Yesterday, Corp Fin announced an update to the Division’s Financial Reporting Manual. The Manual is updated as of October 30, 2020 and sections with updates are marked with the date tag “Last updated: 10/30/2020.” Here’s a summary of some of the changes this update includes:
– Revised to reflect changes to smaller reporting company, accelerated filer and large accelerated filer definitions and amendments from Disclosure Update and Simplifications;
– Clarified the application of Rule 3-13 to Form 8-K and the income test for Rule 3-09 financial statements when there is more than one equity method investee;
– Clarified audit requirements for a special-purpose acquisition company target in Form S-4/F-4;
– Described the substantial deficiency situation impact on certain rule and eligibility standards;
– Included another example of a “To Be Issued” accountant’s report; and
– Removed outdated references and updated for changes to GAAP, guidance issued by the PCAOB, Division of Corporation Finance, and SEC’s Office of Chief Accountant in the last few years.
We’ll be on the lookout for more guidance coming from Corp Fin, given Director Bill Hinman’s upcoming departure. Back in 2016 when Keith Higgins prepared for his departure, Corp Fin issued 35 new CDIs in a single day.
Sold! ISS Changes Ownership (Again)
Earlier this week, ISS announced a change in its majority ownership – it seems like that just happened not too long ago, but looking back it’s been about 3 years since the firm last changed hands. Deutsche Börse AG is buying approximately 80% of ISS from current private-equity owner Genstar Capital. Genstar and ISS’ current management will continue to hold the remaining 20%. The ISS press release says the Deutsche Börse purchase is based on an ISS valuation of almost $2.3 billion. Here’s an excerpt with additional info:
The transaction is expected to close in the first half of 2021 subject to customary closing conditions and regulatory approvals. After the closing, ISS will continue to operate with the same editorial independence in its data and research organisation that is in place today. The current executive leadership team with CEO Gary Retelny will co-invest in the transaction and will also lead the business of ISS after the closing.
PCAOB Issues Audit Committee Resource on Auditing Estimates & Use of Specialists
It’s been almost two years since the PCAOB adopted a new requirements related to auditing accounting estimates, including fair value measurements, and using the work of specialists. With those requirements set to take effect for audits of financial statements for fiscal years ending on or after December 15, 2020, last week the PCAOB issued a resource aimed at helping audit committees understand the requirements. The PCAOB’s memo provides a list of questions for audit committees to consider asking their auditors, here’s the memo’s key takeaways:
– The effects of the new requirements will not be uniform across all audits
– The extent of effects of the new requirements will depend on the nature and extent of accounting estimates included in the company’s financial statements, and also on whether the company uses a specialist
– The new standard and amendments do not change the requirements for the auditor’s communications with audit committees, including those communications related to critical accounting estimates
– Auditors are applying these new requirements in extraordinary times and in situations that continue to evolve due to the Covid-19 pandemic
Yesterday, the SEC announced that it adopted rules to facilitate electronic submission of documents. Welcome news to many, the Commission adopted rule amendments to permit the use of electronic signatures used in connection with many documents filed with the Commission. The Commission also adopted rule amendments to require electronic filing and service of documents in administrative proceedings. Here’s an excerpt from the Commission’s press release about use of electronic signatures:
Today’s amendments permit a signatory to an electronic filing who follows certain procedures to sign an authentication document through an electronic signature that meets certain requirements specified in the EDGAR Filer Manual. In addition, the Commission amended certain rules and forms under the Securities Act, Exchange Act, and Investment Company Act to allow the use of electronic signatures in authentication documents in connection with certain other filings when these filings contain typed, rather than manual, signatures.
Back in April, I blogged about the rulemaking petition requesting the Commission amend rules under Reg S-T to permit use of electronic signatures when filing documents with the SEC – the SEC’s press release says that nearly 100 public companies joined in support of the petition. With electronic signatures being more the norm these days, these amendments will make things simpler, especially as many continue working remotely. See this Fenwick memo for more. The electronic signature rule amendments will be effective upon publication in the Federal Register.
UK Leads Way with Impact of Climate Risk Reporting, Will U.S. Follow?
