We’ve just posted the registration information for our “Proxy Disclosure” & “Executive Compensation Conferences” – which will be held virtually October 13th – 15th. We’re excited to offer a format that can be either “live & interactive” or “on-demand” (your choice! or do both!) – to deliver candid & practical guidance, direct from the experts.
These Conferences will help you tackle ESG & executive pay issues that will be essential to your proxy disclosures and engagements. Check out the agendas – 17 panels over three days.
Early Bird Rates – Act Now! As a special “thank you” for early registration, we’re offering an “early bird” rate for a limited time to both members & non-members of our sites. In addition, anyone who subscribes to one of our sites will get a special “member discount” when they register for these Conferences (both of the Conferences are bundled together with a single price). Register online or by mail/e-mail today to get the best price and make sure that you’ll have access to all of the latest guidance.
ICOs: Investment Advisers Face Scrutiny
This Reuters article says that in his confirmation hearings last week, SEC Chair nominee Gary Gensler signaled openness to additional crypto regulations if his nomination is approved. Overall, the remarks seem pretty non-committal. But in the meantime, the SEC’s Examinations Division has issued a risk alert to explain its continued focus on digital assets – in particular, the Staff will be taking a closer look at the practices of investment advisers to make sure that digital assets are properly classified as “securities” when necessary, and at the disclosures those firms are making about the risks of crypto purchases.
The risk alert also casts a spotlight on transfer agents using distributed ledger technologies and says the Examinations Division will review whether those services comply with Exchange Act Rules 17Ad-1 to 17Ad-7. See this Mayer Brown memo for more details & practice implications.
“Machine Readable” SEC Filings: What Does It Mean?
I blogged recently about how the year-end report from the SEC’s Investor Advocate urged the Commission to adopt rules that would make companies’ SEC filings machine-readable. This paper points out that corporate disclosure has already been reshaped by machine processors, since those types of downloads have been steadily increasing over the past 15-20 years – and looks at how companies are adjusting their SEC disclosures when they know that machines are doing the reading.
“Machine readability” means that it’s easy for machines to separate and extract tables and numbers from text, it’s easy to identify tabular info because of clear headings, column separators and row separators, the filing contains all the needed info (without relying on external exhibits) and the characters are mostly standard ASCII. See page 31 for examples of high and low machine readability, pulled from actual reports. The researchers say that we humans are starting to make adjustments in our behavior to cater to our robot friends:
Our findings indicate that increasing AI readership motivates firms to prepare filings that are more friendly to machine parsing and processing, highlighting the growing roles of AI in the financial markets and their potential impact on corporate decisions. Firms manage sentiment and tone perception that is catered to AI readers by differentially avoiding words that are perceived as negative by algorithms, as compared to those by human readers.
Such a feedback effect can lead to unexpected outcomes, such as manipulation and collusion (Calvano, Calzolari, Denicolo, and Pastorello, 2019). The technology advancement calls for more studies to understand the impact of and induced behavior by AI in financial economics.
On Friday afternoon, the SEC announced that it had filed this complaint against AT&T and three of its IR execs for violations of Regulation Fair Disclosure. This is the first Reg FD enforcement action that we’ve seen in a couple of years – the Enforcement Division does indeed seem to be “powering up” and wasting no time in bringing litigation.
The charges show that the SEC views talking down analyst estimates as a problem under Reg FD. One of the most surprising points in the SEC’s announcement is that the IR execs allegedly disclosed info that the company’s internal policies specifically said could be “material.” Here’s an excerpt (also see this Stinson blog):
According to the SEC’s complaint, AT&T learned in March 2016 that a steeper-than-expected decline in its first quarter smartphone sales would cause AT&T’s revenue to fall short of analysts’ estimates for the quarter. The complaint alleges that to avoid falling short of the consensus revenue estimate for the third consecutive quarter, AT&T Investor Relations executives Christopher Womack, Michael Black, and Kent Evans made private, one-on-one phone calls to analysts at approximately 20 separate firms.
On these calls, the AT&T executives allegedly disclosed AT&T’s internal smartphone sales data and the impact of that data on internal revenue metrics, despite the fact that internal documents specifically informed Investor Relations personnel that AT&T’s revenue and sales of smartphones were types of information generally considered “material” to AT&T investors, and therefore prohibited from selective disclosure under Regulation FD. The complaint further alleges that as a result of what they were told on these calls, the analysts substantially reduced their revenue forecasts, leading to the overall consensus revenue estimate falling to just below the level that AT&T ultimately reported to the public on April 26, 2016.
