I am not certain about many things in this world, but one thing that I am certain about is that we will have many things to talk about this year at our “Proxy Disclosure & 22nd Annual Executive Compensation Conferences,” which are taking place on October 21-22 at Virgin Hotels Las Vegas and via a virtual option if you are unable to attend in person.
Here are just a few of the great panels that I am looking forward to on our extraordinary agenda and involving our expert speakers:
– The SEC All-Stars: Proxy Season Insights
– The SEC All-Stars: Executive Pay Nuggets
– E&S: Balancing Risk & Reward in Today’s Environment
– How Activists Think: Understanding Activism Podcast LIVE
– The Proxy Process: Avoiding Surprises — On Time, On Budget & On Value
– Compensation Disclosures You Need to Fix
If you plan to attend in person, be sure to arrive early enough on Monday to attend the Welcome Party + CCRcorp’s 50th Anniversary Celebration, which will take place from 4:00 pm to 7:00 pm PT on October 20. Register today and take advantage of our Early Bird Rate by emailing info@ccrcorp.com or calling 1.800.737.1271.
Kevin LaCroix recently highlighted on The D&O Diary Blog a recent WSJ opinion piece titled “Quarterly Reports are Written for AI” by Hebrew University Business School Professor Keren Bar-Hava, which describes how the use of AI has changed the way analysts review MD&A. Kevin’s blog notes:
Professor Bar-Hava studied 108 MD&A reports from 27 top U.S. firms during the period 2021-24. She found that, by contrast to the earlier studies noted above, in which better-performing companies tended to have simpler, shorter reports, a different pattern has emerged. She found that positive tone has steadily increased, even when financial performance declined. Words like “growth,” “resilient,” “opportunity” have become more common. Terms signaling uncertainty, such as “might” or “could,” have declined.
Even “more strikingly,” she observed, the “most positive reports often came from the worst-performing firms.” Professor Bar-Hava says this is “no coincidence,” it is, rather, “strategy.” Tone, she says, has “become a tool to manage how algorithms ‘feel’ about performance.” It also “creates a risk” – that is, “the growing gap between what’s said and what’s true.”
What is happening, Professor Bar-Hava explains, is that companies are responding to “AI-induced disclosure pressure – the incentive to write in a way that performs well under algorithmic scrutiny.” The result “isn’t always more transparency.” It may be the opposite; the result may be “performative optimism crafted to influence machines, not people.”
Professor Bar-Hava identifies three levels on which the “AI-induced disclosure pressure” operates:
– Exposure pressure. AI flags vague or evasive language. Companies feel compelled to sound confident, even when the outlook is uncertain.
– Competitive pressure. Algorithms benchmark tone across peer firms. If a competitor sounds stronger, you look weak by comparison.
– Reputational pressure. AI feeds analyst dashboards, investor platforms and news summaries. One poorly framed sentence can ripple fast.
Professor Bar-Hava rightly notes the potential implications of these developments for possible liability under the securities laws. She notes that the SEC in the past has issued rules intended to improve narrative disclosure, “encouraging clarity, conciseness, and plain English.” But tone, she says, is “now a powerful drive of perception,” and it remains unregulated. That, she says, is a “blind spot.” AI driven tone scores are “influencing market behavior.” And if markets are being gamed, she says, “investors are misled.”
Professor Bar-Hava suggest that “tone” should be treated as “a material disclosure element.” We should monitor linguistic choices, as we do accounting choices, especially as “algorithms become the first line of interpretation.” Otherwise, we risk “building a world where clarity is polished but meaning is lost.”
The final paragraph of Professor Bar-Hava’s article makes an important point, which is that corporate boards “must understand that they’re writing for two audiences, people and machines.” Machines she says, don’t read between the lines, “they read the lines.” If we care about truth in reporting, “we must care how it sounds, not merely what is says.”
It is a somewhat disturbing thought that we are moving down a path of having AI write our disclosures for analysis by AI. I feel that such a trend could only be welcomed by plaintiffs’ lawyers and SEC Enforcement lawyers. As Kevin notes in his blog, “if a company is using AI to improve the way the company’s MD&A is scored under AI-driven analysis, the board must try to ensure that there is no gap between what’s said and what’s true.”
Earlier this month, the Center for Audit Quality (CAQ) released the results of a survey of institutional investors that focused on opinions and preferences related to the use of GenAI in public company audits and opinions on the use of GenAI in portfolio companies among institutional investors. The survey was conducted by KRC Research. The survey was conducted in May and involved 102 investors. The survey revealed the following key takeaways regarding the use of AI in audits:
– Nearly all trust the use of AI to support the audit processes and say use of AI increases trust in the audit of public companies.
– Accuracy and efficiency is seen as the most important benefit of the use of AI in the audit, followed by enhanced risk assessment and prioritization.
– Regular audits of AI systems and outputs, and AI usage policies, are seen as most important to maintain trust in the use of AI in the audit process.
– Company management is seen as most responsible for ensuring the responsible use of AI in the audit process by a small plurality (38%).