As reported in the WSJ, last week the UK announced that it will require large companies and financial institutions to report the financial impact of climate risk in alignment with the Taskforce on Climate-Related Financial Disclosures (TCFD) framework by 2025. The TCFD recommendations are widely recognized as authoritative guidance for reporting climate-related information. Many have called for increased reporting of the impact of climate risk and Larry Fink, BlackRock’s CEO, is among those that say the U.S. should take action too. Reuter’s reported that Fink welcomed the UK’s announcement for mandatory climate reporting and said ‘the U.S. should move faster so we can achieve greater coordination.’ He also said the DOL could make it ‘easier, not harder’ for asset managers to integrate sustainability issues into their investment strategies.
Some may recall that earlier this year, a subcommittee of the SEC’s Investor Advisory Committee approved a recommendation encouraging the SEC to begin addressing ESG disclosure. With the incoming Biden administration, climate change has been identified as among the top priorities and some are predicting the SEC may be more receptive to ESG-related disclosure requirements. When it comes to climate risk disclosure, SEC Commissioner Allison Lee has advocated for mandatory disclosure, most recently she stressed the need to address it in a keynote address at PLI’s securities law conference – Cydney Posner’s blog provides a good overview of the address. For now, it remains to be seen if the U.S. moves forward on climate risk reporting and if so, how quickly that might happen.
Tomorrow’s Webcast: “Pay Equity – What Compensation Committees Need to Know”
Tune in tomorrow for the CompensationStandards.com webcast – “Pay Equity: What Compensation Committees Need to Know” – to hear Anne Bruno of Mintz, Tanya Levy-Odom of BlackRock, Josh Schaeffer of Equity Methods and Heather Smith of Impax Asset Management | Pax World Funds discuss pay equity – including why it’s in the spotlight, the difference between “pay equity” & “pay gap”, shareholder expectations, disclosure trends on pay gaps & pay equity, pay ratio interplay, mechanics of board & committee oversight and preparing for shareholder engagements & proposals.
Yesterday, the SEC announced that Chairman Jay Clayton intends to conclude his tenure at the end of the year, slightly ahead of his June 2021 term expiration date. As noted in the SEC’s press release, Chairman Clayton led the agency through a period of historically productive rulemaking – during his tenure, the agency advanced more than 65 final rules, many of which modernized rules that hadn’t been updated in decades.
Last summer, things got interesting when news spread of President Trump’s intention to nominate Chairman Clayton as the United States Attorney for the Southern District of New York, which hasn’t come to pass. Even with the commotion from that announcement, Chairman Clayton continued to move forward with notable rulemaking — including rules enhancing the Commission’s whistleblower program, modernizing Regulation S-K and the shareholder proposal process. In addition to all the rulemaking, the SEC’s press release highlights impacts from enforcement actions, which since 2017 have resulted in the SEC obtaining more than $14 billion in financial remedies.
With the incoming administration, there’s been a fair amount of speculation about who will lead the Commission. In the past, the most senior Commissioner of the current President’s party has served as interim Chair until a new Chair is confirmed. If that tradition is followed this time around, Commissioner Hester Peirce would be interim Chair following Jay’s departure and continue in that role for a while after President-elect Biden’s inauguration. This Bloomberg piece names several contenders for a Biden appointment, including former head of the CFTC, Gary Gensler, former U.S. Attorney for the Southern District of New York, Preet Bharara, and Michael Barr, who is a former aide to ex-Treasury Secretary Timothy Geithner.
