For calendar year companies, the new year begins with the most hectic period of the annual reporting cycle. That’s particularly true for new public companies, which haven’t previously experienced the year-end reporting & proxy frenzy. If this is your first rodeo – or even if it’s not – check out this Harter Secrest memo for tips on how to use this year’s Q4 to make your life easier during next year’s Q1. This excerpt provides some tips on putting together an annual meeting timetable:
Starting with a proposed annual meeting date and working backwards to schedule deadlines for the many workstreams involved in the annual meeting can help your team stay organized throughout one of the busiest times of year and eliminate last-minute surprises. Consider including the following in your timetable:
– Board and committee meetings relating to annual meeting approvals.
– Critical deadlines, such as (i) the record date, (ii) broker search deadline, (iii) dates to deliver materials to your financial printer, (iv) last date to file the proxy statement to incorporate information by reference into the Form 10-K, and (v) last date to file the proxy statement to be able to use notice and access.
– Target dates to send drafts to outside experts and to receive comments back from them.
– Section 16-related tasks: (i) Form 5 deadline; (ii) Schedule 13D or 13G deadline, and (iii) if tied to year-end reporting or meetings, any planned equity grants requiring Section 16 reports.
The memo also provides tips on getting a jump on your D&O questionnaires and 10-K preparation efforts.
Remember a few years ago, when a counterfeit letter purporting to be from BlackRock’s Larry Fink hit the street? Well, the folks who did that apparently had so much fun that they did it again – this time to Vanguard. This excerpt from an Institutional Investor article explains:
The team behind 2019’s fake letter from BlackRock chief executive officer Larry Fink has struck again. This time, they’ve targeted Vanguard and Marvel Entertainment, pitting the two against one another via dueling press releases sent to journalists on Tuesday. Since then, the Yes Men, a group of activist comedians, revealed that they orchestrated this stunt in an effort to push Vanguard toward action on climate change.
For major asset managers like Vanguard, whose exchange-traded funds require ownership of the market at large, acting on climate change is complicated. But because they’re targeting retail investors more than they have in the past, the general public has begun to push for more change.
On Tuesday, a fake press release from Vanguard announced that the firm had set up a “Sustainable Investments” department that would help it strategize on shareholder engagement. The faux announcement also claimed that by 2030, Vanguard would make “fossil-free and deforestation-free funds [the] default option” for investors, and that it would launch a “Vanguardians of the Galaxy” ESG fund for young investors.
In order to close the loop on the “Vanguardians of the Galaxy” thing, the Yes Men also issued a fake press release from Marvel. Fake Marvel characterized Fake Vanguard’s action as “an offensive infringement” of its intellectual property.
These guys call themselves “activist comedians.” I get the activist part, but where’s the comedy come in? I suppose the “Vanguardians of the Galaxy” reference could be a little funny in a “dad joke” sort of way, but this is a pretty elaborate setup for the tiny comedy payoff these guys deliver. I’ll leave it up to you to decide what kind of impact the activist side of the house has made with these pranks, but from a comedic perspective. . . well, I’lI take Letterkenny over the Yes Men every time.
In case you’re not familiar with it, Letterkenny is a Canadian TV comedy that some of my hockey pals suggested to me. The show’s not for everybody – the language would make a longshoreman blush – but if you like non-stop banter & a steady stream of what hockey players call “chirps” delivered in a distinctive dialect, check it out. I think it’s hilarious.
Anyway, Letterkenny reminds me of how many things we import from Canada, including some legal doctrines that we usually think of as home grown. That’s why I thought you might find this Torys memo about proposed climate change regulations issued by the Canadian Securities Administrators interesting. This excerpt from the memo summarizes the highlights of the proposal:
– The proposed rules would be phased-in over a one-year period for non-venture issuers and over a three-year period for venture issuers. For reporting issuers with a December 31 year-end, disclosures would be required in annual filings due in 2024 for non-venture issuers and in 2026 for venture issuers.
– Issuers would be required to make annual disclosure relating to the core elements of the TCFD framework, including governance, corporate strategy, risk management practices and data and metrics in respect of climate change risks and opportunities.