While we don’t know yet whether this claim will end up being settled and what type of penalties (if any) AT&T will face (at this point, the SEC’s allegations are unproven), the fact that the company is charged in the complaint is a reminder that simply having a policy in place isn’t enough to avoid litigation. Check out our 135-page “Reg FD” Handbook if you need to jump-start your compliance efforts.
EDGAR Gets a Makeover!
Wow. The EDGAR filings page has been completely remade (here’s Apple’s page as an example). Our members are giving it mixed reviews so far, but that might be because it takes time to get accustomed to a new interface.
In addition to being able to revert to “classic version” via a button at the top right (h/t Lowenstein Sandler’s Daniel Porco), you can still use “form descriptions” to search for filings – click the “view filings” box in the top left box, and then use the “search table” box just like on the old page.
The updated version also has a new field to be able to search text in filed documents, which will be helpful. Perhaps the “company information” box at the top of the page will eventually be populated with more key info that’s pulled in from filings…
Tomorrow’s Webcast: “Conduct of the Annual Meeting”
Tune in tomorrow for our “Conduct of the Annual Meeting” webcast – to hear Crown Castle’s Masha Blankenship, AIG’s Rose Marie Glazer, Rocket Companies’ Tina V. John, American Election Services’ Christel Pauli and Oracle’s Kimberly Woolley discuss expected “virtual meeting” trends for the 2021 proxy season, annual meeting logistics, rules of conduct, handling shareholder questions, and voting & tabulation issues.
Bonus: If you attend the live version of this 60-minute program, CLE credit will be available! You just need to submit your state and license number and complete the prompts during the program.
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, subscribe now. The webcast cost for non-members is $595. You can renew or sign up online – or by fax or mail via this order form. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
That was quick! Following last week’s SEC announcement that Corp Fin will be scrutinizing climate-related disclosures, yesterday the SEC issued an announcement about creation of an Enforcement Division Task Force focused on climate and ESG. Acting Deputy Director of Enforcement Kelly Gibson will lead the task force, which will include 22 members. Here’s an excerpt from the SEC’s press release:
Consistent with increasing investor focus and reliance on climate and ESG-related disclosure and investment, the Climate and ESG Task Force will develop initiatives to proactively identify ESG-related misconduct. The task force will also coordinate the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations.
The initial focus will be to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules.
Besides noting that the task force will work closely with other SEC Divisions and offices, the announcement says the task force will pursue tips and referrals on ESG-related issues and includes a link to the agency’s TCR webpage for submitting tips, referrals and whistleblower complaints.
With the earlier announcement directing Corp Fin to scrutinize climate-related disclosures and now with the creation of an Enforcement Division climate and ESG task force, the SEC’s sending a message that it intends to focus and dedicate resources to review of climate and ESG disclosures. Yesterday’s announcement also follows Wednesday’s announcement of priorities for the Examinations Division for climate risks relating to brokers and investment advisors, as it seems like they’re going to scrutinize ESG investments. The announcement about Examinations Division priorities includes mention that they’ll review investment advisors and investment company proxy voting policies and procedures and votes to assess whether they align with the strategies.
In an apparent effort to add context to these recent announcements, Commissioners Hester Peirce and Elad Roisman issued a statement saying time will tell what these recent announcements really mean because right now it’s not yet clear. Commissioners Roisman and Peirce note that the Enforcement Division will continue to identify, investigate, and bring actions against those who violate SEC laws and rules but such actions would not be based on any new standard.
In response to these recent announcements, some may want to step-up their efforts around climate-related disclosures. As a resource to help those reviewing and preparing climate-related disclosures, check out the “Internal Controls” memos in our “ESG” Practice Area.
ESG Reporting: Roadmap for Attestation Services
A few weeks ago, I blogged about how investors want to see companies enhance ESG reporting. One enhancement investors want to see is improved data credibility through assurance. Now with the Enforcement Division’s new task force potentially preparing to sift through company ESG disclosures, more companies may be thinking about possible actions to assure themselves and investors of ESG data quality. Recently, the Center for Audit Quality and AICPA issued a memo providing a roadmap for audit practitioners about their role in assisting companies with ESG data assurance efforts, which might offer some help.
Although the report is aimed at audit practitioners, it outlines information to help companies understand what might be involved with a review or examination level attestation from an independent accounting firm. The report includes representative samples from 2 US companies that included an attestation report in their SEC filings. Here’s an excerpt describing several topics to consider prior to engaging a firm to provide ESG attestation services:
Important decision attributes include, but are not limited to, (a) what information will fall within the scope of the attestation engagement (the subject matter); (b) what reporting criteria will the subject matter be measured against (e.g., GRI, SASB, company developed); (c) what level of attestation service will be provided (examination engagement, review engagement); and (d) how will the ESG information and attestation report be disclosed and used?
