Earlier this month, the Ukrainian American Bar Association, Razom, Inc. and the former Minister of Finance of Ukraine submitted a petition for rulemaking to the SEC, requesting that the Commission enact a rule requiring issuers to disclose their business dealings in and with Russia and Belarus. The petitioners request that the required disclosure should include: sales to Russia (direct and indirect), purchases from Russia (direct and indirect), ownership of assets in Russia, and stakes in entities registered in Russia. The petitioners note that issuers should conduct reasonable due diligence about their customers and suppliers to ensure that their disclosures include amounts of indirect sales and purchases to and from Russia that can be reasonably ascertained through diligence of respective supply chains. The petitioners note:
These varying stances of issuers regarding their business in Russia and the choice of many to continue operating in and doing business with Russia makes information about such activities of vital importance to investors. This information is vital because it provides disclosure to investors regarding the risks and costs of continuing to operate in a heavily sanctioned market ruled by a government moving to nationlize industry. Disclosure will also enable investors and regulators to ensure issuers are meeting the ever more complex sanctions rules regarding operations in the Russian market. Likewise, issuers are concerned that Russia may apply its own counter-sanctions against issuers that do not continue fully their operations within Russia. This proposed disclosure would help investors better understand the cost of doing business in Russia.
While it is difficult to say whether the SEC will act on this petition for rulemaking (the Commission rarely does act on these petitions), one might argue that some of these disclosures may already be called for under existing disclosure requirements, depending on materiality. You might recall that the SEC had established an Office of Global Security Risk which sent comment letters to issuers seeking disclosure of business with sanctioned governments, persons and entities based on existing disclosure requirements, but it appears that the Office is no longer in operation. Given that precedent, however, it is possible to see how the SEC might seek to elicit more disclosure through means other than rulemaking, which would of course be time consuming and particularly difficult at the moment with all that the SEC has on its agenda.
Sadly, the Office of Global Security Risk’s long-time Chief, Cecilia Blye, passed away earlier this year. I worked with Cecilia in the Office of Chief Counsel and she was a wonderful colleague and a great mentor to the attorneys in Corp Fin. I offer my condolences to Cecilia’s friends, colleagues and family.
For more on the potential disclosure considerations arising from the war in Ukraine, review the resources we have posted in our “Ukraine Crisis” Practice Area.
As we move through earnings season, we are actually seeing a significant amount of disclosure regarding the impact that the war in Ukraine and the associated actions against Russia and its allies is having on the financial performance of public companies.
At a recent conference, we were discussing the range of financial statement impacts that the war in Ukraine could have, and companies and auditors are definitely focusing on these considerations. One of the key areas is impairments, as the war and the economic impacts could impact the valuation of company assets, including the actual destruction of assets and operations. Further, many companies are grappling with the fallout of ceasing business operations in Russia and Belarus, as well as the prospect of government confiscation of property in those countries. The economic impacts of the war also bring other problems, including the prospect of significant currency fluctuations and hyperinflationary economics. Finally, the disruption brought about by the war and the economic consequences can cause companies to deal with cash flow problems and, even worse, going concern considerations. Investors will no doubt be laser-focused on these issues, and as the war drags and the sanctions tighten the impact of these and other issues will become more and more pronounced.
Although I think the news coverage is doing a pretty good job of pointing this out, a major land war in Europe is something most of us have never experienced in our lifetime. The tragic loss of life is difficult to witness, and the continuous ratcheting up of tensions between Russia and the West is putting us all on edge.
The war has many implications for public companies and their boards of directors, so we understand that it is critical for our members to keep abreast of the developments as they happen. We have established a new “Ukraine Crisis” Practice Area, where you can access resources about legal developments, governance considerations, sanctions, disclosure issues and commercial and investment issues.
If you are not a member of TheCorporateCounsel.net, email sales@ccrcorp.com to sign up today and get access to the “Ukraine Crisis” Practice Area – or sign up online.
Over seven years ago, I wrote an article for The Corporate Counsel titled “Still Your Father’s Oldsmobile: The SEC’s Recent Focus on the Corporate Bond Market,” which recounted statements from former SEC Chair Mary Jo White and former Commissioner Dan Gallagher regarding the need for more transparency and the utilization of electronic platforms in bond markets. Now those issues have resurfaced in a speech that Chair Gary Gensler recently delivered to London City Week.
Gensler may have had an Aston Martin in mind rather than an Oldsmobile, because he started off his remarks with a discussion of James Bond, noting that this year marks the 60th anniversary of the first James Bond film. Carrying through the “bond” theme, Gensler noted the sheer size of U.S. bond markets and returned to some key bond market themes from years ago – transparency, platforms and resiliency.
On the topic of platforms, Gensler noted it is important that SEC consider revising its rules to reflect the increased use of electronic trading platforms in fixed income markets. Gensler has asked the Staff to consider how the Commission might enhance market integrity, access, and pre-trade transparency on these platforms. He noted that, in January, the Commission proposed a new definition for “exchange” that would cover additional fixed income platforms and some systems that bring together buyers and sellers for other securities asset classes. Gensler noted:
In addition, I’ve asked staff to consider ways to increase fair access to electronic trading platforms that would fall within the expanded definition of “exchange,” with the goal of making the benefits of these systems more widely available to investors. I think we have an opportunity to augment investor protections and market integrity as well.
Given the size and importance of fixed-income markets, improvements to transparency, platforms and resiliency for bond trading could potentially be a rare bipartisan issue that the Commission can rally around.
Last week, FASB announced that it issued a proposed Accounting Standards Update that would extend the period of time preparers can utilize the reference rate reform relief guidance and expand the Secured Overnight Financing Rate (SOFR)-based interest rates available as benchmark interest rates. Comments on the proposed ASU are requested by June 6, 2022.