– Issuers would be required to disclose their Scope 1, 2 and 3 emissions or their reasons for not providing such disclosure. In the alternative, the CSA is considering mandatory disclosure of Scope 1 emissions, with the comply-or-explain option available only for Scope 2 and 3 emissions.
– The CSA has opted not to require disclosure of scenario analysis of a company’s resiliency under various climate transition assumptions.
The areas addressed in the proposed regulations track pretty closely those that SEC Chair Gary Gensler has suggested the SEC may address in its own proposal, and the CSA’s discussion of the proposal indicates that Canadian regulators have had to make the same kind of policy choices that the SEC will be making. Since that’s the case, it may well turn out to be a preview of coming attractions.
The latest issue of The Corporate Executive has been sent to the printer (sign up and order this essential resource today). This month’s articles include:
– Key Takeaways from Our Proxy Disclosure & 18th Annual Executive Compensation Conferences
– Compensation Clawbacks in the Courts
– Two Interesting Cases on Termination for “Cause”
It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment.
In a recent speech to the ABA’s annual White Collar Institute, Deputy AG Lisa Monaco announced some significant changes to the DOJ’s corporate criminal enforcement policies. In addition to tightening up the requirements for cooperation credit, Monaco said that the DOJ is changing the approach that it takes to classifying companies as recidivists, and rescinding any guidance suggesting that the appointment of corporate monitors is disfavored. This excerpt outlines the DOJ’s new approach to cooperation credit:
To hold individuals accountable, prosecutors first need to know the cast of characters involved in any misconduct. To that end, today I am directing the department to restore prior guidance making clear that to be eligible for any cooperation credit, companies must provide the department with all non-privileged information about individuals involved in or responsible for the misconduct at issue. To be clear, a company must identify all individuals involved in the misconduct, regardless of their position, status or seniority.
It will no longer be sufficient for companies to limit disclosures to those they assess to be “substantially involved” in the misconduct. Such distinctions are confusing in practice and afford companies too much discretion in deciding who should and should not be disclosed to the government. Such a limitation also ignores the fact that individuals with a peripheral involvement in misconduct may nonetheless have important information to provide to agents and prosecutors.
The department’s investigative team is often better situated than company counsel to determine the relevance and culpability of individuals involved in misconduct, even for individuals who may be deemed by a corporation to be less than substantially involved in misconduct. To aid this assessment, cooperating companies will now be required to provide the government with all non-privileged information about individual wrongdoing.
The new policy reverses the Trump DOJ’s 2018 decision to ease the requirements for cooperation credit. When it comes to classifying a company as a recidivist, the new policy says that every brush with the law in its past is now fair game for inclusion in the assessment, not just those involving similar conduct. Finally, it seems pretty clear that under the new policy, the DOJ will be insisting on the appointment of independent monitors more frequently than it has in recent years.
In short, there’s a new sheriff in town. We’re posting memos in our “White Collar Crime” Practice Area.
Liz has blogged several times about the problem of exploding proxy distribution costs. In her most recent blog, she noted that the NYSE has adopted a new rule under which companies won’t have to reimburse brokers for costs associated with shares acquired through broker promos. That’s intended to address the practice among some retail-focused brokerages of giving away free shares of stock to new customers. Unfortunately, this excerpt from the most recent issue of Carl & Peder Hagberg’s “Shareholder Service Optimizer” (pg. 11) says that new rule may provide a lot less help than companies think:
The SEC has approved a NYSE rule change to provide that no proxy distribution reimbursements should be paid where “free” or “promotional” stock positions are involved. But unless brokerage systems are upgraded to label such positions (fat chance we say) AND to track them if clients move their positions, as many Gen-Zers have been reportedly doing – how can anyone possibly tell which accounts are eligible and which are not? And even we would have to say that if the holder of a freebie increases their position, the promo prohibition likely becomes null and void.
The article notes that Robinhood has apparently taken the position that it is not bound by the NYSE’s rule, and that FINRA hasn’t acted on requests to pass a similar one.
The SEC’s Acting Chief Accountant, Paul Munter, issued a statement earlier this week. I might be reading too much into it, but when public statements are issued out of the blue, I take it to mean that there’s some urgency and importance to the issue, and the SEC might be paying extra attention to it.
