BlackRock’s Investment Stewardship team recently shared this commentary on corporate political activities – which urges companies to provide transparent disclosure so that investors and other stakeholders can understand how public messaging and strategy are aligned with contributions to lobbying efforts and trade associations. Where the stewardship team notes “material inconsistencies” with stated policy priorities and spending, BlackRock may support a shareholder proposal requesting additional disclosure or explanation.
The asset manager says that companies should provide easy-to-navigate info on their website – and should consider disclosing:
1. The purpose of the company’s political contributions and engagement in lobbying activities and trade associations,and how this activity aligns with the company’s strategy and/or goals of public participation, including the company’s legislative and regulatory priorities.
2. How the company engages in these activities (ex: Government Relations/Policy Team).
3. The company’s political contribution and lobbying policy, including management and board responsibilities.
4. The board’s oversight process for monitoring political contributions and lobbying activities.
5. If the company has established a PAC,and if so,how the PAC’s spending furthers the aims of the company’s political contributions.
6. Trade association memberships for which dues exceed a predetermined threshold that requires board approval or oversight.
7. An affirmation ofcompliance with federal and state laws governing political activities and lobbying.
Congress Expands SEC’s Disgorgement Powers
Lynn blogged last week about the proposed expansion of SEC’s disgorgement powers that was nestled in the 1480-page National Defense Authorization Act for Fiscal Year 2021. Although the President vetoed the bill, Congress overrode that and it became law on January 1st. As Lynn noted, the amendments double the statute of limitations for the SEC to seek disgorgement for fraud claims – from 5 to 10 years – as well as raise a number of interpretive questions. This WilmerHale memo discusses possible implications – here’s an excerpt (also see this commentary from Russ Ryan, former Assistant Director of the SEC’s Enforcement Division and Partner with King & Spalding):
The amendments are notable for the SEC’s enforcement program. Most prominently, the extended statute of limitations for scienter-based fraud may incentivize Division of Enforcement staff to investigate conduct that is much more dated than the familiar five-year statute and to expend additional efforts to find evidence supporting a scienter-based charge, which risks complicating responses to Commission requests and increasing defense costs. Moreover, in order to seek disgorgement from a broader period that is only available for scienter-based fraud, the Division of Enforcement may be less inclined to accept settled resolutions that charge non-scienter-based alternatives. This has the potential to complicate settlement negotiations, including because scienter-based resolutions can trigger more significant collateral consequences for some respondents.
The amendments also leave open several questions, including the extent to which the new statutory disgorgement framework supplants the requirements for disgorgement outlined in Liu. For example, the amendments do not expressly address Liu’s requirement that the Commission return disgorged funds to injured investors. They also are silent on Liu’s holding that the Commission must net a defendant’s legitimate expenses when calculating disgorgement awards and on whether and when the Commission may hold defendants jointly and severally liable for disgorgement awards. However, the statutory language’s focus on “unjust enrichment by the person who received such unjust enrichment” provides compelling arguments in favor of netting legitimate expenses and against expansive joint and several liability
Regulatory Risks: Global Chart
One lesson from the pandemic has been that boards need to find a way to identify and address emerging risks – and ideally have contingency plans in place to be able to quickly pivot. This is by no means a new concept, but it remains difficult to master. One resource that we recently posted in our “Risk Management” Practice Area could help – at least with legal risks. It’s an interactive database from Lex Mundi that allows you to select countries around the world to compare regulatory and legislative developments. Also check out this 52-page TCFD guidance on risk management integration and disclosure.
I blogged a few weeks ago about the need to double down on vendor management processes in light of the SolarWinds hack. We’re posting memos in our “Cybersecurity” Practice Area with more detailed advice on what to do right now. For example, most companies should be evaluating whether they’ve been compromised and whether any legal or contractual notices are triggered. This Quarles & Brady memo outlines how your incident response plan can be deployed for this particular event:
1. Work with your IT team to determine whether your organization uses the Orion product and, if so, if the tainted software was downloaded and whether any steps have been taken to mitigate.
2. If the malware was downloaded, investigate any potential malware risks, including whether the hacker accessed your networks and whether any data has been accessed or acquired.
3. Consider engaging a forensics firm for the investigation. Whether you use internal or external resources, we recommend conducting the investigation under legal privilege.