Comment Letter Trends: Top 10 Topics in Reviews
Deloitte recently issued a 218-page roadmap on comment letter trends that includes developments on financial reporting topics through November 6, 2020. In terms of insights about comments related to the Covid-19 pandemic, the report says that early trends indicate that MD&A and risk factor trends have been main focus areas. Good news included in the report is that over the last five years, there’s been a notable decline in the number of reviews with comment letters and the number of comment letters issued. For those beginning to prepare for year-end reporting, it’s helpful to be aware of the leading areas for comment and the report lists these as the “top 10”:
1. MD&A – comments increased on results of operations, highlighting the Staff’s continuing focus on greater transparency and specificity in disclosures about operating results. Comments on Covid-19 have focused on the pandemic’s impact on future operating results and future financial condition, known trends or uncertainties related to COVID-19 that will have a material favorable or unfavorable impact on income from continuing operations, and discussions of current liquidity and availability of financial resources
2. Non-GAAP measures – the report lists several areas of continued focus, including whether there is undue prominence of non-GAAP measures, enhancing disclosure related to the purpose and use of the measures, identification and clear labeling and reconciliation requirements
3. Revenue recognition – largest volume of comments focused on disclosure of significant judgments used in applying the standard
4. Segment reporting – identification and aggregation of operating segments, changes in reporting segments, considerations for entities with a single reportable segment and entity-wide disclosures about products or services
5. Signatures, exhibits and agreements – form and content of certifications, and material contracts, including requests for them to be filed as exhibits
6. ICFR – among others, evaluation of severity of control deficiencies, including those related to immaterial misstatements and disclosures of material changes in ICFR, including the impact and remediation of material weaknesses
7. Fair value – valuation techniques and inputs used, use of third-party pricing services and fair value estimates related to revenue recognition, goodwill impairment and share-based payments
8. Contingencies – focus on specificity of disclosures and amounts accrued, estimates for reasonably possible losses and disclosures related to loss contingencies and whether they have been updated over time as circumstances change
9. Intangible assets and goodwill – goodwill impairment disclosures, including early-warning disclosures and the specific circumstances that led to the charge in the period of impairment rather than general market factors, asset groupings for impairment testing and whether or why an interim impairment test was performed and the results of the test
10. Inventory and cost of sales – accounting policy disclosures regarding inventory valuation, including adjustments related to excess and obsolete inventories
Transcript: “Virtual Annual Meetings: What To Do Now”
We’ve posted the transcript for our recent webcast: “Virtual Annual Meetings: What To Do Now” – it covered these topics:
– Baseline Best Practices for Virtual Shareholder Meetings
– Getting Remote Technology in Order
– How to Ensure Your Platform Allows for Shareholder Entry & Participation
– Virtual “Rules of Conduct”
– Voting & Tabulation Issues
– Contingency Planning
Broadridge is gearing up for next year’s annual meeting season and just yesterday announced the first phase of its enhanced virtual shareholder meeting platform – a press release says the enhanced platform will enable Broadridge to validate beneficial shareholders who log on to other virtual meeting platforms. For more information to help with planning for upcoming virtual annual meetings, check out our “Virtual Annual Meetings” Practice Area – there you’ll find the latest memos and sample transcripts, rules of conduct and video replays from several 2020 meetings.
Also, take advantage of this special offer available to our members from Carl Hagberg who doles out lots of practical advice in his quarterly newsletters: If you sign up now for a 2021 subscription to The Shareholder Service Optimizer, you’ll get two 2020 quarterly issues added to your subscription for free. You can use this link and mention that you’re a member of TheCorporateCounsel.net in the “order notes” box on the subscription page.
With a subscription, you get access to www.optimizeronline.com, which has the complete text of 13 years of back issues, a searchable index of important articles, and a list of “Pre-Vetted Service Suppliers to Publicly-Traded Companies” – with introductory articles to describe the kinds or services rendered, the current competitive environment and the most important things to consider in selecting a service provider. The subscription also comes with “Some free consulting on any shareholder relations or shareholder servicing matter to ever cross your desk.”
On Friday, Corp Fin updated one and withdrew several Securities Act CDIs. These CDIs relate to equity line financing arrangements and PIPEs that can raise issues under Securities Act Section 5 – CDI 139.13 has been updated and CDIs 139.15, 139.16, 139.17, 139.18, 139.19 and 139.20 have been withdrawn. Here’s updated CDI 139.13, which clarifies when a company may file a resale registration statement:
Question 139.13
Question: In many equity line financings, the company will rely on the private placement exemption from registration to sell the securities under the equity line and will then seek to register the “resale” of the securities sold in the equity line financing. When may a company file a registration statement for the resale by the investors of securities sold in a private equity line financing?
Answer: In these types of equity line financings, the company’s right to put shares to the investor in the future and the lack of market risk resulting from the formula price differentiate private equity line financings from financing PIPEs (private investment, public equity). We, therefore, analyze private equity line financings as indirect primary offerings, even though the “resale” form of registration is sought in these financings.
