I am happy to report that all of the hard work has paid off and the updated Executive Compensation Disclosure Treatise is now available! I always think of this publication as my “baby,” and I can’t believe that it has reached its adolescence. With 2 volumes and over 1700 pages, my baby has really grown up. Order now so you can have all of the latest guidance for the upcoming proxy season!

– Dave Lynn

During the “SEC All-Stars” panel at last week’s Proxy Disclosure Conference, I spoke on the topic of proxy plumbing. I commented on how the SEC issued the proxy plumbing concept release eleven years ago as of yesterday, and just when the Commission started to make progress in addressing some of the proxy plumbing topics from that concept release, we appear to be taking one step forward and two steps back. While I noted that usually people do not get too excited when you start talking about any topic with the word “plumbing” in it, the SEC’s recent efforts on proxy plumbing has seen more drama than an episode of “Keeping Up With the Kardashians.”

Well, that drama continues, with the National Association of Manufacturers announcing that it has sued the SEC for its approach of not enforcing the recently adopted proxy voting advice rules while the Staff is reviewing potential changes to those rules.

Back in July 2020, the SEC adopted the final rules governing proxy voting advice provided by proxy advisory firms such as ISS and Glass Lewis. The proxy advisory firms would be required to comply with most of the new requirements beginning December 1, 2021. Obviously a lot has changed at the SEC since July 2020, and earlier this year Chair Gensler directed the Staff to reconsider the rules and guidance. Corp Fin put out statement saying that it will not recommend enforcement action to the SEC based on the interpretive guidance and the rule amendments during the period in which the SEC is considering further regulatory action in this area. In addition, in the event that new regulatory action leaves the 2020 exemption conditions in place with the current compliance date, the Staff will not recommend any enforcement action based on those conditions for a reasonable period of time after any resumption by ISS of its litigation challenging the rules and guidance. The SEC’s June 2021 Reg Flex Agenda indicates that proposed amendments to the rules are expected by Spring 2022.

The National Association of Manufacturers, citing numerous concerns with proxy advisory firms, is challenging the SEC’s approach to the rule changes that were duly adopted through a notice and comment rulemaking process. The complaint states:

The SEC’s suspension of the Proxy Advice Rule is flatly unlawful. The SEC may not decide that it no longer stands by a regulation it earlier lawfully promulgated, and—absent any rulemaking process—simply suspend its application. To the contrary, the procedural provisions of the Administrative Procedure Act (APA) exist precisely to bring regularity to agency action.

NAM asks the court to set aside the SEC’s “suspension of the compliance date” for the rule. Stay tuned for the next episode of “Keeping Up With the Proxy Voting Advice Rules.”

– Dave Lynn

In the Advisor’s Blog on CompensationStandards.com, Liz covers a recent announcement by Glass Lewis that it has launched of an Equity Plan Advisory service – through a newly formed affiliate, Glass Lewis Corporate. This service appears to be similar to that provided by ISS Corporate Solutions. The Glass Lewis press release states:

Public companies can work with a Glass Lewis Corporate advisor to model their equity compensation plan against the Glass Lewis model. Advisors will review plans with customers, testing different new-share requests and equity plan amendments against Glass Lewis’ methodology, examining multiple what-if scenarios. Glass Lewis maintains a strict separation between Glass Lewis Corporate advisors and Glass Lewis research analysts in order to ensure the continued independence of our proxy advice.

As Liz notes, this new business model could draw some criticism, as Glass Lewis starts to look more like ISS with this foray into counseling the same companies that are the subject of its recommendations.

– Dave Lynn

Glass Lewis has announced a strategic partnership with Arabesque, a provider of ESG data and insights. The announcement states:

The partnership will see Arabesque provide company ESG profiles for Glass Lewis’ Proxy Paper research reports, enabling clients to gain the latest ESG data and insights on over 8,000 companies worldwide, and access to climate and regulatory data solutions. Using big data and a quantitative, algorithmic approach, Arabesque’s capabilities draw on more than four million ESG data points daily from over 30,000 sources for performance metrics on sustainability, including corporate net-zero alignment.

As a rationale for this partnership, Glass Lewis indicates that investor demand for ESG data is surging, with one third of all assets under management globally now integrating sustainability factors.