4. If data was accessed or acquired, determine whether notices are required under notification laws or contracts.
5. Consider putting your cyber insurance carrier on notice as the costs may be covered under your policy.
6. Bear in mind that the threat actor may still have visibility into your network when engaging in incident response activities and planning and implementing a remediation plan.
7. Even if you don’t use Orion or did not put the update into production,determine whether any third parties that connect to your network or handle your data were impacted.
8. Stay on top of advisories from your vendors, government, and trusted advisors.
For companies in or servicing the banking industry, things are even more urgent due to new legal requirements that are arising out of this incident. This Eversheds Sutherland memo explains that the NY Department of Financial Services is requiring all financial institutions to immediately report whether they’ve been affected in any way – and this Sullivan & Cromwell memo says that the FDIC and other agencies have also proposed rules that would require banks to notify federal regulators of cyber incidents within 36 hours, and would require bank service providers to notify affected banks immediately.
Skyrocketing Cyber Insurance Premiums: Not a Fait Accompli
With recent increases to the number and cost of cyber claims, it’s not too surprising that premiums are also on the rise – some are reporting increases of 50% of the expiring rate, according to this D&O Diary blog. It also says you might end up with lighter coverage even though you’re paying more – due to decreasing liability limits and tighter underwriting standards.
To keep your fees & coverage in check, the blog suggests 11 steps to take before your next renewal negotiation. Here’s #1 – and note that even if you’ve done this in the past, you likely need to do it again due to the current WFH environment and the increase in cyber crime:
1. Perform a vulnerability assessment as soon as possible: To assess your network versus the cyber threats to your network (which you previously identified in your risk assessment), where is your network vulnerable? Is it a staffing and resource issue, where you do not have the staff to monitor your network? Is it a patching problem (where you might be two or three or more “Patch Tuesdays” behind the eight ball)? Is it a structural problem (are you still running Windows 7)? Or, is it an employee training and education that rears up every time one of your employees “clicks on a link” or attachment from which he or she doesn’t know the sender?
Many of these issues are easily remediated for very little money. Some issues will need more TLC, and others will take some money to remediate. There is little doubt remediation will be easier, cheaper and better to swallow than a theoretical $200,000 premium increase and maybe an $8 million ransomware settlement that jeopardizes your credibility with your customers and investors.
Of course, these extra efforts also come at a cost – this Bloomberg article reports that 64% of bank executives are forecasting an increase in cybersecurity spending next year. That’s on top of the 15% jump this past year – equating to almost $1 billion for each of the largest US banks.
Carbon Markets: ESG’s Next Frontier?
Last fall, the BRT said that the US should adopt a “market-based approach” to reduce carbon emissions – such as a carbon tax or cap-and-trade scheme. That was followed a couple months later by the international Taskforce on Scaling Voluntary Carbon Markets releasing this consultation document – which includes a draft blueprint for a carbon market and a roadmap for implementation (a final version is expected this month). According to the Taskforce, if carbon trading is the key to reducing emissions, the market needs to grow by at least 15x over the next decade.
If investors end up viewing participation in these trading arrangements as “material,” we could also eventually see information about them trickle into sustainability reports and even SEC disclosures – which means we’ll all have to get somewhat familiar with how they work, so that we can make sure they’re accurately described. Right now, focus on climate risk management seems to be intensifying:
We’ve been blogging on our Proxy Season Blog about BlackRock’s updated Stewardship Expectations – which say that the asset manager expects companies to disclose a plan for how their business model will be compatible with a low-carbon economy and that the boards of companies that are “on watch” and don’t show significant progress on the management and reporting of climate-related risks could see themselves getting “against” votes. And the New York State Common Retirement Fund announced last month that it has a goal to transition its portfolio to net zero greenhouse gas emissions by 2040. This KPMG memo summarizes how large companies are reporting on their “net zero” transitions.
The concept of carbon markets is also getting some traction at the state level. This White & Case memo summarizes a proposed cap-and-invest system for the transportation sector in the Northeast and mid-Atlantic region (Massachusetts, Rhode Island, Connecticut and DC). And for general climate-related risks, financial institutions are also getting more state-level scrutiny, with the New York Department of Financial Services recently encouraging banks to set up governance and risk frameworks to manage climate change risks. We’re constantly posting new resources in our “ESG” Practice Area – including industry-specific developments.
