In the the latest issue of his “Audit Committee & Audit Oversight Update”, Dan Goelzer notes a new study that concludes that the SEC & investors don’t put a lot of trust into companies that use “trust words”. Here’s how Dan summarizes the study’s findings:
The authors counted the number of times 21 trust words appeared in the MD&A section of 3,595 reporting company Form 10-Ks from 1995 to 2018. The 21 words were: accountability, character, ethics, ethical, ethically, fairness, honest, honesty, integrity, respect, respected, respectful, responsible, responsibility, responsibilities, transparency, trust, trusted, truth, virtue, and virtues. About half of the sample used the trust words and the mean value of the number of trust words used was 1.8.
Study findings include:
– Market reaction to earnings announcements is lower for companies using trust words than for those that do not. This suggests “that the use of trust words is negatively associated with the information content of earnings.”
– “Lower ability managers” are more likely to use trust words.
– Companies that use trust words are more likely to receive comment letters from the SEC, and these comment letters are likely to raise accounting issues.
– Companies using trust words tend to pay higher audit fees. “Our result suggests that auditors assess higher audit risk or/and exert greater audit effort for firms using trust words in 10-Ks., suggesting higher audit risk for these firms.”
– There is a negative relation between the use of trust words and corporate social responsibility scores.
I don’t think any of these findings comes as a surprise – although I bet the one about “lower ability managers” is gonna leave a mark on a few management teams! I’ve always thought that the more cringeworthy a company’s investor communications are, the more reason people have to be skeptical about it. Anyway, Dan says that the study’s bottom line is that “firms using trust words tend to invite more scrutiny from investors, the SEC, auditors, and others. Thus, the use of trust words seems to reflect the opposite of a firm’s culture of trust.”
If you’ve ever been involved in changing a company name, you know what a hassle it can be. In addition to all the state law filings you’ll need to make, there’s a bunch of other stuff you’ll need to update. If you work for a financial institution, you’ll also have to put up with snide comments from your friends because the company likely will have changed its name from something very respectable (if a bit stodgy) to something that sounds like it should be the name of a new prescription drug for toe fungus.
Public companies changing their names have to deal with all of this and also sort out what they need to do with the SEC to properly address the name change. That’s where this recent Perkins Coie blog can be quite helpful. It identifies seven things that public companies need to do when changing their name, including the actions they need to take with the SEC. This excerpt addresses what you’ll need to do to update the company’s information on EDGAR:
While easy to overlook, you’ll need to change the company’s name on the SEC’s EDGAR database. You need to go to the SEC’s “Maintain and update company information” page and jump down to the “Editing company information” section and follow the detailed steps to make the address change.
You’ll make the request for this online through the EDGAR Filing Website or the OnlineForms Management Website. Your company name change must be reviewed and approved by the SEC’s EDGAR Staff, which can take a few days. So, bake that into your timeline.
Once accepted by the SEC staff, the updated name won’t appear on EDGAR until you make your first filing subsequent to that. After you do make that first subsequent filing, when people search EDGAR using your old name, the new name will pop up.
Note that your old company name will show up at the top of your company’s filing history on EDGAR after the name changes. For example, see the two former names listed beneath this company’s name on its EDGAR page.
Other SEC-related issues associated with a name change that are addressed by the blog include whether the company will need to file a preliminary proxy statement if it needs shareholder approval for the name change, the need to update the cover page of future filings to reflect any change in a CUSIP number or trading symbol, and 8-K and exhibit filings triggered by the name change.
A few weeks ago while I was surfing the Internet, I stumbled across a very helpful new tool for tracking SEC filings developed by Emory Law School Prof. Andrew Jennings. The tool is called KFilings, and it allows users to get email alerts for relevant new filings that pop up in the SEC’s EDGAR system. Users can create unlimited free alerts for one or more registrants and/or filing types. Alerts can be scheduled to go out in real time, or in daily or weekly email digests. Check it out, because the price is sure right!
On Friday, the DOJ announced that a federal grand jury in California returned an indictment charging activist short seller Andrew Left with multiple counts of securities fraud. At the same time, the SEC announced civil charges against Left and his firm, Citron Research. The DOJ’s announcement of the indictment details Left’s alleged misconduct, but this excerpt from the SEC’s announcement does so more succinctly:
The SEC’s complaint alleges that Left, who resides in Boca Raton, Fl., used his Citron Research website and related social media platforms on at least 26 occasions to publicly recommend taking long or short positions in 23 companies and held out the positions as consistent with his own and Citron Capital’s positions. The complaint alleges that following Left’s recommendations, the price of the target stocks moved more than 12 percent on average.
According to the SEC’s complaint, once the recommendations were issued and the stocks moved, Left and Citron Capital quickly reversed their positions to capitalize on the stock price movements. As a consequence, Left bought back stock immediately after telling his readers to sell, and he sold stock immediately after telling his readers to buy.
