On Friday, the SEC issued a press release announcing that Corp Fin Director Erik Gerding intends to leave the SEC at the end of this year. The range of rulemaking adopted under Director Gerding’s leadership has been broad and impressive. As highlighted in the press release:
Mr. Gerding led the Division as it recommended rules to the Commission on climate-related disclosures for investors; cybersecurity risk management, strategy, governance, and incident disclosure by public companies; and special purpose acquisition companies. During his tenure, the Division also implemented new or updated rules on beneficial ownership reporting, universal proxy, listing standards for clawbacks of erroneously awarded compensation, conflicts of interest in securitizations, “pay versus performance” executive compensation disclosures, and Rule 10b5-1 plans regarding when insiders can sell their shares.
The SEC simultaneously announced that Cicely LaMothe will serve as Acting Director upon Director Gerding’s departure. Cicely LaMothe currently serves as Deputy Director, Disclosure Operations for the Division of Corporation Finance and was previously the Program Director of the Disclosure Review Program, Associate Director of the Office of Assessment and Continuous Improvement, and Associate Director of Disclosure Operations.
Per Axios, lawmakers seem optimistic that they will avert a government shutdown with a continuing resolution to fund the government into March. But we once again find ourselves up against a government funding deadline this Friday, and the SEC is preparing accordingly, adding this note on its homepage about its operational status in the event of a lapse in appropriations:
[T]he SEC’s operating status will change concurrently with the rest of the federal government, in accordance with the agency’s plan for operating during a shutdown. As that plan contemplates, we are currently preparing for a potential shutdown, with a focus on the market integrity and investor protection components of our mission. Our plan calls for the continuing operation of certain Commission systems, including EDGAR. Additional information is available from the Division of Corporation Finance, the Division of Examinations, and the Division of Investment Management.
As it has done a few times before, Corp Fin also posted an announcement last Friday, “Division of Corporation Finance Actions in Advance of a Potential Government Shutdown,” providing guidance on the Division’s operations during a shutdown and various considerations for filing matters. This guidance may seem very familiar because it largely follows the guidance we have received from the Staff in past government shutdown situations. With that in mind, check out Dave’s top ten takeaways from the SEC’s guidance in September 2023.
The latest issue of The Corporate Counsel newsletter has been sent to the printer. It is also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format. The issue includes the following articles:
– Annual Season Items
– The SEC’s Cybersecurity Summer Is Over: What to Do Now That Winter Is Coming
Please email sales@ccrcorp.com to subscribe to this essential resource if you are not already receiving the important updates we provide in The Corporate Counsel newsletter.
This Skadden memo offers insights into emerging board governance practices aimed at providing appropriate oversight to corporate cybersecurity programs. This excerpt notes that boards are starting to look beyond the already heavily burdened audit committee when deciding who should take the lead for the board on cybersecurity oversight:
There is no one-size-fits-all approach. What is important is to be thoughtful about which body has the time available to assess these issues on an on-going basis and will be able to bring relevant expertise to the challenge. Responsibility could be given to the audit committee, since that body usually oversees controls of various sorts and general compliance with legal and regulatory requirements.
But, where cybersecurity issues are central to the business, some companies have created a technology committee rather than saddle the audit committee with additional work, since it typically already has a lot on its plate. Such a technology committee is usually dedicated to overseeing the strategy, performance and compliance of all the company’s technology, positioning this committee well to make cybersecurity governance decisions and address newly emerging challenges associated with other technology issues such as artificial intelligence deployment.
Other companies have a risk committee dedicated to identifying, assessing and mitigating risks, including cybersecurity risks, across the company. In short, there are many approaches to how a board may structure its cybersecurity oversight, yet it is ultimately the board’s responsibility to determine which structure or body would best serve the company.
The memo also provides an overview of directors’ oversight responsibilities and key considerations that boards should keep in mind when establishing governance structures to address cybersecurity concerns.
After I blogged about the SEC’s position on expenditures for executive security being regarded as a perk, a member reached out with an anecdote about an interesting – and troubling – real world scenario where this issue came up:
Some years ago, one of my former firm’s clients was a major defense contractor, and had been advised by the US Government that because of known threats, certain security-related items should be installed at the CEO’s residence. The SEC staff insisted that the costs needed to be disclosed as perquisites, to which we relented. One of our concerns was that because other senior executives did not have comparable security coverage, we were letting the bad guys know where the systemic vulnerabilities might be. This continues to be an issue. When it comes to matters of national security, I disagree with the staff position.
In light of the SEC’s position, companies thinking about implementing or upgrading security arrangements for their executives should consider whether casting a wider net may be necessary in order to avoid disclosure that inadvertently reveals – or creates – security vulnerabilities.
We’ve posted the transcript for our webcast “Surviving Say-On-Pay: A Roadmap for Winning the Vote in Challenging Situations” – full of practical tips for say-on-pay scenarios that companies frequently encounter – from D.F. King’s Zally Ahmadi, Compensia and CompensationStandards.com’s Mark Borges, Orrick’s JT Ho, Foot Locker’s Jenn Kraft, and Tesla’s Derek Windham. They covered the following topics:
You will definitely want to check this out as we enter the proxy season, and the transcript is a low-time-and-effort way help you think through any changes you want to make on how you approach your say-on-pay proposal in 2025.