In determining whether to seek an examination level engagement or a review level engagement, the report suggests where and how the ESG information will be disclosed plays a part in the decision. Management may determine a review level of engagement is sufficient when the information will be disclosed on a company website rather than disclosed in a SEC filing. The nature of intended users and the significance of the ESG information to them will also affect the level of attestation service for a particular company – when ESG disclosures are being used for investment decision making, the report says an examination level engagement may be more appropriate.
For more about the need for assurance services, last week, the International Federation of Accountants and the International Integrated Reporting Council announced an initiative to help determine how to best deliver integrated report assurance. The organizations plan to roll the initiative out in phases and the first installment announced last week sets out what integrated reporting assurance involves, the difference between limited and reasonable assurance and what is required of auditors and organizations to strive for reasonable integrated reporting assurance.
Transcript: “Audit Committees in Action: The Latest Developments”
We’ve posted the transcript for our recent webcast: “Audit Committees in Action: The Latest Developments” – it covered these topics:
Last week, John blogged about Acting SEC Chair Allison Herren Lee’s statement directing Corp Fin to scrutinize climate change disclosures. Many companies had already been focused on their climate-related disclosures given the increased focus coming from investors and other stakeholders. But, with Corp Fin now directed to look closer, a recent Audit Analytics blog looked back what happened with SEC comment letters following release of the Commission’s 2010 guidance.
Corp Fin could scrutinize more than they did a decade ago, after all company initiatives and disclosures relating to climate risk have changed in that time. Still looking back at comment letters is one way to help gauge potential focus areas. Here’s what Audit Analytics had to say about comment letters issued back around the time of the 2010 SEC guidance:
The most common area of focus for climate change comment letters was the risk factors section. This was followed by the business overview section, reserves reporting, and the liquidity section of the MD&A. And top five concluded with the accounting for contingencies. This was to be expected as these were the areas focused on in the 2010 guidance.
In terms of industries most likely to receive comment letters, the findings weren’t surprising – the Mining and Extraction sectors, including oil and gas companies, topped the list. They were followed by Power Generation and Manufacturers, respectively, with Insurance being the only other notable industry.
Looking at things today, Audit Analytics predicts we’ll see many of the same industries bear the brunt of potential SEC comment letters. But, the firm also says companies in industries that were largely spared the last time around will likely see more scrutiny this time. For those sharpening pencils for possible updates in their upcoming Q1 reports, check out our “Climate Change” Practice Area for the latest memos and other resources.
Do Social Boycotts Influence Board Turnover?
According to an academic study, researchers say social boycotts can lead to increased board turnover at targeted companies. The study’s abstract provides an overview explaining that researchers studied how personal social values affect directors’ willingness to serve on boards. The researchers found when director ideologies are aligned with those of activists targeting a company on which they serve, a director is more prone to leaving.
The findings aren’t that surprising as one would hope directors and companies are somewhat aligned with their values. In terms of what this could mean, the researchers note social values may become an even more central part of future director recruitment as millennials and younger generations tend to place more emphasis on social impact. This excerpt from the Academy of Management Insights (subscription required) summarizes the study’s findings:
– Boycotted firms experienced a 7% increase in board director turnover
– Boards faced a greater likelihood of director turnover among directors who shared ideologies with boycotters (liberal directors were more likely to leave after liberal boycotts, and vice versa)
– Directors became more loyal to firms that were targeted by movements from the opposing ideology. Conservatives, compared to liberals, were especially prone to loyalty when their firms faced challenges from liberal activists
– The link between shared social values and director exits was stronger after boycotts that caused stock prices to drop
Audit Committee Oversight: 10 Topics for Leveraging Internal Audit
Now that March is here, many audit committees might be reflecting on their workload over the last couple of months as, among other things, they wrapped up tasks related to year-end reporting. To help understand company-wide risks and mitigation activities, many audit committees lean on internal audit to provide insight into whether company risk mitigation efforts are effective. 2020 brought increased attention to risks that previously weren’t always top of mind. Besides focusing on financial controls and operational audits, a PwC memo says some internal audit departments have expanded their work to areas beyond the traditional internal audit world.