Readers of The Corporate Counsel newsletter received updates on several important annual reporting items in the latest issue – including a reminder on changes to the Form 10-K cover page. Here’s more info:
The Form 10-K cover page is changing again. When the SEC adopted amendments to the “accelerated filer” and “large accelerated filer” definitions last spring, it added a check box to the cover pages of Annual Reports on Forms 10-K, 20-F and 40-F to indicate whether an internal control over financial reporting auditor attestation is included in the filing. The check box will need to be tagged using Inline XBRL, when applicable.
Last month, I blogged that companies conducting Rule 506 offerings in New York need to file a completed Form D through the NASAA Electronic Filing Depository in order to notify the state. Danielle Benderly of Perkins Coie member wrote in to share this additional point:
While under these amended regulations New York is streamlining its requirements for an issuer selling its own securities to New York residents by requiring the issuer to file Form D alone, instead of as an attachment to Form 99, an issuer that files Form D in New York under these amended regulations is still registering as a dealer under New York law for itself, and registering as salespersons the officers, directors, principals or partners identified on the Form D, for a 4-year period – not just making a notice filing and paying a fee.
This article recommends that issuers consider making the Form D filing in NY for Rule 506(c) offerings – but not necessarily for Rule 506(b) offerings.
Our January E-Minders is Posted
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Before last week’s holiday break, John blogged about the SEC’s approval of the NYSE direct listing proposal – we’re posting memos about the new rule in our “Direct Listings” Practice Area. A recent Wilson Sonsini memo summarizes the NYSE rule and also gives a brief update about Nasdaq’s proposed direct listings rule:
Following the SEC’s approval of the NYSE rule change, Nasdaq submitted a substantially similar proposed rule change relating to primary direct listings, and is seeking immediate effectiveness. This latest submission differs from Nasdaq’s previous proposed rule change, which remains under review by the SEC.
Also last week, the staff of the SEC Division of Trading and Markets issued a statement after receiving Nasdaq’s latest proposed rule change saying the staff intends to work to expeditiously complete its review of Nasdaq’s proposals.
Even with expeditious review, it’s uncertain whether Nasdaq’s direct listing proposal will go anywhere right now. With Chairman Clayton departing from the SEC on December 23, the Commission is down to four Commissioners and like many rule proposals this year, the Commission adopted the NYSE direct listing rule by a 3-2 vote with Commissioners Allison Herren Lee and Caroline Crenshaw dissenting.
Taking Care of Employees: Sabbaticals
Earlier this week, I blogged about how companies are focusing more on employee health and safety and a while back, Liz blogged about an ISS ESG survey that found the Covid-19 pandemic has heightened asset manager focus on social issues, including treatment of employees. One company that appears to be focusing on employee well-being is Citigroup – it’s offering a new sabbatical program and paid leave opportunities. This Employee Benefit News blog discusses the program, along with related risks:
From January the Wall Street giant will start offering 12-week sabbaticals (at 25% pay) to staff in North America who’ve been at the company for five years or more — a parting gesture from the CEO before he steps down in February. The bank will also offer a month of fully paid leave to anyone who wants to work pro bono for a charity.
The blog discusses several risks, such as the need for policies to be clearly spelled out so they’re not too onerous, employee notice requirements, and timing, as following the pandemic many employees might be eager for a break.
The blog notes larger companies that grant sabbaticals usually do so on an informal basis with company-wide policies being less common. But, as companies look for ways to show employees, investors and other stakeholders that they’re focused on employee well-being, the sabbatical program is one way to try sending that message and as stated in the headline, it’s a way to combat work-from-home fatigue.
Looking Ahead: Hope for 2021
As we’re ready to say sayonara to 2020 and look forward to 2021, I wish each of you good health and happiness. Thanks for reading – and contributing throughout the year – may we all make the most of what we hope are brighter days ahead!