The amendments in the proposed ASU would defer the sunset date from December 31, 2022, to December 31, 2024, reflecting the fact that in 2021, the UK Financial Conduct Authority delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023. Further, based on the developments of a term-based version of the SOFR rate (SOFR term) in the marketplace, the proposed ASU would amend the definition of the SOFR Swap Rate to include other versions of SOFR, such as SOFR term, as a benchmark interest rate under ASU Topic 815, which deals with derivatives and hedging.
In the latest Deep Dive with Dave podcast, John and I talk about the topics we cover in the March-April 2022 issue of The Corporate Counsel. We discuss the SEC’s climate change, cybersecurity and beneficial ownership reporting rule proposals. Thanks for listening to the Deep Dive with Dave podcast!
I would be the first to admit that I usually say that it does not make much sense to begin preparing for compliance with new SEC rules when they are still in the proposal phase. Proposed rules are subject to change based on the comments that the SEC receives during the rulemaking process, and in many cases the SEC provides fairly generous compliance periods that give companies time to prepare for the new requirements.
With the SEC’s climate change disclosure proposals, I think it is a whole different ballgame. In an article that I recently published in Corporate Secretary, I describe the steps that companies should consider taking now to address the likely outcome of this rulemaking effort. The article notes:
It usually does not make sense to dedicate resources toward compliance when SEC rules are still at the proposal phase, but these proposed changes are quite different. Their scope and complexity may make them costly for companies if adopted. Even with generous transition provisions, companies may still not have time to develop the processes necessary to comply. For these reasons, public companies and their boards of directors should start working now to prepare for a whole new disclosure regime. They can do this by taking a series of steps.
The article sets forth five steps that companies can take now based on what the SEC has proposed. First, companies should take an inventory of the information they are already providing on climate change, determine how that information is gathered and how quantitative metrics are calculated, and assess their information-gathering and communication process. Second, companies should map their existing disclosures to the SEC’s proposed rules to identify potential gaps. Third, companies should revisit their approach to goals and targets in light of the SEC’s proposed requirements. Fourth, companies should look to the SEC’s proposed requirements to consider whether changes to their governance around climate change are necessary. Fifth, the proposed changes to financial statements should be previewed with management, the audit committee and auditors.
It is going to be a long and costly road to implementation of the SEC’s climate change disclosure rules when adopted, and I think this is a journey that companies should consider starting as soon as possible.
I must admit that, despite having read the SEC’s climate change disclosure proposing release discussion of the topic several times, I am still mystified about what the proposed financial statement requirements in the SEC’s climate change disclosure proposal would require companies to do if the rules were adopted as proposed.
That is why I was happy to come across Deloitte’s Comprehensive Analysis of the SEC’s Proposed Rule on Climate Disclosure Requirements, which goes into much more detail than other publications regarding these proposed requirements and provides helpful disclosure examples, as well as considerations for implementing processes going forward to track the information needed for the proposed financial statement requirements.
I struggle to admit to myself that I might be interested in what happens this week at the SEC’s Older Investor Roundtable, which takes place (virtually) this Thursday. But as much as I try to deny the relentless advance of time, the constant stream of AARP mailings to my household serves as a constant reminder that there is a reason why they call me a “Senior Editor” around here.
The Older Investor Roundtable is hosted by the SEC and NASAA and features AARP. The SEC describes the event as “a multi-topic listening session intended to encourage input and feedback from senior and older communities.” The roundtable will focus on the experiences of older investors, those with diminished capacity, their loved ones, and caregivers for the purpose of informing rulemaking and policy decisions.
As we begin the third year of the COVID-19 pandemic, the inevitable question arises with each reporting cycle: “Should we keep our COVID-19 pandemic risk factor and, if so, how should we update it?”
In response to the onset of the pandemic and the Staff’s guidance, many companies have included a separate, detailed risk factor about the pandemic in their periodic reports and registration statements. The risk factor recounts the various risks for companies arising from the pandemic and the measures that have been taken to prevent the spread of the COVID-19 virus. But as with many of the other complications arising from the pandemic, magical thinking pushes us to want to put COVID-19 into the rearview mirror, even in the disclosure realm.
While the outcome depends very much on the individual circumstances of the particular company, my general advice is that it is still too early to get rid of the COVID-19 risk factor in its entirety. Undoubtedly, there are elements of the disclosure that can be updated from period-to-period as public health measures evolve and the risk profile changes, but unfortunately we do not seem to be past a number of key risks arising from the pandemic, even though we may be experiencing more “normal” in our daily lives. For example, companies with operations in China or with elements of business dependent on goods and service from China are still at risk from the impact of lockdowns (as evidenced by reports that residents in Shanghai were being fenced into their apartment buildings over the weekend), while that risk now seems to be more remote in the United States. At the same time, risk factor disclosure about the risks associated with vaccine mandates may now be obsolete as the government’s priorities appear to have shifted on that front (at least for now).
One further consideration is the disclosure of risks arising from supply chain problems, which in the earlier days of the pandemic were very much intertwined with the impact of the pandemic and the resulting public health measures. Today, supply chain risks have taken on a life of their own apart from the pandemic, and as a result those risks in many cases warrant their own separate risk factor discussion. We now have a wide variety of factors contributing to the supply chain problems, including, for example, the impact of the pandemic and public health measures worldwide, economic disruption, rising prices, labor shortages, materials shortages and the war in Ukraine. For those companies with operations impacted by the supply chain issues, a frequently-updated dedicated risk factor is likely a good idea given the focus of investors on this area.
The bottom line? Even though you are not required to wear a mask on a plane or at the Starbucks, the pandemic is not over and certain risks remain a reality.