The memo outlines 10 areas for audit committees to consider leveraging internal audit, with examples of internal audit focus areas for each. To help ensure audit committees are providing effective oversight, here are a few topical areas that audit committees might consider tapping internal audit for help:
– Organizational culture, values and compliance: effectiveness of the compliance program considering new guidance from the DOJ and with a deeper focus on the state of the risk and compliance culture, key reporting indicators of company culture, assessment of culture as part of routine internal audits, review of the organization’s process and controls related to diversity and inclusion metrics and reporting
– Health and safety: sufficiency of return to the workplace plans, including the process undertaken to create and vet the policy as well as compliance with any applicable regulations, assessment of health and safety protocols, process for monitoring and reporting of ethics and compliance hotline activity related to health and safety
– Brand management: management’s processes for monitoring and responding to content on social media and its impact on reputation, the organizations policies around employee use of social media
– Human capital and talent management: mechanisms to monitor and obtain feedback on programs focused on employee satisfaction and well-being, processes to measure workforce productivity, the company’s recruitment and retention programs
As we see more Form 10-Ks with new Item 101 human capital resource disclosures, it’s becoming clear that companies are taking this opportunity to tell their “diversity & inclusion” story. This WSJ article from Monday says that about one-third of S&P 500 companies are including at least some information on diversity in their annual report. A recent Semler Brossy report found some companies are also including HCM disclosure in their proxy statements – which makes sense as companies tell their stories about board oversight of human capital and related initiatives. Semler Brossy’s report says that of the proxy statement HCM disclosures reviewed, diversity & inclusion was the most frequent topic covered.
Companies want to do the right thing and tell all they’re doing on the D&I front, and stakeholders want to see this. At the same time, disclosures need to be accurate. They’ll not only be scrutinized by investors and other stakeholders, but also could attract unwanted attention from plaintiffs’ attorneys – as explained in this recent Keith Bishop blog.
Over the last year, we’ve blogged about several board diversity lawsuits that have cropped up. These lawsuits seem to have quieted down, perhaps as a result of California’s law mandating certain board diversity requirements for companies based in the state and Nasdaq’s proposed listing standard relating to board diversity disclosures. But, this D&O Diary blog provides a discussion of a more recent board diversity lawsuit – this one involving Micron Technology. We don’t know whether these lawsuits will continue or whether they’ll be successful, but they certainly are an unwelcome development for the companies involved.
As noted in the D&O Diary blog, the most recent lawsuit differs from prior board diversity lawsuits in that it involves a company based in Idaho – not California – and it was brought by a law firm not involved with the prior lawsuits. As much as companies carefully consider disclosures during what is usually an iterative drafting process, this most recent lawsuit serves as another reminder to consider disclosures relating to diversity and inclusion from all angles, including from the potential perspective of plaintiff firms.
Legislative Push for Board & Executive Diversity Disclosures
Last week, a bill that would require public companies to disclose the gender, race, ethnicity and veteran status of directors, board nominees and senior executive officers was reintroduced in the House and Senate. The bill, called “Improving Corporate Governance Through Diversity Act of 2021” was simultaneously introduced by Congressman Gregory Meeks in the House and Senator Bob Menendez in the Senate.
First introduced in 2017, the bill passed the House in 2019 but then stalled in the Senate. It’s too early to gauge whether the bill will pass but with Democrats in control of both chambers, there’s a chance it could – although it’d likely be a challenge – see John’s blog from last week about Senators urging the SEC to reject Nasdaq’s board diversity listing standard proposal. Various organizations support the proposed legislation, including the US Chamber of Commerce. In addition to requiring board and executive diversity disclosures, this press release describes other provisions:
– Empowers SEC’s Office of Minority and Women Inclusion (OMWI) to publish triennially best practices, in consultation with an advisory council of investors and issuers, for compliance with these enhanced disclosure rules.
– Mandates OMWI to create an advisory council consistent with the Federal Advisory Committee Act requiring formal reporting, public openness and accessibility, and various oversight procedures.
– Allows OMWI to solicit public comment on its best practices publication consistent with the formal rulemaking process under the Administrative Procedures Act.
Board Diversity Matters: There’s More!
With board diversity, there’s a lot more going on besides the introduction of federal legislation and concern about potential plaintiff firms, it’s almost a bit of an extravaganza. Today, I blogged on our “Proxy Season Blog” about the NY State Comptroller’s recent press release outlining its proxy voting guidelines addressing board diversity matters – the Comptroller has expanded its voting position at S&P 500 companies and in certain cases, anticipates increased votes “against” directors.
Also, in response to comments and criticism launched by members of the Senate Banking Committee that John blogged about last week, Nasdaq amended its proposed listing standard relating to board diversity disclosures. This Bryan Cave blog summarizes the changes – and there are several. First, one change relates to companies that have five or fewer directors – these companies would only need to include one diverse director rather than two. In another change, Nasdaq has proposed a one-year grace period for companies with a vacancy on the board that would put the company under Nasdaq’s recommended diversity objective. At this point, the SEC still has to approve Nasdaq’s proposal so stay tuned.