The at-the-market limitations contained in Rule 415(a)(4) would otherwise prohibit market-based formula pricing for issuers that are not eligible to conduct primary offerings on Form S-3 or Form F-3. Nevertheless, we will not object to such companies registering the “resale” of the securities prior to the exercise of the equity line put if the transactions meet the following conditions:
the company and the investor have entered into a binding agreement with respect to the private equity line financing at the time the registration statement is filed;
the “resale” registration statement is on a form that the company is eligible to use for a primary offering;
there is an existing market for the securities, as evidenced by trading on a national securities exchange or alternative trading system, which is a registered broker-dealer and has an active Form ATS on file with the Commission; and
the equity line investor is identified in the prospectus as an underwriter, as well as a selling shareholder.
We will not object to the filing of a registration statement for a private equity line financing prior to the issuance of securities by the company under the equity line even when there are contingencies attached to the investor’s obligation to accept a put of shares from the company, as long as the above conditions are satisfied and the following terms of the investment have been agreed upon by both parties and disclosed by the company at the time that the resale registration statement is filed:
the number of shares registered for resale;
the maximum principal amount available under the equity line agreement;
the term of the agreement; and
the full discounted price (or formula for determining it) at which the investor will receive the shares.
[November 13, 2020]
SEC’s Private Offering Rules: Updated Chart of Registration Alternatives
Last spring, John blogged about the chart Stan Keller, Jean Harris and Rich Leisner kindly sent along reflecting the proposed changes to the private offering framework. Now that the amendments have been adopted, Stan, Jean and Rich sent along an updated Chart of Alternatives to Registration reflecting the final amendments to those alternatives – and included very helpful printing instructions to ensure the chart is printable in its most useful form as a handy reference booklet. Check it out!
Tomorrow’s Webcast: “Doing Deals Remotely”
Tune in tomorrow for the DealLawyers.com webcast – “Doing Deals Remotely” – to hear Joseph Bailey of Perkins Coie, Murad Beg of Provariant Equity Partners and Avner Bengara of Hughes Hubbard & Reed discuss adjusting to doing deals remotely, including lessons learned and emerging best practices for completing a successful transaction in this strange new environment.
Yesterday, ISS announced its policy updates for next year. Here’s the policy document. The big news this year is that ISS is ratcheting up the pressure on companies to improve board diversity, and taking a more accommodating approach to exclusive forum bylaws. Here are a couple of excerpts from ISS’s executive summary of the policy changes:
– For 2021, ISS benchmark research reports for companies in the Russell 3000 or S&P 1500 indexes will highlight boards that lack racial and ethnic diversity (or lack disclosure of such) to help investors identify companies with which they may wish to engage and foster dialogue between investors and companies on this topic.
– For 2022, for companies in the Russell 3000 or S&P 1500 indexes where the board has no apparent racially or ethnically diverse members, ISS will recommend voting against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis).
– Under the new policy, ISS will generally recommend a vote for federal forum selection provisions in the charter or bylaws that specify “the district courts of the United States” as the exclusive forum for federal securities law matters and recommend a vote against provisions that restrict the forum to a particular federal district court.
– Under the updated policy for exclusive forum provisions for state law matters, in the absence of concerns about abuse of the provision or about poor governance more generally, ISS will generally recommend in favor of charter or bylaw provisions designating courts in Delaware as the exclusive forum for state corporate law matters at companies incorporated in that state.
We’ll be posting memos in our “Proxy Advisors” Practice Area. With proxy season just around the corner, check out this Davis Polk blog for a list of key dates on ISS & Glass Lewis’s calendars for the upcoming months.
California Voters Adopt New Privacy Statute
Remember how much fun getting geared up to comply with the CCPA and its seemingly endless rulemaking process was? Well if you enjoyed that, you’ll be delighted to learn that on election day, California voters passed Proposition 24, the California Privacy Rights Act (CPRA). This intro to Thompson Hine’s memo on the new statute provides an overview of its provisions:
On November 3, California voters approved Proposition 24, also known as the California Privacy Rights and Enforcement Act of 2020 (CPRA), which amends and expands upon California’s other landmark privacy legislation, the California Consumer Privacy Act of 2018 (CCPA). In particular, the CPRA establishes new data privacy rights for California residents, imposes new obligations and liabilities on businesses and service providers, and creates a regulatory agency empowered to enforce California privacy law and prosecute noncompliance. The CPRA becomes operative on January 1, 2023, and, with some exceptions, will apply to California residents’ personal information collected by organizations after January 1, 2022.