Last summer, the Supreme Court’s decision in Liu reaffirmed the SEC’s authority to seek disgorgement as a remedy in enforcement actions. Following the Court’s decision, some questioned whether Liu changed or removed the five-year statute of limitations that was settled in the Supreme Court’s Kokesh decision. Russ Ryan, former Assistant Director of Enforcement and Partner with King & Spalding offered one take on this question and discussed several reasons Liulikely doesn’t give the SEC unlimited time to sue for disgorgement claims. But now, Congress stepped in and passed the National Defense Authorization Act for Fiscal Year 2021 (NDAA), which includes amendments to the Exchange Act relating to the SEC’s ability to seek disgorgement awards.
The proposed amendments provide the SEC with express statutory authority to seek disgorgement in civil enforcement proceedings pending in federal court. And, the amendments double the statute of limitations – from 5 years to 10 years – for the SEC to seek disgorgement in claims involving fraud, although it reaffirms the 5-year limitation period to seek disgorgement for non-fraud claims.
This Paul Weiss memo provides an overview of the proposed amendments and says they are a direct Congressional response to the limitations imposed by the Supreme Court in Liu and Kokesh. One potential impact of the proposed amendments is that they may increase the SEC’s power when its involved in settlement negotiations. As noted in the memo though, the full scope and actual impact of the amendments remain to be seen and the amendments raise additional issues. Here’s an excerpt:
If enacted, the NDAA will bolster the SEC’s ability to seek disgorgement in civil actions, both by doubling the statute of limitations and by providing the SEC with express statutory authority to seek such a remedy. Nonetheless, the full scope and impact of these amendments remain to be seen, and will likely require case law development. For example, it will likely fall to the courts to determine whether the SEC’s authority to seek “disgorgement”—now untethered from the SEC’s separate authority to seek “equitable relief”—will continue to be bound by the equitable limitations identified in Liu. On the other hand, the statutory authorization to require disgorgement of any unjust enrichment “by the person who received such unjust enrichment” could limit the persons subject to disgorgement even more than the Supreme Court’s decision in Liu, which permitted the SEC to seek disgorgement against affiliates of the wrongdoer in certain circumstances.
Right before last week’s holiday, the President vetoed the NDAA. The President’s reasons for vetoing the bill are unrelated to the SEC’s authority in seeking disgorgement awards – the House voted to override the President’s veto, while it’s unclear exactly when the Senate will consider the veto override.
Paycheck Protection Program: Potential Onslaught of Investigations
Throughout the last year, we blogged quite a bit about the federal government’s Paycheck Protection Program – here’s a blog about an SEC enforcement sweep of public company borrowers. As we get ready to ring in 2021 and put 2020 behind us, last week Congress allocated more funding for the program as part of the most recent economic stimulus package – John blogged about some of the changes with this most recent funding. But, this K&L Gates memo warns companies should expect a continued wave of PPP investigations in 2021.
The memo includes several stats indicating a potential onslaught of enforcement actions, including that the SBA fraud hotline received more than 100,000 complaints in 2020 (compared to 742 complaints received in 2019) and that the SEC has brought seven COVID-19 related fraud actions and has opened more than 150 COVID-19-related investigations and inquiries. For PPP lenders and recipients, the memo says now’s the time to be proactive to be able to show more than the bare minimum has been done to ensure strong compliance with the PPP program. The memo has this advice for actions companies can take now:
Overall, lenders, recipients, and any others involved in the PPP loan approval process will want to demonstrate their specific, good faith, and documented efforts to ensure that loans not only would be disbursed and received speedily, but also carefully limited to properly covered companies and individuals. In particular, companies should revisit their control processes and document the good and compelling reasons for specifically implementing them at the time (and any changes later made), initiate and conduct routine compliance checks regarding the same, identify any red flags suggesting fraudulent or other suspicious activity, and investigate them appropriately with aid of counsel.
Farewell to Jacob Stillman
Yesterday, the SEC issued a statement mourning the passing of Jacob Stillman. Jake served the Commission for 55 years, including 17 as Solicitor and passed away December 25th. Jake’s tenure at the SEC spanned 11 administrations and he is remembered as a man of great character, a lawyer with unparalleled knowledge of the securities laws, and a beloved colleague. Over the course of his career, Jake received numerous awards, among them the Federal Bar Association’s 48th Annual Justice Tom C. Clark Award for Outstanding Government Lawyer. He also was honored by his peers with the William O. Douglas Award, granted by the Association of Securities Exchange Commission Alumni.
Don’t Forget: Renew Your Membership Today!