Also, Reuters reported that during a virtual forum last week Acting SEC Chair Allison Herren Lee said the SEC should consider revisiting disclosure requirements and strengthening guidance on board diversity in an effort to address a lack of board diversity. This Cooley blog questions whether enhanced diversity disclosure will follow Acting Chair Lee’s recent directive to Corp Fin to enhance its focus on climate-related disclosures. It’s hard to say where all of this will lead but in the near term anyway stakeholder focus on board diversity ranks right up there with focus on climate.
Back in September, Liz blogged about the SEC’s adoption of amendments to the SEC’s whistleblower awards program, which had been in the works for a while. With a new SEC, whistleblower awards continue rolling along. Last week the SEC issued two press releases relating to awards that high-lighted certain aspects of the amendments.
First, this SEC press release announced an award of more than $9 million. What’s unique about this award is that the SEC’s press release says it marks the first SEC whistleblower award based on a non-prosecution agreement or deferred prosecution agreement since the amendments to the SEC’s whistleblower program became effective last December. Some may recall the amendments to the SEC whistleblower rules included a change allowing awards based on deferred prosecution agreements and non-prosecution agreements entered into by the DOJ. The SEC’s press release doesn’t say how much the whistleblower received from the original award, but another $9 million coming from the related DOJ action is a nice payday. Here’s an excerpt:
The whistleblower provided significant information about an ongoing fraud to the SEC that enabled a large amount of money to be returned to investors harmed by the fraud. The SEC in turn provided that information to the DOJ. The whistleblower also provided significant assistance by traveling at the whistleblower’s own expense to be interviewed by DOJ.
Also last week, the SEC announced two additional whistleblower awards totaling more than $1.7 million. Although the award amounts were smaller for these awards, the SEC highlighted in its press release that the whistleblowers provided Forms TCR to the Commission within 30 days of their first learning of the Form TCR filing requirement under the agency’s new whistleblower rules. Not sure we’ve seen the agency draw attention to Form TCR previously, here’s an excerpt about that:
‘As these awards show, deserving whistleblowers may receive an award if they comply with the Form TCR filing requirements within 30 days of first obtaining actual or constructive notice of the filing requirement or 30 days from the date the whistleblower hires a lawyer to represent them in connection with the whistleblower’s previous submission of information to the Commission, whichever occurs first, and they otherwise meet the eligibility requirements,’ said Jane Norberg, Chief of the SEC’s Office of the Whistleblower. ‘These whistleblowers earned their awards by providing high quality information that supported a pair of successful Commission enforcement actions.’
Compliance Programs Stay on Front Burner, Virginia Passes Privacy Legislation
Over the last year, as California’s Consumer Privacy Act became effective, we blogged about some of the late changes and here’s John’s blog about passage of the California Privacy Rights and Enforcement Act of 2020. Although various states have proposed privacy laws, Virginia is the first state this year to adopt new privacy legislation. Virginia’s Consumer Data Protection Act is awaiting the governor’s signature and presuming it’s signed, it is slated to take effect in January 2023. This Morgan Lewis memo outlines considerations for businesses, here are a few takeaways:
First, unlike the CCPA’s limited private right of action for security breaches, Virginia’s legislation does not provide for a private right of action. Instead, the attorney general will have the exclusive right to enforce the law.
Second, Virginia’s legislation would impose stricter requirements than the CPRA as to how businesses obtain consent from consumers before processing sensitive data. While the CPRA accounts for sensitive personal information and permits consumers to submit opt-out requests specific to this sensitive personal information, the Virginia legislature borrowed the stricter standard in the GDPR and requires a business to obtain affirmative consent before any sensitive data may be collected and processed.
Third, covered businesses that only process consumer requests to opt out of the sale of personal data will need to expand their opt-out compliance programs. If passed, the Virginia legislation goes further than just granting Virginians the right to opt out of the sale of their personal data and broadens that opt-out right to the use of personal data for targeted advertising and profiling purposes.
Companies that have already taken measures to comply with the CCPA, CPRA and GDPR likely have a head start to ensure compliance with Virginia’s legislation. But, the differences with Virginia’s legislation probably mean it’d be a good idea to add compliance program review back to the to-do list. For a comparison between Virginia’s legislation and the CCPA, this GreenbergTraurig blog has a chart showing how certain aspects of Virginia’s legislation are broader than the CCPA.
Our March E-Minders is Posted
We have posted the March issue of our complimentary monthly email newsletter. Sign up today to receive it by simply entering your email address!
