Increased gender and ethnic diversity on public company boards is generally viewed positively. Nasdaq’s board diversity listing proposal has generated a bit of back and forth discussion as some have questioned the empirical research Nasdaq cited as justification for the proposal – John blogged back in April with one take on it and then Liz blogged about another take on it in May. Last week, the SEC issued a notice stating that it designated a longer period to consider Nasdaq’s proposed rule change. August 8 is the new date by which the Commission shall either approve or disapprove Nasdaq’s proposed rule change, as modified by Amendment No. 1.
Besides the back and forth that John and Liz blogged about, there’s been quite a number of comment letters about Nasdaq’s proposal and the Commission’s notice says it’s extending the period so it has sufficient time to consider the proposed rule change and the comment letters. And, for those reading the latest Reg Flex Agenda closely, you probably noted that corporate board diversity is among items listed in the proposed rulemaking stage, which includes an October 2021 target date.
With stakeholders continuing to look for disclosure about board diversity, we’re starting to see increased company disclosure. To help stakeholders compare disclosure practices, KPMG (along with the help of ESGauge) recently launched a free new tool that tracks disclosure about board diversity. Here’s the press release, which includes some initial findings and a link to the tool.
KPMG’s tool facilitates comparison of disclosure practices by sector, index (Russell 3000 and S&P 500) and company size. When preparing next year’s proxy statement disclosure about board diversity, this tool might help in-house counsel see how much companies in their industry and size range are disclosing about board and individual director diversity and related policies and help ensure their disclosure is keeping step!
For more board diversity info, Deloitte and the Alliance for Board Diversity recently released a 44-page report examining representation of women and racial/ethnic minorities on boards among Fortune 100 and Fortune 500 companies. See this Cooley blog for a recap of some of the report’s findings.
Big thanks to member Sundance Banks for alerting us to what appears to be a pretty widespread whistleblower hoax, and to others who have provided more background over the last few days, including WilmerHale’s Susan Muck & Kevin Muck. Many companies maintain an email inbox at which employees can submit concerns about accounting or compliance matters, in addition to their third-party ethics hotline. An anonymous gmail account has been pinging those inboxes with a message that starts like this:
Dear Ethics Committee,
I am a long-time employee, but for the purpose of this report, I request to remain anonymous. I also do not want to name the person this report is about, at least for the time being. I would like to bring to your attention an incident that happened a while back to see whether it warrants any action on my part.
My boss, whom I’ve worked with for years now, and in any respect had been a stand-up person I look up to, has confided in me about stock trading they’ve made the past year. He/She shared with me the fact that they’ve bought and sold a significant amount of [our company’s shares/one of our major business partner’s shares]. When I asked how often they traded and how much money did they earn, he/she just smiled and said: “let’s just say I know something others don’t. That’s what working in this company for __ years will get you”, indicating how long they worked in the company. A couple of days later, he/she called me to their office for a quick chat. We began talking about normal work affairs, but towards the end of the conversation, the boss asked me to close the door. When I did, he/she brought up the conversation about the stock trading again, telling me it’s probably for the best I don’t share this with anyone. I immediately responded that I didn’t and had no intention to do so. I also mentioned that this is not my business. The boss looked at me for a while and said that they knew they could count on me. They also mentioned that I am a very good employee and that he/she really appreciates me. The boss has been nothing but nice to me since then.
The message continues for a few more paragraphs and honestly seems pretty believable. But it quickly came to light as a scam when several companies contacted outside counsel about next steps, and the lawyers recognized that multiple clients were receiving very similar submissions. At least 25 companies have received this – the full number is likely much higher. Until Snopes starts debunking fake whistleblower messages, what should you do – or not do – if you receive this email or something like it?
1. Contact your outside counsel – a key takeaway here is that outside counsel can be very helpful in spotting commonalities that could be red flags.
2. Don’t respond until you’ve verified that the submission is legit – this is tricky, because whistleblower submissions typically trigger a cascade of policies & procedures, including prompt notification of directors and outside auditors, and responding to the whistleblower to get more information. But if you get this exact email, know that even regulators agree that it isn’t genuine and companies shouldn’t spend resources responding. They don’t want you engaging with potential criminals, if you can help it.
3. Don’t provide additional info to the whistleblower until you’ve verified that the submission is legit – again, this is delicate, but even responding with seemingly benign info could give the scammer points of contact in the legal, compliance or finance departments for future phishing schemes or illegitimate requests for money transfers.
4. Don’t download files or click on links – this version of the email doesn’t contain any files or links, but if you’ve already responded and received any sort of follow-up communication, don’t open it.
5. Alert your directors & auditors – this incident underscores the need for strong cybersecurity training and good email hygiene, and they should be on the lookout for scams.
6. Don’t forward the email – the scammer may be able to collect more email addresses if you do that. Copy & paste the content into a new message – or take a screenshot – if you need to share something that seems suspicious.
