me, I would be happy to discuss it with you.