The purpose of this particular statement is to remind auditors, managers, and audit committees of the importance of auditor independence – and the need to continually monitor independence in light of business activities & relationships. Here’s an excerpt:
We continue to encourage audit committees to consider the sufficiency of the auditor’s and the issuer’s monitoring processes, including those that address corporate changes or other events that potentially affect auditor independence. This is particularly relevant in the current environment as companies seek to access public markets through new and innovative transactions, and audit firms continue to expand business relationships and non-audit services.
Management, the audit committee and the independent auditor should proactively seek to inform themselves of any potential impact to auditor independence, in fact and appearance, as companies negotiate potential transactions with third parties. This requires all parties to potential transactions to understand the filings that could be required by such transactions, the existing auditors’ relationship with counterparties, and the potential impact of transactions and the auditor’s relationships with the counterparty on the existing auditor’s ability to continue to comply with the Commission’s auditor independence rule applicable to such filings. This proactive monitoring requires management, the audit committee, and the independent auditor to each consider the potential effects of the auditor’s existing business and service relationships with other companies on the auditor’s ability to remain independent of the issuer if a contemplated transaction is consummated.
For example, it is important to understand what business relationships exist, including non-audit service relationships, between the audit firm and other entities that will, or in the future could, require an audit, become the existing audit entity’s affiliates, or result in other companies that have significant influence over the entity. Given the importance of independence as it relates to the audit of financial statements, these relationships and services and their implications to auditor independence should be carefully considered when management is negotiating the timing and substance of a transaction with third parties.
The statement also urges an understanding of the general standard of independence in Rule 2-01 of Reg S-X. This Cooley blog provides even more context and lays out the bottom line for companies:
It is important for companies to keep in mind that violations of the auditor independence rules can have serious consequences not only for the audit firm, but also for the audit client. For example, an independence violation may cause the auditor to withdraw the firm’s audit report, requiring the audit client to have a re-audit by another audit firm. As a result, in most cases, inquiry into the topic of auditor independence should certainly be a recurring menu item on the audit committee’s plate.
Earlier this week, I blogged about the PCAOB’s summary of 2020 inspection findings. A member emailed to ask whether the results of PCAOB audits are made public – because deficiencies in auditor performance could be very relevant to an audit committee’s decision to retain the auditor for the next year.
The PCAOB does indeed post inspection reports – as well as disciplinary actions. However, there’s a big lag between when inspections occur and when reports are issued. Audit committee chairs have told the PCAOB that they’re concerned about that, according to Appendix B of this Center for Audit Quality memo (pg. 14) – which also provides questions that audit committees can ask auditors about their inspections.
In his statement from earlier this week, SEC Acting Chief Accountant Paul Munter noted that the PCAOB inspection program is a key component of ensuring audit quality, and that audit committees should always be focused on audit quality. In my experience, the Big Four and some other large accounting firms always present to the audit committee about inspection findings – but you can’t count on all firms to do that. Especially OUS firms. A lot of mid-sized foreign private issuers that have a primary listing on the NYSE or Nasdaq aren’t a good fit for the Big Four, and one reason their audit quality can suffer is that their audit committees aren’t able to reliably get inspection info from smaller OUS audit firms in advance of engagement decisions.
If an audit committee is unable to access detailed inspection findings, the sample questions from the CAQ memo and the PCAOB’s summary of findings can be a starting point for digging for information.
The SEC announced yesterday that John Nester, formerly the Director of the Office of Public Affairs, is retiring from the agency at the end of this month after nearly 25 years of SEC service. Since April, John has been helping the Office of the Chief Operating Officer prepare the SEC and its Staff for success in a post-pandemic environment. As Public Affairs Director from 2006 until April 2021, John helped modernized the SEC’s external and internal communications, which doubled the agency’s web traffic!
Earlier in his SEC career, John was a member of the SEC’s investor education office, where he conceived and helped organize a national financial literacy campaign backed by state securities regulators and nearly three dozen government agencies, public service organizations, industry associations, and educational groups. John received many awards throughout his SEC tenure, including the Distinguished Service Award, which is the Commission’s highest honor. We would like to congratulate John on his career and his contributions to the SEC’s mission.