A very troubling aspect of this hoax – in addition to it coming at a time when the White House has warned all companies to be on high-alert about cybercrime – is that it undermines an important system that companies and regulators rely on to prevent wrongdoing. I don’t want to suggest in any way that you ignore whistleblower complaints – but in light of this, it’s probably worth doing a gut-check with outside counsel before responding. I’ve been told that regulators are also taking this incident very seriously.
Quick Poll: What’s the Fake Whistleblower’s Endgame?
Like a chain email that just won’t stop, or one of those Facebook “warnings” from 2009 that periodically recirculates for no apparent reason, the endgame here is a bit of a mystery. Vote for your favorite theory in this anonymous poll:
It is with a heavy heart that I share the sad news that we lost a legend of the SEC’s Division of Corporation Finance and the securities bar, Abbie Arms. Abbie passed away on May 19, 2021 at the age of 73 after a long and difficult battle with lung disease. For many years, Abbie served in key senior positions in Corp Fin, where she shaped regulatory policy on many important capital markets and public company issues.
Abbie was a brilliant securities lawyer who was highly skilled at analyzing complex issues and formulating appropriate regulatory responses that were consistent with the Commission’s investor protection mandate. Abbie loved working at the SEC and mentoring and teaching young lawyers in the Division. In my formative years at the SEC, I learned much about the operation of the Securities Act from being in meetings with Abbie, and I still use and value those insights to this day.
After leaving the SEC, Abbie practiced for many years at Shearman & Sterling LLP, where she was able to assist the firm’s clients with her extraordinary knowledge and skills as a securities lawyer. She also served as a Trustee of the SEC Historical Society from 2007-2013. Abbie was a loving and compassionate person who was loved and admired by her family, friends, co-workers and community. We will greatly miss Abbie and we offer our sincerest condolences to her family and many friends.
The May-June issue of “The Corporate Counsel” newsletter is in the mail (try a no-risk trial). 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. The issue includes articles on:
– Fun in the Summer — Navigating the Filer Status Maze
– Fighting to Keep Your Secrets — A Fresh Look at Confidential Treatment
Dave & I have been doing a series of “Deep Dive with Dave” podcasts addressing the topics we’ve covered in recent issues and we’ve just posted one for this issue. Be sure to check it out!
According to this Institutional Investor article, a new study finds that “green bonds” proved to be an attractive safe haven investment during the pandemic:
Climate-friendly debt served as a better protection against large market fluctuations than gold, as well as performing better than other environmental, social, and governance investments, according to new research from Imran Yousaf of Pakistan’s Air University, Muhammed Tahir Suleman of the University of Otago in New Zealand, and Riza Demirer of Southern Illinois University Edwardsville.
In the paper, the trio argued that green bonds were the “preferable safe haven” investment for passive investors hoping to defend their portfolios against the “uncertainty” of the pandemic. Conventional stock portfolios that included green bonds saw the highest risk-adjusted returns during the pandemic when compared against equity portfolios supplemented by gold and other ESG assets, the researchers found.
That’s the good news. The bad news is that – at least on the junk end of the spectrum – green bonds may not turn out to be so green at the end of the day. The problem is that these issuers are disclosing to investors that they may not be able to use the proceeds of the financings for the purposes that they intended. The disclosure I’ve seen is pretty robust (check out the last risk factor on p. S-23 of Dana’s recent pro supp), so investors don’t have a lot of recourse if the proceeds aren’t deployed according to plan, but that doesn’t seem to bother many of them. Here’s an excerpt from this WSJ article:
Companies that issue green bonds create frameworks specifying the use of proceeds for objectives like transitioning to renewable energy. They also hire third parties to verify that the objectives are being met. If a borrower fails verification, however, bondholders have no legal right to seek compensation. “There are no mechanisms to ensure investors that the green investment will actually occur,” said Mitu Gulati, a law professor at the University of Virginia. “The only conclusion I can draw from that is that investors don’t actually care. It’s so much eyewash.”
The article says that the risk that climate-friendly promises may turn out to be illusory wasn’t a big concern when these securities were issued exclusively by investment grade commitments with long-held commitments to stability, but now, as junk issuers enter the market, the concern is that many of them may discover that Kermit the Frog was right – it’s not easy being green.
Shareholder activists have made effective use of social media platforms in their campaigns, but corporations have been slower to adopt non-traditional channels of communications with investors. According to this Corporate Secretary article, that’s another thing that’s changed due to the pandemic. Here’s an excerpt:
Historically, shareholder activists have been better at using social media and digital communications tools to wield influence during a contested situation, with many issuers taking a conservative approach to social media and digital communications. But the pandemic has forced a greater adoption of tools such as videoconferencing and social media communications, and Bruce Goldfarb, founder, president and CEO at Okapi Partners, says he’s seeing more adoption of social media this year.
‘There were some companies that used social media as part of their IR process prior to the pandemic – especially companies that already made use of social media in their marketing and sales efforts – but investors would much more frequently file materials they had posted on social media,’ he points out. ‘More companies have recently done so, and that evolution is at least partly attributable to the pandemic.’ Goldfarb adds that he is seeing more examples of additional proxy materials being filed with the SEC this year – particularly LinkedIn and Twitter posts.