– Increased accuracy and reduced errors when using AI increases trust in the audit.
– The most cited concerns about the use of AI in the audit process is data security and privacy, lack of human oversight, and lack of clear auditing guidelines
With regard to the use of AI in portfolio companies, the key takeaways were:
– Nearly all are confident in the ability of portfolio companies to manage the risks associated with the use of AI.
– Data privacy and cybersecurity are the biggest risks associated with the use of AI.
– Nearly six in ten feel federal regulations on the use of AI are clear and comprehensive, while one third say federal regulations lack comprehensiveness.
– Nearly all say it is very or extremely important for portfolio companies to have formal structures to govern the use of AI.
– Regularly assessing the risks of AI and formal policy guidelines on the use of AI are seen as the most important steps to manage the risks associated with the use of AI.
The SEC recently announced that the next Small Business Capital Formation Meeting will take place on July 22, 2025, beginning at 10:00 Eastern Time. The meeting will be conducted at the SEC’s headquarters and via a live webcast. An agenda for the meeting is forthcoming.
The Small Business Capital Formation Advisory Committee “is designed to provide a formal mechanism for the Commission to receive advice and recommendations on Commission rules, regulations and policy matters relating to small businesses, including smaller public companies.”
The SEC has announced the appointment of Kevin Muhlendorf as the agency’s new Inspector General, effective July 28. Muhlendorf leads the Securities Enforcement Practice at Wiley Rein LLP in Washington D.C. He previously served as Acting Inspector General for the Washington Metropolitan Area Transit Authority, and served as a Trial Attorney and Assistant Chief in the U.S. Department of Justice Fraud Section, and as Senior Counsel in the SEC’s Division of Enforcement. Acting Inspector General Katherine Reilly will return to her role as a Deputy Inspector General.
As noted on the SEC’s website, the SEC’s Office of Inspector General “seeks to prevent and detect any fraud, waste, abuse, and mismanagement at the SEC while promoting integrity, economy, efficiency, and effectiveness in Commission programs and operations.” The OIG accomplishes this mission by:
– conducting independent and objective audits, evaluations, and other reviews of SEC programs and operations;
– conducting independent and objective investigations of potential criminal, civil, and administrative violations that undermine the ability of the SEC to accomplish its statutory mission;
– preventing and detecting fraud, waste, and abuse in SEC programs and operations;
– identifying vulnerabilities in SEC systems and operations and making recommendations to improve them;
– communicating timely and useful information that facilitates management decision making and the achievement of measurable gains; and
– keeping Congress, the Chair, and the Commissioners fully and currently informed of significant issues and developments.
On Saturday, Texas Governor Greg Abbott signed into law Senate Bill 2337, which imposes new regulations on proxy advisory firms such as ISS and Glass Lewis. Liz and Meredith have been covering developments with this legislation over on the Proxy Season Blog. This new law will become effective on September 1, 2025. As described in this blog, the new Texas law will mandate certain disclosures when proxy advisory firms recommend casting a vote for “non-financial reasons” or provide conflicting advice to multiple clients. The “non-financial” reasons include a recommendation wholly or partly based on environmental, social or governance investing, diversity, equity or inclusion, social credit or sustainability scores or membership in or commitment to an organization or group that bases its assessment of a company’s value on nonfinancial factors.
I took a non-traditional route into practicing law, and as a result I missed out on the time honored tradition of being a summer associate. I must admit that I am occasionally a little jealous of the summer associates that flock to law firms at this time of year, with all of their fun planned activities and frequent lunches.
In my experience, however, most summer associates are not here for the entertainment, but are rather looking for some substantive work opportunities so they can really get a full picture of the practice of law and the firm where they are working. Over the course of the past few weeks, Meaghan Nelson has been providing some great advice to summer associates and those who are supervising their work over on The Mentor Blog. Meaghan offers summer associates ten great pieces of advice for navigating the summer associate gig, as well as advice for providing effective feedback to summer associates. Be sure to check it out before your summer associates are gone, because as well all know, the summer really flies by!
So far, 2025 has proven to be challenging in many ways for public companies on the disclosure front, as we have navigated an evolving global trade policy, volatile financial markets and decidedly mixed signals on the future direction of the economy. Now, as the June 30 quarter-end date looms for many companies, we learned over the weekend of the U.S. strike on Iranian nuclear sites and we try to process what this could mean for the financial markets and the economy as companies begin preparing their quarterly reports.
The principal concerns now that the U.S. is involved in the conflict will be focused on retaliatory measures and how they could potentially escalate the situation and wreak havoc on the world economy. Over the course of this weekend, one of the potential retaliatory measures that was frequently discussed is a blockade of the Strait of Hormuz, which is a vital shipping lane for the world’s oil supply. This CNN article notes its strategic importance:
From the perspective of the global economy, there are few places as strategically important. The waterway, located between the Persian Gulf and the Gulf of Oman, is only 21 miles wide at its narrowest point. It’s the only way to ship crude from the oil-rich Persian Gulf to the rest of the world. Iran controls its northern side.