The CPRA’s proponents put Proposition 24 on the ballot because of their objections to several legislative amendments to the CCPA & the California AG’s new regulatory framework that they believe “significantly weakened” its safeguards. The memo reviews the key provisions of the CPRA, and notes that approving the CPRA ballot initiative, California voters made several substantive amendments to the CCPA – and effectively prevented California’s state government from undermining them through future legislation.
Post-Election Suggestion: “Look at Mills! Look at Mills!”
There’s a zero percent chance that I’m going to use this blog to wade into the giant cauldron of rage into which our country has descended following last week’s election. I’m also not going to minimize the differences that separate us. We have a lot of work to do. But, like you, I have friends and family members whose political opinions differ significantly from mine, and I’d kind of like to continue to share the country with them and with all of you.
With that objective in mind, I want to close out the week with a suggestion as to how we might at least start to turn down the temperature. This is going to sound strange, but hear me out – I would like you to watch this video of NBC’s coverage of the final lap of the men’s 10,000 meters at the 1964 Tokyo Olympics. It’s only about a minute long.
I know the video quality is terrible, but I’m guessing that you still felt the same chills that I did watching the last 100 meters of that race. You know what? The people who voted for the other guy felt those chills too, and it’s fair to say that the letters “U.S.A” on the front of Bill Mills’ uniform probably had a lot to do with that. I believe that this kind of shared feeling is what Abraham Lincoln was getting at in his First Inaugural Address, and since there’s no blogger alive who can follow Honest Abe, I’ll let him have the last word:
We are not enemies, but friends. We must not be enemies. Though passion may have strained, it must not break our bonds of affection. The mystic chords of memory, stretching from every battle-field, and patriot grave, to every living heart and hearthstone, all over this broad land, will yet swell the chorus of the Union, when again touched, as surely they will be, by the better angels of our nature.
3. Does your board have the same or different dollar thresholds requiring board approval for the following categories: acquisitions, financing transactions, general contracts, and real estate?
– Same – 38%
– Different – 62%
Please take a moment to participate anonymously in these surveys:
This SquareWell Partners report addresses investor approaches to ESG issues during 2020 and predicts how they will shape the dialogue between companies & shareholders during the upcoming year. This excerpt address investors’ increasing focus on capital allocation decisions:
As the impacts of COVID-19 will continue and the ‘V’-shaped recovery looking less likely, capital allocation decisions will require a delicate balancing act for companies in 2021 to manage the diverging expectations of its stakeholders (especially within its shareholder base regarding the payment of dividends).
Companies will be expected to justify their capital allocation decisions, whether it is to remunerate shareholders or not. Whilst investors like Schroders have communicated that they would be more flexible regarding capital raising requests, other investors (and proxy advisors) will scrutinize the management quality, urgency of the funds, and the long-term strategy before supporting any capital raise (as in the case at French mall operator, Unibail-Rodamco-Westfield).
The report cautions that while investors demonstrated restraint during the current year, 2021 will likely be a critical year during which investors will pass judgment on corporate actions or failures to act in response to the crisis.
Rule 10b5-1 Plans: No Affirmative Defense to Bad Publicity
Pfizer’s announcement earlier this week about the apparent efficacy of its Covid-19 vaccine is the best news the market – and the world – has heard this year. That announcement helped fuel a stock market surge, and according to media reports, Pfizer’s CEO & another executive sold a sizeable amount of the company’s shares during the rally.
The more thoughtful coverage of these sales pointed out that they were made under the terms of pre-existing Rule 10b5-1 plans, but the situation provides another example of the fact that whatever else a 10b5-1 plan does, it doesn’t provide an affirmative defense against bad publicity.
Last week, Liz blogged about a recent report from the NYSE & Diligent that said that 81% of directors indicated that their board either already has a plan for increasing boardroom diversity or will have one soon, but that 45% lacked a specific timeframe for meeting diversity goals. However, the report goes on to say that those companies that have established a timeframe plan to move fast, and are limiting the number of boards on which directors may serve to help them achieve their diversity goals. Here’s an excerpt from this CorporateSecretary.com article:
But when a timeframe is set, it is ambitious: 35% of companies have set a one to three-year period in which to meet their diversity goals. The most widely adopted approach companies are taking to promote board refreshment is limiting the number of boards a director can sit on (17%). This brings a new focus on the concept of overboarding – a growing issue for investors in recent years. Although the Diligent and NYSE study doesn’t provide numbers when talking about limiting the number of boards a director can sit on, both ISS and Glass Lewis have tightened their stance on this in recent years.