– Dave Lynn

As long as I can remember, the SEC’s budget has been a political football. Despite the SEC’s earnest requests for self-funding over the years (the SEC has traditionally netted enough cash from its operations to actually fund its own budget and more), Congress has chosen to keep control of the purse strings as a means to maintain some control over the agency’s regulatory direction. The practical result of this is that the SEC, like many government agencies, is perennially underfunded for the enormous task that it faces.

Earlier this month, the House Financial Services Committee considered the SEC’s mission and budget and heard from Chair Gary Gensler. The Majority Staff memorandum regarding the hearing notes that the SEC’s fiscal year 2023 budget request of $2.169 billion reflects an 8.8 percent increase from fiscal year 2022 “in order to address key priority areas” and “is needed to hire additional agency personnel to oversee increasingly complex and growing financial markets that are expanding across borders and asset classes, including digital assets.” Congresswoman Maxine Waters (D-CA), Chairwoman of the Committee, told Gensler at the hearing: “You have a lot to restore and rebuild. During the Trump Administration, the Commission provided minimal oversight and eliminated key protections for investors.”

The Committee considered a number of pieces of legislation and potential legislation related to the SEC’s mission, including the following:

H.R. ___, Strengthening the Office of Investor Advocate. This discussion draft will strengthen the independence and increase reliability of the funding of the SEC’s Office of Investor Advocate. It would also authorize this office to conduct investor testing and other research, and publicize its findings.

H.R.___, Investor Justice Act of 2021. This discussion draft would create a grant program, administered by SEC’s Office of Investor Advocate, to support investor advocacy clinics.

H.R.___, Empowering States to Protect Seniors from Bad Actors Act. This discussion draft would create a grant program—similar to the one created by the Dodd-Frank Act’s Sec. 989A, which has not been implemented, housed within the SEC Investor Advocate Office to support and strengthen states’ senior investor protection programs.

H.R.___, To amend the Securities Exchange Act of 1934 to improve the governance of multiclass stock companies, to require issuers to make annual diversity disclosures, and for other purposes. This discussion draft would establish minimum listing standards for the stock exchanges in two areas of corporate governance: (1) multiple classes of stock with unequal voting rights, and (2) board diversity. The discussion draft would also require newly listed companies that choose to have multi-class stock structure to also include a seven year sunset provision for that multi-class stock structure, eventually leading to “one share, one vote.”

H.R. 2620, Investor Choice Act of 2021 (Foster). This bill would prohibit financial professionals from requiring their clients into pre-dispute arbitration agreements and ban prohibitions on class action lawsuits in customer contracts that investors often are required to sign in order to receive services from broker-dealers or investment advisers.

H.R.___, Whistleblower Protection Reform Act (Green). This bill is identical to H.R. 2515, which passed the House in 2019 on suspension. It would protect whistleblowers against retaliation, including individuals (1) who blow the whistle internally; (2) who assist in an SEC investigation of these violations, or (3) make disclosures that are required or protected under any law subject to SEC jurisdiction. Currently, these anti-retaliation protections apply only to individuals who report information directly to the SEC.

H.R.___, To prohibit registered investment advisers, brokers, and registered representatives of brokers from facilitating the transaction of or recommending the securities of certain special purpose acquisition companies, and for other purposes. This discussion draft would prohibit brokers and investment advisers from recommending to retail investors SPACs that grant high percentage of “promote” to the sponsors—a compensation arrangement that offers free shares to the sponsors of the SPACs. Currently, SPAC sponsors receive 20% or more in “promote,” which dilutes the shares of retail investors.

– Dave Lynn

A ubiquitous feature of this blog, and so many things that we encounter on a daily basis, is the embedded hyperlink. Embedded hyperlinks make things so easy for us – we can move from what we are reading directly to some related information so that we no longer have to bother looking things up on our own. But when it comes to SEC filings, it is always important to remember that links have consequences.

This topic was addressed during the panel “Creative Proxies: Tips to Optimize Communications” during the first day of last week’s Proxy Disclosure Conference. While there is often a desire to treat SEC filings like other communications and use hyperlinks as a means to improve the user experience, it is important to consider the liability implications that arise from linking to any material outside of the filing. The issue comes up these days when, for example, a company may want to reference the company’s ESG report in the Form 10-K or proxy statement, given the important information that is included in that external document.