As all subscriptions expire on December 31st, renewal time is upon us. To our returning members, thank you for your business! If you’ve not yet renewed, visit our “Renewal Center” to ensure that your subscriptions don’t lapse and that you can continue to access all of our valuable upcoming webcasts, newsletters and other content in the new year.
Yesterday, the SEC issued a statement that President Trump designated Commissioner Elad Roisman as Acting Chair of the agency. John blogged last week about former Chairman Jay Clayton’s departure – his last day was December 23. Commissioners Hester Peirce, Allison Herren Lee and Caroline Crenshaw issued a statement congratulating Commissioner Roisman’s designation as Acting Chair. Yesterday’s SEC statement follows news last week when Commissioner Peirce tweeted an early congratulations to Chair Roisman. It’s still uncertain who President-elect Biden will nominate to serve as SEC Chair but until then, Acting Chair Roisman will preside over a four-person Commission.
Growth in ESG Investing Charges Ahead
Growth in ESG investing has been well documented – here’s a recent CNBC article. Last summer, State Street Global Advisors (SSGA) released a report about growth in ESG investing and concluded that investors who were once indifferent about ESG seem to have resolved any lingering reservations. So much so, in fact, that SSGA projects over the next ten years we’ll see an eightfold increase in global ESG ETF and index mutual fund assets. SSGA bases the prediction on how the Covid-19 pandemic has exposed inequities leading investors to place more emphasis on living according to their values, including taking a stand with investment choices. The report cites three trends that will drive the ESG investing increase:
– The great reset in a turbulent 2020: The Covid-19 pandemic and its aftershocks have put a spotlight on important ESG issues such as income inequality, diversity and inclusion, social injustice, employee welfare and climate change. Many investors have concluded that they can no longer look the other way and are ready to address these ESG issues in their portfolios. Factors such as a company’s contingency planning and work environment, as well as how they treat their customers and communities, are now top-of-mind for many investors.
– Studies suggest that portfolios with ESG integration may provide downside protection when markets are struggling, underscoring ESG’s potential as a long-term investment. Some investors have expressed concerns that ESG investments would result in subpar performance and so far, those fears have proven to be unfounded.
– Beginning of an enormous intergenerational wealth transfer: as this occurs, SSGA believes ESG investing will be in the mainstream of every investment portfolio.
SSGA recently issued another memo saying that the momentum behind ESG investing will likely carry it far beyond the pandemic. The CNBC article references research from Sustainable Research and Analysis, an independent ESG research firm, and it attributes growth in sustainable investing to similar factors, while also attributing growth to the Paris climate accord, which it says sensitized investors and asset managers to think more sustainably, and the growing number of asset managers signing on to the UN Principles for Responsible Investing.
Prioritizing Employee Health & Safety: Are Chief Medical Officers Here to Stay?
John blogged not too long ago about how many consider the “S” in ESG the most difficult for companies to analyze and integrate. One aspect of “S” that is garnering a lot of attention during the pandemic is employee health and safety along with customer safety – this NYC Comptroller press release says it has submitted an initial shareholder proposal focused on worker health and safety. One way some companies are demonstrating their commitment to employee health and safety is by bringing on a chief medical officer – or if such a role is already in place, by expanding the CMO’s role.
For companies that don’t have someone fulfilling the CMO role, this HBR article asserts that it’s time to bring one on. Companies in the hospitality sector or with employees on the front lines are places where there’s a good chance to find a CMO or where they might be considering one. But, the article says even for companies with most employees working remote, it’s still important to have an in-house medical expert:
Hiring an in-house medical expert is an important signal that your leaders cares about their people. ‘Consulting outside experts’ does not suffice. You need to show that employee physical – and mental – health is a fundamental concern. One company gave its workforce direct access to the CMO on the company intranet. The idea was to give everyone ‘peace of mind [that the organization is] seeking a medical perspective to best understand how to keep our employees and communities safe.’
With so much conflicting information that’s changing by the day, it’s important to have an expert who is capable of wading through and interpreting all the data and opinions to determine the course of action that best serves your customer base. Organizations that are not built on hospitality have to decide when and how to start seeing clients and partners, attending road shows and conferences, and much more. Ultimately, business leaders have a social responsibility to set the conditions for safe and healthy behavior.