The report says that 14% of companies have also introduced age limits for their directors in order to promote board refreshment & greater diversity. Another 11% percent have added more seats to their boards in order to make room for more diverse directors to join.
Covid-19: U.S. Chamber Petitions SEC for Liability Protection
The Covid-19 pandemic has already prompted a wave of litigation, including nearly three dozen securities lawsuits. In an effort to protect businesses from what it characterizes as “unjustified Covid-19 lawsuits,” the U.S. Chamber of Commerce recently filed a rulemaking petition with the SEC seeking to enhance protections against pandemic-related securities claims. Here’s an excerpt from Kevin Lacroix’s D&O Diary blog:
On October 30, 2020, the U.S. Chamber Institute for Legal Reform and the Chamber’s Center for Capital Markets Competitiveness filed a petition with the Securities Exchange Commission, pursuant to Rule 192(a) of the Commission’s Rules of Practice. (Rule 192(a) provides that “Any person desiring the issuance, amendment or repeal of a rule of general application may file a petition therefor with the Secretary” of the SEC.) The petition urges that the SEC should exercise the authority given to the agency in the PSLRA an “act without delay to place reasonable limits on securities litigation arising out of the COVID-19 pandemic.”
The Chamber’s petition asks the SEC to consider several specific actions. These include:
– Using its authority under the PSLRA to “bar liability for statements about a company’s plans or prospects for getting back to business, resuming sales or profitability, or other statements about the impacts of COVID-19, whether forward-looking or not—as long as suitable warnings were attached.”
– Alternatively, limiting liability for all such statements to circumstances in which the plaintiff can prove that the speaker had actual knowledge of their falsity (which would have the effect of treating all such statements as “opinions” for purposes of the securities laws).
– Requiring financial statements – which aren’t protected by the PSLRA safe harbors – to include language reminding users that a number of the elements of those statements “are determined on the basis of projections of future business or market conditions or by applying “mark to market” standards and stating that due to the tremendous uncertainties flowing from the pandemic and its effect on the economy, there is a greater possibility of variation than in the past.” Liability for pandemic-related misstatements in financial statements that include these warnings would be barred or, or alternatively, treated as the equivalent of opinions requiring proof that the company subjectively knew they were false in order for them to be actionable.
Kevin’s blog reviews the petition in detail, as well as some of the impediments to any quick action by the SEC on it. He also provides additional context for the concerns about a potential explosion in Covid-19-related securities litigation in light of the rise of “event driven” securities class actions in recent years.
Tomorrow’s Webcast: “The Top Governance Consultants Speak”
Tune in tomorrow for the webcast – The Top Governance Consultants Speak – to hear Laura Wanlass of Aon, Rob Main of Sustainable Governance Partners, Allie Rutherford of PJT Camberview and Chris Young of Jefferies discuss what you should be focusing on in fall engagements and what proposals are emerging for the upcoming year.
The ongoing proceeding against the alleged perpetrators of the 2016 hack of the Edgar system is one of the Division of Enforcement’s most high-profile cases. Last week, the SEC announced that it had reached a settlement with three of the defendants in that case, Sungjin Cho, Ivan Olefir, and Capyield Systems, Ltd., an entity affiliated with Olefir. According to the SEC’s complaint, the defendants allegedly traded on the basis of the hacked information during the period from July to October 2016. The SEC’s litigation release lays out the sanctions imposed:
Cho, Olefir and Capyield consented to the entry of final judgments that would permanently enjoin them from violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 17(a) of the Securities Act of 1933. Additionally, Cho and Olefir agreed to conduct-based injunctions limiting their ability to trade U.S.-listed securities and derivatives. Cho agreed to pay a civil penalty of $175,000, and Olefir and Capyield agreed to pay a joint and several penalty of $250,000.
Earlier this year, the SEC reached a similar settlement with two other defendants. But the two alleged masterminds of the scheme – Ukrainian nationals Artem Radchenko & Oleksandr Ieremenko – are currently being sought by the Secret Service & the State Dept. The U.S. government has offered a reward of $2 million for information leading to their arrest or conviction.