The article says that companies are increasingly open to alternative channels of communication with shareholders, and that social media could be a particularly useful tool for shareholder engagement by companies that have seen a big jump in retail investors this year (gee, who might they be referring to?), but that they need support from their advisors and outside counsel.
The May-June issue of the Deal Lawyers print newsletter was just posted – & also sent to the printer (try a no-risk trial). It includes articles on:
– A Comparison of Public and Private Acquisitions: New Data Highlights Recent Trends in Private Company Deal Terms
– Representations and Warranties Insurance: No Longer Optional for Strategic Buyers
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 4th from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
A few months ago, I blogged about the materiality standard and the hazards associated with the SEC serving up disclosure mandates designed to give investors “what they want.” But in a recent speech, Commissioner Allison Herren Lee put forward a different perspective on the materiality standard. She made several provocative comments in her speech, but to me the most striking was her statement that “[f]inally, investors, the arbiters of materiality, have been overwhelmingly clear in their views that climate risk and other ESG matters are material to their investment and voting decisions.”
I think Commissioner Lee is pushing the envelope here. Investors are not “the arbiters of materiality” under the securities laws. Instead, materiality is determined by a third party’s assessment of whether information would be significant to a hypothetical “reasonable investor” in making an investment decision. It’s an objective test, and it contemplates a very different inquiry from one that focuses on the subjective assessments of a particular investor or group of investors.
Don’t take my word for this – in the Reg FD adopting release, the SEC itself said that “materiality is an objective test keyed to the reasonable investor. . .” Prioritizing subjective and potentially agenda-driven investor statements about desired disclosure mandates isn’t a great fit with a purportedly objective standard. But such an approach would make it easier to avoid the need to show some financial consequences to public companies or the value of their stock before information could be regarded as material, and that may help explain its attraction to ESG disclosure advocates.
Financial considerations have always been fundamental to the materiality concept under the securities laws. After all, it’s a reasonable investor test and not a reasonable person test. I think this is where things get a little squishy with ESG disclosure. It’s indisputable that an issue like climate change will impose substantial costs on society as a whole. But it’s less clear that it will have a significant financial impact on most businesses and the value of their securities. In fact, a 2018 IPCC publication stated that “for most economic sectors, the impact of climate change will be small relative to the impacts of other drivers.”
For a financial regulator like the SEC, that discrepancy between societal costs and costs to public companies and markets creates a potential disconnect, the implications of which Commissioner Roisman highlighted in a recent speech:
It seems that some of the interest, particularly in “E” and “S” disclosures, is not in what risks environmental or social factors pose to the company, but rather what risks the company poses to, for example, the climate. To the extent that the interest is in understanding risks the company poses to the climate, what makes the SEC the appropriate federal government agency to require these disclosures, as opposed to, for example, the Environmental Protection Agency?
In a draft article submitted in response to the SEC’s request for comment on climate change disclosures, UVA law profs Paul and Julia Mahoney argue that the SEC is not the right agency to mandate ESG disclosures. They contend that the push for disclosure is being led by institutions whose purpose is in part “to pursue public policy goals outside the normal political process,” and whose statements asserting the supposed financial value of ESG are “cheap talk that conveys no information other than that the institution wants the SEC to require the disclosures.” What’s more, the article says that by doing so, the SEC “risks eroding public trust in its capacity and willingness to serve as an apolitical, technocratic regulator of the capital markets.”
The meme stock saga took another interesting turn last week, when the arbiters of materiality from Reddit charged Wall Street and drove several of their favorites to staggering new heights. That’s nothing new – it’s been happening all year. But what’s a bit different this time is the way that one company, AMC, has decided to whole-heartedly embrace its “apes.” This Verge article explains:
AMC announced today that it was creating AMC Investor Connect, “an innovative, proactive communication initiative that will put AMC in direct communication with its extraordinary base of enthusiastic and passionate individual shareholders to keep them up to date about important company information and to provide them with special offers.” This represents “a groundbreaking new approach” to communicating with retail investors, the company says. It’s a shame they didn’t put a bunch of rocket emojis in the announcement — after all, there’s no need to be coy. We all know exactly who AMC is speaking to, and if they sign up today, they’re getting free popcorn.
The AMC Investor Connect website bears virtually no resemblance to a traditional investor relations site, and is tied in with its existing “AMC Stubs” affinity program. Meanwhile, AMC’s CEO continued the company’s new age investor outreach when he sat down for an hour long YouTube interview on the “Trey’s Trades” channel, in which he made a pitch for support of the company’s proposal to authorize an additional 25 million shares of common stock. Apparently, he wasn’t wearing any pants during the interview, which I guess is a thing arbiters of materiality like meme stock CEOs to do these days.
Meanwhile, the SEC said it was observing the meme stock market for signs of “manipulative trading or other misconduct.” General goofiness, it appears, remains outside of the agency’s jurisdiction.