Attached to the SEC’s complaint is an appendix cataloguing the allegedly false and misleading statements by Left and Citron Research that form the basis for the agency’s enforcement proceeding. Last month, the SEC brought settled administrative charges against Anson Research associated with its involvement in activist short reports. The DOJ’s action is the culmination of a multi-year investigation into activist short selling that began in 2021 and targeted Citron and Left, among others. Whether there are other shoes to drop from either the SEC or DOJ remains to be seen.
With the liberalization of the communications rules for public offerings in recent decades, many folks may have assumed that concerns about “gun-jumping” have largely been relegated to the ash heap of history. Unfortunately, Pershing Square’s recent announcement that it is delaying the pricing of its IPO appears to provide an example of how companies can still stub their toes on the rules governing communications during the public offering process.
The company didn’t provide any reasons for delaying the IPO in its announcement, but it did reference a communication from Pershing Square’s CEO Bill Ackman to a handful of investors. That communication contained some information that doesn’t appear to have been in the company’s preliminary prospectus, and that, in some cases, is inconsistent with information in the preliminary prospectus. This excerpt from a free writing prospectus that the company filed last Thursday explains the situation and the problematic comments made in Ackman’s communication:
On July 24, 2024, the communication attached as Appendix A was sent to a limited number of strategic institutional and high net worth investors in Pershing Square Holdco, L.P., which owns 100% of the Company’s investment manager, Pershing Square Capital Management, L.P. (the “Manager”) by William A. Ackman, the Chief Executive Officer of the Manager and the Company. Mr. Ackman sent Appendix A as an internal communication to the investors in Pershing Square Holdco, L.P. and therefore did not believe that it would require public disclosure.
You should not consider the statements in the communication attached as Appendix A in making your investment decision with respect to the Offering, including, in particular:
– The statements regarding the absence of key man risk. See “Risk Factors—Reliance on the Manager Risk—Key Personnel Risk” in the Company’s preliminary prospectus.
– The statements regarding the post-Offering trading dynamics, including with respect to market demand, trading discounts or premiums or trading volume. Shares of closed-end investment companies frequently trade at a discount from their net asset value. See “Risk Factors—Investment and Market Discount Risk” in the Company’s preliminary prospectus.
– The statements regarding the Manager’s historical performance. See “Appendix A – Supplemental Performance Information of the Affiliated Funds” to the Company’s preliminary prospectus.
– The statements regarding indications of interest from investors and any investor’s rationale for participation or non-participation in the Offering. Indications of interest are not binding agreements or commitments to purchase. Any investor may determine to purchase more, less or no Common Shares in the Offering. In addition, the underwriters may determine to sell more, less or no Common Shares in the Offering to any investor.
– The statements regarding the Pershing Square Tontine Holdings, Ltd. IPO.
The Company specifically disclaims the statements made by Mr. Ackman.
The typical remedy for gun-jumping is an SEC-imposed “cooling off” period that delays the offering for a period of time in order to allow the impact of the communication on the market to dissipate. My guess is that’s what’s prompting the delay here.
Check out our latest “Timely Takes” Podcast featuring Orrick’s J.T. Ho & his monthly update on securities & governance developments. In this installment, J.T. reviews:
– SEC Reg Flex Agenda
– SEC 2024 Disclosure Review Priorities
– SEC Guidance on Effective Cooperation in Enforcement Investigations
– Proxy Voting Advice Rules Update
– AI Disclosures in SEC Filings
This month’s podcast includes a “bonus round” featuring J.T.’s commentary on recent cybersecurity disclosure guidance and on the first criminal verdict involving a Rule 10b5-1 plan.
As always, if you have insights on a securities law, capital markets or corporate governance issue, trend or development that you’d like to share in a podcast, we’d love to hear from you. You can email me and/or Meredith at john@thecorporatecounsel.net or mervine@ccrcorp.com.
Well over a year ago, Dave asked, “Are robots coming for your auditor?” His blog noted that CAQ’s analysis of 2022 audit quality reports showed that some firms had added a discussion about how they employ AI and data analytics to improve audit quality and highlighted a study that showed AI has been effective at improving audit quality while also displacing junior-level audit professionals. As this July 2024 Spotlight details, the PCAOB has also taken note and is considering action in response to these trends — especially the rapidly developing use of GenAI:
The PCAOB’s standard-setting agenda includes a research project to assess whether there is a need for guidance, changes to PCAOB standards, or other regulatory actions in light of the increased use of technology-based tools in the preparation and subsequent audit of financial statements. [To that end,] we conducted outreach regarding the current state of integration of GenAI tools in audits and financial reporting. We spoke to auditors mainly at larger firms and representatives from several companies (i.e., preparers of the financial statements) about their current use of GenAI and the direction in which they expect GenAI will be integrated in audits and financial reporting.