For a look at some of what’s included in the CMO role, this blog discusses how the CMO role at Salesforce has evolved since the arrival of Covid-19. As some companies scramble to hire a CMO, the blog says it’s likely more than just a passing fad.
A couple of weeks ago, the SEC announced revisions to Volume 1 of the EDGAR Filer Manual. Volume 1 of the Filer Manual is the manual that provides general information about electronic submissions on EDGAR, including the requirements for becoming an EDGAR filer. The updates clean up outdated information and also include a couple of changes intended to simplify things. Among the updates are changes allowing those submitting EDGAR access requests to use electronic notarizations and remote online notarizations, which include electronic signatures, in addition to manually signed notarizations. The SEC also amended Rule 10 of Regulation S-T to remove the manual signature requirement for Form ID notarization.
Along with those changes, the SEC also relocated some basic instructions and technical explanations previously found in Volume 1 of the Filer Manual to the more user-friendly EDGAR – Information for Filers webpage found on the SEC’s website. Among other things, these instructions cover questions relating to preparing and submitting a Form ID application, updating company information and correcting, withdrawing or deleting a filing.
Vaccines: Possible Risk Factor for Some Companies
With distribution of vaccines underway, there’s increased hope that the other side of the pandemic will come and a recent Intelligize blog discusses whether some companies should consider the vaccines as a risk factor. As many adjusted to working from home, many took advantage of online services – the blog mentions Zoom, Netflix and DoorDash as examples. But, once the lockdown is over, consumer preferences could change – the blog notes that people may prefer to go out to eat rather than having dinner delivered. Zoom’s most recent Form 10-Q included this risk factor and for companies positively impacted by the pandemic, it may be worth considering the need to include something similar:
We may not be able to sustain our revenue growth rate in the future.
We have experienced significant revenue growth in prior periods. You should not rely on the revenue growth of any prior quarterly or annual period as an indication of our future performance. We expect our revenue growth rate to generally decline in future periods. Many factors may contribute to declines in our growth rate, including higher market penetration, increased competition, slowing demand for our platform, especially once the impact of the COVID-19 pandemic tapers, particularly as a vaccine becomes widely available, and users return to work or school or are otherwise no longer subject to shelter-in-place mandates, a failure by us to continue capitalizing on growth opportunities, and the maturation of our business, among others. If our growth rate declines, investors’ perceptions of our business and the trading price of our Class A common stock could be adversely affected.
More on “Proxy Season Blog”
We continue to post new items on our blog – “Proxy Season Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply entering their email address on the left side of that blog. Here are some of the latest entries:
– SV 150 and S&P 100 Proxy Season Recap
– Nuggets from BlackRock’s Voting Guideline Updates
– Vanguard Engagements: Focus on Board & Workplace Diversity
In addition to allocating another $35 billion in funding for new Paycheck Protection Plan borrowers, the Covid-19 stimulus legislation also contains good news for existing borrowers. My law firm colleague Brent Pietrafese tipped me off to the fact that the legislation reverses the IRS’s position on the tax deductibility of expenses paid with the proceeds of PPP loans. This excerpt from this Forbes article on the bill’s changes to the PPP program summarizes the new approach to deductibility:
Ever since the IRS published Notice 2020-32, borrowers and tax professionals alike have put their faith in Congress to overrule the Service and provide a double benefit: tax-free forgiveness of loan proceeds AND deductible expenses paid with PPP funds. Section 276 of Division N of the latest bill does just that, providing that “no deduction shall be denied or reduced, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income.” Importantly, this rule applies to ALL borrowers; even those who have already applied for forgiveness. Thus, expenses paid with PPP funds are now completely deductible.
The legislation makes a number of additional changes to the program, including expanding the categories of expenses for which PPP loan proceeds may be used, streamlines the forgiveness process for loans under $150,000, and creates the possibility of a second round of financing for certain borrowers that have fully extinguished their prior PPP loans. Like everything else about this program, the provisions in the stimulus bill are controversial. We’ll be posting memos in our “Covid-19 Issues” Practice Area.