Each year, we blog about Larry Fink’s annual letter to CEOs. With BlackRock being among the largest shareholders for many companies, the letters are read with interest to help understand BlackRock’s key focus areas for the upcoming shareholder meeting season. A recent academic study examined whether “broad-based public engagement”, such as Larry Fink’s annual letter, is effective at influencing company behavior and it found that it is.
The study examined several questions, including among others, whether companies adjust disclosures following the release of Larry Fink’s annual letter and if so, whether BlackRock values the disclosures. For each of these questions, the researchers said yes, companies adjust their disclosures and BlackRock values them.
The researchers studied disclosures from 2016 – 2019 of 3,550 companies and observed a change in portfolio firms’ 8-K disclosures around the letter release date, suggesting that companies are responding to Fink’s call for more disclosure about topics of interest. Specifically, we find that portfolio firms’ disclosures during the post-letter period reflect an increase in language similar to that included in the letter, controlling for a variety of firm and disclosure characteristics. Moreover, our results indicate that the observed change in disclosure around the BlackRock letters is a response to BlackRock’s broad-based public engagement letters, rather than to a general demand for information from other important stakeholders (e.g., Vanguard and State Street) or to BlackRock’s private engagement.
Further, BlackRock appears to value these additional disclosures, as evidenced by less opposition to management recommendations in votes during subsequent annual shareholder meetings. This result extended to the subset of proposals related to environmental and social issues.
This Institutional Investor article discusses the research and in it the authors appear to advocate for investor public engagement. Hard to say whether we’ll see more of this from other investors but the authors say their research suggests public engagement is an effective way for investors to communicate broadly with portfolio companies beyond more costly individual interactions.
Welcome Back! Clayton Returns to Sullivan & Cromwell, Avakian to WilmerHale
In the time since former SEC Chair Jay Clayton departed the agency, some have wondered whether he would return to private practice. Some may recall last summer when the DOJ issued an announcement that the President intended to nominate Jay to become the US Attorney for the SDNY – that nomination didn’t really go anywhere as he stayed at the SEC until the holiday season. A couple of weeks ago, Sullivan & Cromwell announced that Jay is returning to the firm’s New York office as Senior Policy Advisor and of counsel. The announcement also says that he’s been appointed as Lead Independent Director of Apollo Global Management.
Separately, last week WilmerHale announced that Stephanie Avakian, former Co-Director of the SEC’s Enforcement Division, is returning to the firm later in the year as Chair of its Securities and Financial Services Department and as a member of the firm’s Management Committee. Stephanie had been a partner at the firm prior to joining the SEC back in 2014.
January-February Issue of “The Corporate Executive”
The January-February issue of The Corporate Executivehas been sent to the printer (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:
– The Impact of COVID-19: Our Model CD&A Disclosure
– Recent Case Tests Attorney-Client Privilege for Law Firm Assisted Internal Assessments
– Deferred Compensation Plan Funded by a Rabbi Trust but Participants are Shut Out by Company and 409A
– Officer and Director Indemnification Provisions May Need Review
Activist hedge funds are usually considered a potential threat by public company management, but that’s not always the case. A recent study takes a look at the phenomenon of “validation capital,” where hedge funds take a position in a company and protect management from other activists as they implement the company’s strategy. Here’s an excerpt from the abstract:
Although it is well understood that activist shareholders challenge management, they can also serve as a shield. This Article describes “validation capital,” which occurs when a bloc holder’s—and generally an activist hedge fund’s—presence protects management from shareholder interference and allows management’s pre-existing strategy to proceed uninterrupted.
When a sophisticated bloc holder with a large investment and the ability to threaten management’s control chooses to vouch for management’s strategy after vetting it, this support can send a credible signal to the market that protects management from disruption. By protecting a value-creating management strategy that might otherwise be misjudged, providers of validation capital benefit all shareholders, including themselves.
These arrangements often involve side payments to the hedge funds providing the muscle, which the authors acknowledge creates the potential for a corrupt bargain – but they conclude that legal and market forces make that an unlikely outcome. They claim that empirical data from hedge fund activism events supports that conclusion. This “Institutional Investor” article discusses the study, and cites Trian’s 2014 investment in BNY Mellon as an example of validation capital.
Earlier this month, Sen. Pat Toomey (R-PA) & other Republican members of the Senate Banking Committee sent a letter to Acting SEC Chair Allison Herren Lee urging the SEC to reject Nasdaq’s board diversity listing proposal.