Members of this site can access the transcript of this program. If you are not a member, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.
Yesterday, in Alliance for Fair Board Recruitment v. SEC, (5th Cir.; 12/24), the 5th Circuit held that the SEC exceeded its authority when it approved Nasdaq’s board diversity rule. The case was decided by a 9-8 vote, and the Court’s action overrules a 5th Circuit panel’s prior decision upholding the rule.
In reaching this decision, the 5th Circuit concluded that the SEC’s actions implicated the “major questions” doctrine and that absent a clear Congressional directive, the agency lacked the statutory authority to authorize Nasdaq’s rule. The SEC and Nasdaq argued, among other things, that because “full disclosure” was central to the Exchange Act, the SEC had broad authority to adopt a board diversity disclosure requirement. The Court disagreed, and this excerpt from the majority’s opinion indicates that it viewed the scope of the authority granted by the Exchange Act more narrowly:
SEC and Nasdaq contend that Supreme Court precedent establishes that full disclosure is the “core” purpose of the Exchange Act. . . But that is not true. What the Court has actually said is that the Act “embrace[s] a fundamental purpose . . . to substitute a philosophy of full disclosure for the philosophy of caveat emptor. and thus to achieve a high standard of business ethics in the securities industry.” Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 151 (1972) (emphasis added) (quotation omitted); compare post, at 45 (Higginson, J., dissenting).
In other words, the Court has acknowledged that disclosure is not an end in itself but rather serves other purposes, such as the purpose of promoting ethical behavior or “the purpose of avoiding frauds.” Ibid. Thus, nothing in the Court’s precedents undermines our conclusion that a disclosure rule is related to the purposes of the Act only if it is related to the elimination of fraud, speculation, or some other Exchange Act–related harm.
The Court ultimately concluded that the board diversity rule was “far removed” from the purposes of the Act. According to a Bloomberg Law article on the decision, Nasdaq doesn’t plan to appeal the ruling, while the SEC is “reviewing the decision and will determine next steps as appropriate.”
Wilson Sonsini recently issued the 2024 edition of its SV 150 Governance Report, which surveys governance practices among Silicon Valley’s largest companies. The report is full of information on topics such as board composition, demographics and governance practices, proxy statement disclosure practices, executive compensation, shareholder proposals and activist activities. Here’s what the report has to say about the prevalence of various defensive measures:
– 54% of companies had staggered boards and charter provisions requiring a supermajority vote to remove a director.
– 55% of companies had plurality voting standards for director elections
– 100% of companies allowed the board to change the number of directors
– 92% of companies permitted the board to fill vacancies
– 99% of companies had an advance notice bylaw
– 28% of companies had a proxy access bylaw
– 27% of companies permitted stockholders to call a special meeting
– 63% of companies required a supermajority vote to amend charter documents
– 96% of companies authorized a class of blank check preferred
– 82% of companies had an exclusive forum bylaw
– 63% of companies had a federal forum bylaw that applied to 1933 Act claims
Only a single company had a poison pill in place, although the prevalence of blank check preferred means that virtually all of the SV 150 have a pill on the shelf or could implement one at a moment’s notice. Less than 1% of the SV 150 companies had cumulative voting rights.
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In light of the shocking murder of UnitedHealth’s CEO last week and the risk that similar events may occur in the future, many companies are enhancing security arrangements for their executives or establishing those arrangements for the first time. While companies may be inclined to conclude that these security arrangements are a necessary business expense, they need to be aware that the SEC typically views them as “perks” subject to disclosure in proxy materials. This excerpt from Chapter 7 of our Executive Compensation Disclosure Treatise (available on CompensationStandards.com) explains the SEC’s position:
From the company’s perspective, [personal security] expense is integrally and directly related to the performance of its executives’ duties—necessary to ensure their safety, particularly where they frequently travel internationally or their celebrity makes them an inviting target for kidnapping or other personal injury.
Notwithstanding these beliefs, the SEC has expressly stated that it considers expenditures incurred to ensure the personal safety of a named executive officer to be a disclosable perquisite. Specifically, the SEC has held that business purpose or convenience does not affect the treatment of an item as a perquisite where it is not integrally and directly related to the performance by the executive of his or her job.
Accordingly, a company’s decision to provide an item of personal benefit for security purposes does not affect its characterization as a perquisite. For example, a company policy that for security purposes an executive (or an executive and his or her family) must use company aircraft or other company means of travel for personal travel, or must use company or company-provided property for vacations, does not affect the conclusion that the item provided is a perquisite or personal benefit.
Companies should also note that as part of its qualitative evaluation of executive comp programs, ISS has sometimes been critical of the amounts expended for executives’ personal security arrangements. Whether recent events will prompt the SEC to take a more nuanced position or ISS to reconsider what security expenditures should be regarded as “excessive” remains to be seen.
We cover compensation-related issues on CompensationStandards.com and this is a topic we’ve blogged about there in the past, but since executive security arrangements are top of mind for so many companies right now, we thought it was appropriate to flag the potential disclosure requirements here as well.