In this recent SEC Institute blog, George Wilson notes the risk associated with mentioning or hyperlinking to information outside of an SEC filing:

In a recent Workshop, one of our participants asked about the pros and cons of mentioning or linking to a separate ESG report in Form 10-K. One of the risks in such a reference is that the ESG report could become part of the Form 10-K and become “filed” information. This would potentially subject the information in the ESG Report to the liability provisions set forth in section 18 of the 1934 Act and, if the 10-K is incorporated by reference into a 1933 registration statement, the strict liability provisions of section 11 of the 1933 Act. Neither of these outcomes would be advisable for all the information in an ESG report.

Keep in mind that Rule 105(b) of Regulation S-T states that “electronic filers may not include in any HTML document hyperlinks to sites, locations, or documents outside the HTML document, except links to officially filed documents within the current submission and to documents previously filed electronically and located in the EDGAR database on the Commission’s public Web site (www.sec.gov).”

My advice – when in doubt, don’t hyperlink and be cautious about references to information included on the company’s or other websites! SEC reporting companies are now required to link to certain specific information in SEC filings, but outside of those circumstances, there is never a good reason to include an active hyperlink to external material.

– Dave Lynn

The transcript from our recent webcast – “MD&A & Financial Disclosures: What to Do Now” – is now available to our members. This webcast was full of practical tips for complying with the new MD&A & financial disclosure requirements applicable to your upcoming Form 10-K. Sonia Barros from Sidley, Raquel Fox from Skadden, Mark Kronforst from Ernst & Young, Lona Nallengara from Shearman & Sterling and yours truly discussed:

1. Overview of Amendments and Compliance Dates
2. Lessons From Early Compliers
3. Deleted Items
4. Liquidity & Capital Resources
5. Critical Accounting Estimates
6. Results of Operations
7. Objective of the MD&A
8. Quarterly Comparisons
9. Supplementary Financial Information
10. Interpretive Issues

– Dave Lynn

Yesterday, the SEC Staff released a report on the meme stock craze that occurred earlier this year. The report delves into the conditions that led to extreme price movements in GameStop and surveys the various elements of the markets that were impacted by the unusual market activity. The Staff identified a few areas that may require more study and consideration, which include: (i) forces that may cause a brokerage to restrict trading; (2) digital engagement practices (e.g., game-like features and “celebratory animations”); (3) trading in dark pools and through wholesalers; and (4) short selling and market dynamics.

Commissioners Peirce and Roisman issued a statement criticizing the Staff report, noting:

In the wake of an anomalous market event, it can be tempting to identify a convenient scapegoat and leverage the event to pursue regulatory actions without regard to the factual record. The report, however, finds no causal connection between the meme stock volatility and conflicts of interest, payment for order flow, off-exchange trading, wholesale market-making, or any other market practice that has drawn recent popular attention. Indeed, in our discussions about causes of the January episode, whether with staff or with market participants, we have seen no evidence that these practices were a cause of these events.

Reading the report reminded me of my finest GameStop moment. To celebrate the release of a new Mario Kart game, I accompanied my son to the local GameStop dressed in a full Mario costume, complete with giant cartoon head, denim overalls and big yellow buttons. The GameStop employees were generally befuddled and I don’t recall there being any other customers in the store. I had originally acquired the costume for my son’s Mario Kart-themed birthday party, where I drove around a go-cart track like a maniac dressed in the Mario costume. I guess these are the things we do as parents so our kids think we are cool.

– Dave Lynn

EY recently published highlights from its most recent SEC Staff comment letter survey, noting:

• Non-GAAP financial measures remained in the top spot in thelist of the most frequent topics in SEC staff comment letters for the year ended June 30, 2021. Management’s discussion and analysis and segment reporting were second and third, respectively.
• The volume of SEC staff comment letters on periodic reports continued to decline and was down by 20% from the previous year.
• The Staff continued to issue comment letters addressing COVID-19 disclosures in MD&A, business descriptions, and risk factors in addition to disclosures about fair value measurements and other topics, including the use of non-GAAP financial measures.
• The SEC staff has started issuing comments on climate-related disclosures, including considerations of the Commission’s 2010 guidance.
• Companies planning to go public through an initial public offering or merger with a SPAC should consider the topics of frequent comment when preparing their initial registration statements and subsequent filings.

The EY publication also includes tips on how to navigate the comment-letter process. For even more details on that, members should check out our 43-page “SEC Comment Letter Process” Handbook, which was recently revised & updated by former Staffers Sonia Barros & Sara von Althann of Sidley Austin.

– Dave Lynn

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