About 20 million barrels of oil, about one-fifth of daily global production, flow through the strait every day, according to the US Energy Information Administration (EIA), which called the channel a “critical oil chokepoint.”
A spike in oil prices as a result of a blockade of the Strait of Hormuz could serve to ignite inflationary pressures in the global economy already impacted by the evolving U.S. global trade policy, which could ultimately cause a negative impact on an already fragile U.S. economic outlook. As we discussed in the May-June 2025 issue of The Corporate Counsel, companies will need to carefully monitor and address (to the extent material) these risks and uncertainties. Key disclosure considerations include:
– Disclosure of known trends and uncertainties in the MD&A disclosure, including the impact of the unfolding trade policy changes, ongoing market volatility, inflationary pressures and potentially weakening economic conditions on a company’s results of operations and liquidity;
– Disclosure of geopolitical and economic risks in a company’s risk factors, to the extent not already covered by existing risk factor disclosure, while considering the need to avoid hypothetical risk factor disclosure;
– The impact of the uncertainty on the company’s earnings guidance or expectations, and whether it may be necessary for the company to pre-release earnings information closer to the end of the quarter or consider suspending guidance for the near term in light of all of the uncertainty;
– The need to address certain significant events in a Current Report on Form 8-K, including layoffs and other exit activities as well as impairments; and
– For companies facing significant business headwinds due to global trade and economic conditions, the need to consider whether the company can continue as a going concern in the near term.
As with the trade policy shock that took place during the last fiscal quarter, the geopolitical and economic implications of the U.S. strike in Iran will continue to unfold over the next days and weeks as quarterly disclosures are being prepared, so companies and their Disclosure Committees should closely monitor the developments and their potential disclosure implications.
On Friday, the Staff of the Division of Corporation Finance revised two and withdrew one of the Regulation S-K Compliance and Disclosure Interpretations addressing disclosure of environmental proceedings pursuant to Item 103 of Regulation S-K. These changes to the CDIs appear to stem from the updates to Item 103 that occurred in August 2020 in Release No. 33-10825, Modernization of Regulation S-K Items 101, 103, and 105. Those changes were intended to “update these rules to account for developments since their adoption or last revision, to improve disclosure for investors, and to simplify compliance for registrants.” The SEC reorganized Item 103 to incorporate the instructions into the text of the rule and to modify the quantitative thresholds for environmental proceedings.
In the updated CDIs, the Staff withdrew Question 105.02, which previously indicated that language in former Instruction 5 to Item 103 regarding administrative or judicial proceeding arising under “local provisions” was interpreted to include environmental actions brought by a foreign government. The Staff revised Question 105.01 to update the prior reference to a deleted instruction and to eliminate a reference to the Staff’s former view and instead only reference the Staff’s current view, which remained unchanged. In Question 105.03, the Staff revised the references to an instruction that was eliminated in the 2020 rulemaking to instead refer to the relevant text of the rule.
As we have covered over the past few months, the future of the PCAOB remains in hands of Congress as a proposal was advanced to eliminate the PCAOB and fold its auditor oversight operations into the SEC. As Dan Goelzer noted earlier this month, a group of forty-six academics and former regulatory officials wrote to the Senate Banking and Budget committees to explain why the proposal to abolish the PCAOB in the 2025 budget resolution violates the Senate’s “Byrd Rule.” Dan notes: “That rule requires that the budget impact of reconciliation provisions must be more than merely incidental to the non-budgetary consequences. Eliminating the PCAOB would have little effect on the federal budget but major policy implications for auditor oversight and investor protection.” The letter from the academics and former regulatory officals states:
We believe this proposal violates several of the Byrd Rule criteria for inclusion in a reconciliation bill for the following reasons:
1. The PCAOB is a nonprofit organization and is not funded through the federal budget.
2. The proposal would not result in a significant reduction to the federal deficit, because, per Sec. 50002 and the Congressional Budget Office (CBO), it would replace the PCAOB by establishing a new program inside the SEC that would require similar funding to carry out operations.
3. The PCAOB was created by a provision of the Sarbanes-Oxley Act of 2002, which was enacted through regular order, not through budget reconciliation. If this provision of the Act is to be overturned, that should also be accomplished through regular order rather than through budget reconciliation.
4. The non-budgetary consequences of Sec. 50002 are substantial and very large relative to any budgetary consequences, which are merely incidental.
5. The proposal relates to a specific organization and could be considered “targeting.” Targeting violates the Byrd Rule.
As this Thomson Reuters article notes, last Thursday the Senate parliamentarian deemed the Republican PCAOB elimination proposal to be subject to the Byrd Rule. The article notes:
The June 19, 2025, ruling by the Senate parliamentarian means the provision would be subject to a 60-vote requirement, which would almost certainly be unworkable for a bill that faces a precarious road to passage even through the simple majority allowed under the reconciliation process.
With this development, it appears that the PCAOB will likely continue to operate in its current form, at least for now.