SEC Enforcement: 2020 Annual Report
Last week, the SEC’s Division of Enforcement issued its annual report for the 2020 fiscal year. This Sullivan & Cromwell memo summarizes the report’s highlights:
As the Report details, the Division obtained a record-breaking $4.68 billion in monetary remedies in FY 2020, including $3.59 billion in disgorgement and $1.10 billion in penalties. Total monetary relief in FY 2020 exceeded that in FY 2019 by $330 million, or 8%.
The Division filed 715 enforcement actions in FY 2020, which reflected a 17% decline from the previous year. Of the total actions brought, 405 were so-called “standalone” enforcement actions, 180 were follow on administrative proceedings, and 130 were actions to de-register companies that were delinquent in their SEC filings. Of the total number of enforcement actions, 492 were brought after instituting mandatory telework in mid-March. The decline in the number of actions is attributable largely to the disruptions resulting from COVID-19, as well as the fact that the prior year included numerous actions filed as part of the SEC’s Share Class Selection Disclosure self-reporting initiative.
Three enforcement areas drove the majority of the SEC’s standalone cases: (i) securities offerings (32%); (ii) investment advisory and investment company issues (21%); and (iii) issuer reporting/accounting and auditing (15%). The SEC also brought actions relating to broker-dealers (10%), insider trading (8%), market manipulation (5%), Public Finance (3%), and FCPA (2%). The SEC continued to pursue charges against individuals; 72% of the SEC’s standalone cases involved charges against one or more individuals.
The Division of Enforcement received 23,650 tips, complaints, and referrals in FY 2020, with most of them being received during the pandemic. That represents a substantial increase over the comparable FY 2019 figures, and the report says that they’ve helped to create a “strong pipeline for future enforcement actions.”
Virtual Annual Meetings: Gearing Up for 2021
At this point, most of us have reconciled ourselves to the fact that things aren’t getting back to normal anytime soon. Since that’s the case, companies will need to prepare for possibility that their 2021 annual meeting will once again need to be a virtual or hybrid meeting. This recent Bryan Cave blog offers up some tips on preparing for next year’s virtual meetings. This excerpt lays out some things to think about when it comes to such a meeting’s format and rules of conduct:
Companies need to decide whether a meeting will be virtual-only, physical-only or a hybrid. For any virtual component, they need to decide whether the access will be audio-only or audio plus video. While a majority of virtual meetings during the 2020 proxy season appeared to be in audio-only format, we expect that in 2021 companies will increasingly use video for their meetings, as video conferencing has evolved during the pandemic.
Clear rules of conduct are imperative. As more companies transitioned to virtual meetings in 2020, one area of focus was on how and when shareholders could submit questions. Investors and others questioned whether companies might be “cherry-picking” the questions they answered and requested that all shareholders have access to the questions submitted. Companies in 2021 will need to put in place and clearly address the Q&A process. For example, issuers need to decide whether questions may be asked live during the meeting via a chat function and/or over the phone, and/or prior to the meeting by submitting online or through email.
If you’re not already thinking about the possibility of a virtual component to your meeting next year, you probably ought to be. The blog says that many companies are already exploring retention of virtual meeting providers and video and real-time Q&A alternatives, and have also begun drafting disclosure about meeting logistics to include in their proxy materials.
This Bloomberg Law article lays out some thoughts on what the Biden administration might mean for the SEC & its rulemaking and enforcement priorities. This excerpt points out that the recent amendments to the proxy rules targeting proxy advisors & shareholder proposals top the list of rules that could be undone by a reconstituted SEC:
In July 2020, the SEC made significant changes to the proxy advisor rules. Critics, such as Commissioner Allison Herren Lee, argued that the new rules were unwarranted, as they addressed no identifiable problem. The scope of the opposition to this measure makes it a candidate for early reversal in 2021. A to-do list of similar measures could also include recent changes to the shareholder proposal rules that make it more difficult for a small investor to submit or resubmit a proposal for inclusion in company proxy materials.
The article also predicts a more receptive environment for ESG-related disclosure requirements, and a more aggressive enforcement posture. Whether a Democratic led SEC can find a way to reach consensus on issues like these and end its string of 3-2 votes on rulemaking proposals remains to be seen, but I sure wouldn’t bet the farm on it.