ESG Meets AMDG: The Council for Inclusive Capitalism
The NYT DealBook had a recent story about the Vatican’s new initiative with an international group of private sector, governmental & NGO leaders. Called “The Council for Inclusive Capitalism,” the group was formed in response to Pope Francis’s challenge to “build inclusive and sustainable economies and societies.” The DealBook article notes that the group’s members represent $2.1 trillion in market cap and 200 million employees, and that, with the Pope’s blessing, they’ve made pledges toward achieving “environmental and sustainable-business goals that fit into the E.S.G. movement.”
I’m pretty cynical about this kind of thing, and I’d ordinarily conclude that an initiative like this would likely involve more spin than substance. But my money’s on the Pope here, if only because I’m not sure that these folks fully realize with whom they’re dealing. You see, Pope Francis is a member of the Society of Jesus – better known as the Jesuits – and I’m very familiar with the capabilities of that particular organization.
I spent nearly a decade as a student at a Jesuit high school and a Jesuit college. Over the ensuing years, I’ve been very impressed at how adept these guys are at extracting financial & other commitments from a wide variety of sources in support of their projects. You don’t have to take my word for it – just ask the family who owns everybody’s favorite supermarket about my own high school’s powers of persuasion.
Over the past 500 years, the Jesuits have educated everybody from Rene Descartes to Stephen Colbert. As a result, they’ve become highly skilled at cozying up to the upper crust in order to put the bite on prevail upon them for assistance in doing “the Lord’s work.” And as this anecdote from a 2013 Guardian article illustrates, they have a reputation for getting things done:
An old joke tells of a Franciscan, a Dominican and a Jesuit who are arrested during the Russian revolution for spreading the Christian, capitalist gospel, and thrown into a dark prison cell. In a bid to restore the light, each man reflects on the traditions of his own order. The Franciscan decides to wear sackcloth and ashes and pray for light. Nothing happens. The Dominican prepares and delivers an hour-long lecture on the virtue of light. Nothing happens. Then the Jesuit gets up and mends the fuse. The light comes on.
As the payoff suggests, the Society of Jesus has always been known for practicality and unflappability in the service of its motto: Ad Maiorem Dei Gloriam (for the greater glory of God) [AMDG]. Equally well known is the Jesuits’ reputation as educators – giving rise to the adage: “Give me a child of seven, and I will show you the man.”
My guess is that during his 55 years as a Jesuit, some of this probably rubbed off on the Pope. So, if any of these companies or investors signed on to this project thinking they could commit to some ESG softballs in exchange for a “green sheen” & a photo op at the Vatican, they may be in for a bit of a surprise from the Pontiff (with whom they’ll meet on an annual basis). That’s because the Jesuits’ reputation as disciplinarians is also pretty formidable. “AMDG” isn’t the only acronym associated with the Jesuits – just ask any Jesuit high school student or alum what “JUG” is all about.
By the way, the Catholic Church isn’t the only religious group that’s decided to get in the ESG game – the Church of England is playing too, and as the English might put it, they’re “throwing a bit of stick about.“
Jay Clayton Signs Off
SEC Chair Jay Clayton issued a statement announcing that yesterday would be his final day in his position. He had previously announced that he’d leave his post by the end of the year, but somehow it seems fitting that the news came on the same day that commissioners Crenshaw and Lee issued a statement dissenting from the SEC’s approval of the NYSE’s direct listings proposal.
This is my final blog for the year, and I want to close by wishing a Merry Christmas to everyone celebrating the holiday, and a healthy & prosperous 2021 to all of our readers! This has been a very tough year for everyone, and while there are likely to be more difficult days ahead, there is also reason to believe that next year will be better. So, keep your chin up & thanks for reading!
Yesterday, the SEC announced a proposal to amend the provisions of Rule 144(d) to prohibit “tacking” of certain market-adjustable convertible or exchangeable securities. The proposal would also modify and update the filing requirements for Form 144. (Here’s the 84-page proposing release.) This excerpt from the SEC’s press release summarizes the proposed changes to Rule 144’s tacking rules:
The proposal would amend Rule 144(d)(3)(ii) to eliminate “tacking” for securities acquired upon the conversion or exchange of the market-adjustable securities of an issuer that does not have a class of securities listed, or approved to be listed, on a national securities exchange. As a result, the holding period for the underlying securities, either six months for securities issued by a reporting company or one year for securities issued by a non-reporting company, would not begin until the conversion or exchange of the market-adjustable securities.