While acknowledging the potential benefits of board diversity, the letter contends that Nasdaq’s proposal would interfere with “a board’s duty to follow its legal obligations to govern in the best interest of the corporation and its shareholders,” violate the materiality principle that governs securities disclosure & harm economic growth by imposing costs on public companies and discouraging private companies from going public. Okay, those may be reasonable criticisms – but I rolled my eyes at this part of the letter:
The materiality doctrine prevents the development of an unstable, politicized securities regime that would be ripe for abuse of power. Without it, political factions could use securities regulations to advance the latest social policy fad, sidestepping democratic deliberation. Securities regulation would become a political football, as all sides of a social policy issue would fight to enshrine their perspective into regulation.
Sen. Toomey & his colleagues undoubtedly intended their statement about securities regulation becoming a “political football” as a warning about a future regulatory dystopia. Unfortunately, it seems more like a pretty accurate description of the past several years at the SEC, where the outcome of virtually all major regulatory proposals has been decided by a 3-2 vote along unbending partisan lines. That’s a situation that seems unlikely to change in the near future.
Contracts: SDNY Says the Pandemic is a “Force Majeure”
This Shearman blog reviews the SDNY’s recent decision in JN Contemporary Art v. Phillips Auctioneers, (SDNY; 12/20), in which Judge Denise Cote held that an auction house was permitted to terminate an agreement because the pandemic constituted a “natural disaster” within the meaning of the agreement’s force majeure clause. This excerpt discusses Judge Cote’s reasoning:
The Court held that the COVID-19 pandemic and related government restrictions on business activity were “squarely” within the agreement’s force majeure clause, which allowed the auction house to terminate the contract if the auction were postponed due to “circumstances beyond [the parties’] reasonable control.” First, the Court concluded that it could not be “seriously disputed” that COVID-19 constituted a “natural disaster” as the pandemic was an event “brought about by nature” and a “natural event that cause[d] great damage or loss of life.”
Second, the Court determined that the COVID-19 pandemic was the type of “circumstance” envisioned by the clause because the enumerated examples included environmental calamities and “also widespread social and economic disruptions.” The COVID-19 pandemic fell within that category, the Court noted, as it was “a worldwide public health crisis that has taken untold lives and upended the world economy.”
The blog says that this decision is among the first to explicitly hold that the pandemic qualifies as a “natural disaster” under a contractual force majeure clause.
In news that may throw an 11th hour monkey wrench into the finalization of a number of 10-K filings, Acting SEC Chair Allison Herren Lee issued a statement yesterday in which she directed Corp Fin to take a hard look at companies’ climate change disclosures. Here’s an excerpt:
Today, I am directing the Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings. The Commission in 2010 provided guidance to public companies regarding existing disclosure requirements as they apply to climate change matters.
As part of its enhanced focus in this area, the staff will review the extent to which public companies address the topics identified in the 2010 guidance, assess compliance with disclosure obligations under the federal securities laws, engage with public companies on these issues, and absorb critical lessons on how the market is currently managing climate-related risks. The staff will use insights from this work to begin updating the 2010 guidance to take into account developments in the last decade.
You may recall that a few years ago, the GAO took a look at the SEC’s actions since it issued climate change disclosure guidance. The GAO report expressed some concern with the Staff’s level of training on climate related disclosures, so that may present some challenges for everyone involved in the review process. Those training shortcomings may well have been addressed in the years following the GAO report, but there’s still the matter of the lack of uniformity in climate change disclosures that the GAO report also noted.
Finally, the SEC hasn’t exactly been cracking the disclosure whip on climate change in recent years, so the Staff’s likely to find a fairly target rich environment when it reviews existing climate disclosures. Add all of that up, and, well, in the words of Bette Davis, “fasten your seat belts, it’s going to be a bumpy night.”
Now is probably a good time to refresh yourself on the SEC’s 2010 guidance, and to review the other resources in our “Climate Change” Practice Area. If you want to get a sense for where the SEC may be heading in this area and the broader ESG disclosure category, check out this blog from Cooley’s Cydney Posner.
Disclosure: ESG Top Priority for Corp Fin’s Acting Director
Acting Chair Lee & Corp Fin’s Acting Director John Coates are clearly “singing from the same hymnal” when it comes to increasing the agency’s emphasis on climate change and other ESG disclosures. In fact, according to this Bloomberg Law article, ESG is Coates’ top disclosure priority. Here’s an excerpt:
A Harvard Law School professor who has pushed the SEC to update its corporate disclosure requirements on climate change and other ESG issues is now planning to turn his words into action as an agency insider. John Coates, who joined the Securities and Exchange Commission on Feb. 1 as acting director of its Division of Corporation Finance, is poised to play a leading role in any agency action to boost companies’ environmental, social, and governance disclosures, following his work on the issues at Harvard and on an SEC advisory panel.