Disclosure: Prescriptive v. Principles-Based Approaches
Since the S-K modernization amendments just became effective, I thought this recent Bass Berry blog provided a timely illustration of the differences in disclosure practices that might result when a principles-based rule replaces a prescriptive one.
The blog reviewed a Staff comment letter & response involving a company that disclosed its dependence on a handful of 10%+ customers. In its comment letter the Staff requested the company to disclose the identities as required – until recently – by the prescriptive language of Item 101(c) of S-K. However, as a smaller reporting company, the company was permitted to adopt the principles-based approach sanctioned by Item 101(h). Here’s an excerpt from the company’s response to the Staff:
The Company respectfully asserts that disclosure of the names of its customers is not required by Item 101(h)(4)(vi) of Regulation S-K, nor does the Company believe the identity of its largest customers is material to an understanding of its business taken as a whole or necessary for investors to make an informed investment decision. Unlike Item 101(c)(1)(vii) of Regulation S-K, Item 101(h)(4)(vi) does not require a smaller reporting company to identify the name of any customer that accounts for 10% or more of its revenue. The Company also believes that the identities of its customers are of significantly less importance than a qualitative and quantitative description of the extent to which revenue from such customers is relied upon.
Each of the Company’s top three customers in 2019 have been customers for many years. The Company’s largest customer, representing 36.8% of revenue in 2019, has been a customer for 30 years. The second and third largest customers in 2019 have been customers for approximately 10 years and 7 years, respectively. While the Company does consider the loss of revenue from any one of its largest customers significant, warranting appropriate risk factor disclosure of the potential consequences of such loss, the Company does not believe investors will be more informed of these risks by knowing the customers’ identities.
The Company also indicated that both it & its customers regarded their identities to be highly confidential and commercially sensitive, but also agreed to provide additional disclosure about the percentage of its revenue derived from sales to those customers during the prior year. The Staff did not comment further on the company’s disclosure.
Stock Buybacks: Guidance for Your Repurchase Program
The SEC’s recent enforcement action against Andeavor LLC arising out of internal control lapses relating to the company’s stock repurchase plan has caused many companies to take a hard look at the mechanics of their own plans. If you’re working with one of those companies, take a look at this recent Mayer Brown memo, which reviews the application of the Rule 10b-18 safe harbor and a variety of other potential issues that may arise under the federal securities laws, state corporate law, and – for some issuers – applicable provisions of the CARES Act.
Yesterday, Corp Fin issued three FAQs to address transitional issues that companies have been wondering about in light of the recent amendments of Regulation S-K Items 101, 103 and 105, which are effective for filings made after today. Thanks to the Staff for addressing these questions – and it was also great that the SEC sent out a separate email showing exactly which interpretations had been added. Here are the topics that are covered (also see this Cooley blog):
1. Whether a Form S-3 prospectus supplement that’s filed after November 9th, relating to a registration statement that became effective before that date, has to comply with the new rules.
2. Whether new Item 101 requires companies to disclose info in the Form 10-K for more than the fiscal year covered by the report.
3. Whether a company must always provide a full discussion of the general development of its business in an annual report or registration statement that requires Item 101 disclosure.
Tesla D&O Coverage Gets an “Elon Exclusion”
Earlier this year, John blogged that Tesla struck a deal in which CEO Elon Musk would personally provide D&O coverage to the board. Last week, the company’s latest Form 10-Q reported that the coverage came with a $3 million price tag for 90 days of coverage – which apparently was a 50% discount from the market quotes that Tesla received!
Tesla says that it’s now decided to line up a customary policy with third-party carriers. You’ve gotta wonder whether they’ve been able to negotiate a more reasonable price, since according to this article, the new policy has an “Elon exclusion.”
Will Mr. Musk play it safe without the safety net of insurance coverage? We’ll see, but my guess is he feels fine being self-insured. He now has $3 million more to cover mishaps, and that’s just pocket change for the fourth-richest man in the world.
Visit Our “Proxy Season Blog”
We continue to share daily posts on our “Proxy Season Blog” – which is available to 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 inputting their email address on the left side of that blog. Here are some of the latest entries:
– Emerging Shareholder Proposal: B-Corp Conversions
– ISS to Cease Providing Draft Reports to S&P 500
– 14a-8 No-Action Letters: Key Points for Next Year
– Investors’ Letter-Writing Campaigns Just Got Easier
– Trends in Audit Committee Disclosures