“Market-adjustable” conversion provisions are a common feature of “toxic” or “death spiral” securities. Instead of a pre-established conversion rate, the securities are issued with a conversion rate that represents a discount to the market price of the underlying securities at the time of conversion. If there’s no cap on the number of shares that may be issued or floor on the conversion price, the market adjustment feature means that the number of shares issuable upon conversion may be enormous.
Currently, holders of convertible securities are allowed to tack their holding periods for the securities held pre- and post-conversion for purposes of calculating their eligibility to resell under Rule 144 period. As this excerpt from the proposing release points out, the SEC thinks that’s a problem for market-adjustable securities:
If the securities are converted or exchanged after the Rule 144 holding period is satisfied, the underlying securities may be sold quickly into the public market at prices above the price at which they were acquired. Accordingly, initial purchasers or subsequent holders have an incentive to purchase the market-adjustable securities with a view to distribution of the underlying securities following conversion to capture the difference between the built-in discount and the market value of the underlying securities.
The SEC thinks these sellers look a lot like statutory underwriters, and proposes to remove this incentive by amending Rule 144(d)(3) to preclude tacking in the case of unlisted market-adjustable securities. Why distinguish between these securities and listed securities? According to the release, the answer is that the NYSE & Nasdaq listing rules put a cap on the amount of shares that may be issued without shareholder approval, which limits the ability of a company to issue market-adjustable securities & reduces the concerns of an unregistered distribution.
The SEC also proposes to tweak the filing requirements for Form 144. If adopted, the rules would require a Form 144 to be filed electronically, but the filing deadline would be changed so that the Form 144 could be filed concurrently with a Form 4 reporting the transaction. Rule 144 transactions involving securities of non-reporting companies would no longer require a Form 144 filing. The proposal also would amend Forms 4 and 5 to add an optional check box to indicate that a reported transaction was made under a Rule 10b5-1 plan.
Direct Listings: SEC Approves NYSE Proposal
Let’s see, where were we on the NYSE’s direct listing proposal? Oh yeah, last August, the SEC approved the proposed rule, but shortly thereafter, it stayed the rule in response to a petition for review filed by the CII. Yesterday, the SEC lifted that stay and approved the rule. In doing so, it rejected arguments that the direct listing proposal circumvented traditional due diligence processes & created a potential “end run” around Section 11 liability.
So, will this fundamentally change the IPO process as we know it? Probably not. Sure, there will always be the high-name recognition Unicorns like Palantir that may find a direct listing to be an attractive option – particularly now that primary shares may be offered. But most IPO candidates aren’t well known & need Wall Street to play its traditional role in the process.
CF Disclosure Guidance: SPACs
Looking very much like an agency that wants to get everything off its desk before the Christmas holiday, the SEC capped off a busy afternoon yesterday with Corp Fin’s issuance of new disclosure guidance. CF Disclosure Guidance Topic: No. 11 provides Corp Fin’s views regarding disclosure considerations for SPACs in connection with both their IPOs & subsequent de-SPAC transactions.
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Political Contributions Disclosure: SEC Can’t Spend Funding On Rules
One of our members pointed out to us that the 2021 Consolidated Appropriations Act that Congress passed last night includes the now customary prohibition on the SEC spending any of its funds on rules requiring the disclosure of political contributions. Here it is, in all its glory:
I called this a “now customary” prohibition because Congress has been doing the exact same thing in appropriations bills for several years now. Disclosure of political contributions is a controversial issue, and the decision to ban the SEC from taking any action on it would likely be controversial too – if anybody had time to complain. Congress’s bipartisan willingness to repeatedly bury this kind of decision in one paragraph of 5,000+ page appropriations bills isn’t exactly a “profile in courage.”
November-December Issue of “The Corporate Executive”
The November-December issue of The Corporate Executive was just posted – & also sent to the printer. It’s available now to members of TheCorporateCounsel.net who also subscribe to the electronic newsletter (try a no-risk trial). This issue includes articles on:
– Tax Withholding Deposits for Stock Plan Transactions—Understanding the New Relief
– Some Deferred Compensation Plans and Employment or Stock Award Agreements May Need to be Amended by December 31, 2020
– SEC Proposes Amendments to Rule 701 and Form S-8