Under his guidance, the SEC’s Division of Corporation Finance could enhance its focus on climate disclosures when it reviews companies’ filings. It also could start working on rules to mandate more corporate reporting on climate change and other ESG matters. He may even play a role in requiring disclosures on companies’ political spending, if Congress allows the SEC to act.
“If I were to pick a single new thing that I’m hoping the SEC can help on, it would be this area,” Coates said about ESG in an interview with Bloomberg Law.
A recent Reuters article also quotes Coates as saying that the SEC “agency ‘should help lead’ the creation of a disclosure system for environmental, social and governance (ESG) issues for corporations.”
Zoom Etiquette: No Jammies in Chancery Court!
It turns out that “Cat Lawyer” wasn’t the only member of the bar who fumbled a Zoom hearing in recent months. Francis Pileggi recently provided some guidance on his blog about “protocols & professionalism” for remote hearings. He included a number of helpful links to information from the Delaware courts, but it was a link to a recent letter from Vice Chancellor Slights that caught my eye. This excerpt from that letter suggests that one lawyer involved in a hearing would have been better off using a cat filter instead of taking a “come as you are” approach:
Mr. Weisbrot’s email states that I would not consider an application from him because he was “not wearing a tie.” That is true, as the record reflects. What the record also reflects is that Mr. Weisbrot appeared in court for trial (via Zoom) on Tuesday in either a printed tee-shirt or pajamas (it was difficult to discern).
Egads! Look, we long ago established that I don’t know much about fashion, but even I would think twice about showing up for a Chancery Court hearing in my “Dragnet” tee-shirt.
This Bryan Cave blog provides some helpful input about the SEC’s recently adopted electronic signature process – a topic that we’ve received a lot of questions about in our Q&A Forum. Here’s an excerpt addressing a common area of uncertainty: will the authentication requirements be met if a company emails a document for signature and asks that the recipient reply by email affirmatively indicating approval of the filing?
Many take the more conservative view that affirmative reply emails, without added features, are not sufficiently secure to authenticate the signer’s identity. For example, someone other than the signer may have access to his or her email account and the ability to send affirmative reply emails on his or her behalf. Similarly, someone could theoretically walk by an unoccupied computer and send a reply email.
Another view is that an affirmative reply email in and of itself should be a sufficient “logical or digital” authentication as long as the attestation form confirms the signatory’s email address to be used for that purpose.
We recommend that unless and until the SEC provides guidance, companies proceed with caution in using “affirmative reply” emails to authenticate signatures, and that, to the extent practicable, they consider adding features such as those discussed in Item 3 below.
As the blog’s response suggests, the details surrounding the authentication requirement are somewhat murky, and this is an area where experienced practitioners disagree on the right approach. Some guidance from the Staff on this and other electronic signature-related topics would be helpful. Sure, this is pretty mundane stuff – but worrying about the mundane stuff probably accounts for the vast majority of sleepless nights among securities lawyers.
Activism: The Pandemic as a Catalyst
Last year’s proxy season saw a decrease in the number of activist campaigns, as pandemic-related disruptions during the early spring early raised investor concerns about the potential for opportunistic behavior among activist hedge funds. This recent Deloitte report suggests that this year may be a different story – and that some of the changes brought about by the pandemic may serve as a catalyst for activism. Here’s an excerpt:
In another intriguing example of how dramatically things have changed in the past year, labor productivity in the United States jumped even as companies scrambled to adjust to the economic upheaval. Worker productivity growth in the United States had been essentially flat in the decade since the Great Recession, but through the first three quarters of 2020, it jumped.
This may be a macroeconomic clue that points to unexpected value in our new ways of doing business—increased digital interaction with their customers, or workforce changes such as work-from-home. Activists are likely to see in this and other “disconnects” new opportunities for boosting margins that can be added to their playbooks. As a result, we may see activists pushing companies to pursue digital transformation or change product mix based on the lessons of the crisis.
The report suggests that the typical advice to boards – “think like an activist” – is even more important this year. The focus on margin improvement is a case in point. Activists will typically look for opportunities to improve a company’s performance in three main areas: revenue growth, margin enhancement, or portfolio changes. Boosting margins is often a more attractive option than revenue growth, because smaller gains can have a bigger impact on the bottom line.
Transcript: “Shareholder Proponents Speak – 14a-8 Fallout & Other Initiatives”
We have posted the transcript for the recent webcast – “Shareholder Proponents Speak: 14a-8 Fallout & Other Initiatives.”