The survey found that auditors’ current use is focused on administrative and research activities, while financial statement preparers have been more focused on integrating GenAI in operational and customer-facing areas than on accounting and financial reporting. More specifically:
Auditing: Some firms stated that their staff can use GenAI when preparing certain administrative documents or initial drafts of memos and presentations related to the audit. Some firms also indicated that they had developed and deployed GenAI-enabled tools to assist staff in researching internal accounting and auditing guidance. Generally, the global network firms we spoke to are further along in developing and deploying GenAI-enabled tools than non-affiliated firms are.
Financial Reporting: Some preparers noted that their personnel use GenAI in creating initial drafts of internal documents (e.g., summaries of accounting standards and interpretations, presentations, and benchmarking of company information with publicly available information from competitors). In addition, some preparers also use GenAI to assist in the performance of less complex and repetitive processes, such as preparing account reconciliations or to assist with identifying reconciling items.
Most audit firms also reported investing in GenAI-enabled tools to expand their use case but cited data privacy and security, plus the lack of auditability of the underlying source data, as limiting factors for using GenAI for audit or attest procedures. They also indicated that current PCAOB auditing standards are “not currently viewed as impediments to the development and use of GenAI in the audit.”
AI will be a prominent topic at our “2024 Proxy Disclosure & 21st Annual Executive Compensation Conferences.” I’m especially excited about the panel “In-House Insights: Governing and Disclosing AI.” Our experienced in-house panel featuring Kate Kelly of Meta, Arden Phillips of Constellation Energy and Erick Rivero of Intuit will discuss how AI has impacted their work in the last 18 months – and what they expect going forward — from creating policies and developing governance practices, considering risks, opportunities & related disclosure, and how they’re utilizing AI to streamline day-to-day legal tasks. Don’t miss it! Our “early bird” rate for individual in-person registrations ($1,750, discounted from the regular $2,195 rate) ends today! You can register by visiting our online store or by calling us at 800-737-1271.
Following the demise of Chevron, there’s been an ongoing debate about the impact the end of this 40-year-old doctrine will really have on the lawmaking process, administrative state, and federal court system. It appears that many Senate Democrats are among those who think the end of Chevron could have disastrous consequences. Earlier this week, numerous Senate Democrats introduced the Stop Corporate Capture Act (SCCA), which had first been introduced in the House in 2021. Touted as a bill to “codify Chevron deference,” this press release from Senator Warren’s team highlights that the bill would do much more:
Protect Chevron Doctrine
– Codify Chevron deference, allowing expert agencies to conduct rulemaking in line with their reasonable interpretation of their authorizing statutes.
Modernize and Reform the Regulatory Process
– Streamline the White House’s review period for regulations, creating a 120-day time limit for review.
– Authorize agencies to reinstate rules that are rescinded by Congress through the Congressional Review Act.
– Reform agencies’ cost-benefit analysis to emphasize public benefits of a rule, including non-quantifiable benefits like promoting human dignity, securing child safety, and preventing discrimination.
Empower and Expand Public Participation in Rulemaking
– Create an Office of the Public Advocate to help members of the public participate more effectively in regulatory proceedings.
– Strengthen agency procedures for notifying the public about pending rulemakings.
– Provide the public with greater authority to hold agencies accountable for unreasonable delays in completing rules.
– Require agencies to respond to citizen petitions for rulemaking that contain 100,000 or more signatures.
Increase Transparency and Protect Independent Expertise in Rulemaking
– Require all rulemaking participants to disclose industry-funded research or other related conflicts of interest.
– Require any submitted scientific or other technical research that raises a specified corporate conflict of interest be made available for independent public review.
– Bring transparency to the White House regulatory review process by requiring disclosure of changes to draft rules during that process and the source of those changes.
– Require agency officials to provide justification when the regulatory review process ends with a rule being withdrawn.
– Establish financial penalties for corporate special interests that knowingly submit false information during the rulemaking process.
I’ve been poking around sec.gov to familiarize myself with the new layout and functionality since the upgraded site was unveiled a few weeks ago. I thought I’d share a few useful pages to reference for our blog subscribers who check sec.gov directly. If you don’t, rest assured that we keep combing the website for important updates and sharing them on our blogs!
– One of the changes touted by the SEC in this announcement is easier access to past events, saying, “the site improvements include a new events archive that allows users to quickly locate details about previous Commission meetings or other public events, including Sunshine Act notices and archived webcasts.” The Past Meetings & Events page now clearly lists and links into past meetings, events and public appearances by senior officials, for example, this landing page for the latest Investor Advisory Committee.
– This new & improved What’s New page is a helpful resource to keep at hand to check for website updates that you might otherwise miss (especially since it seems like some email alerts continue to be spotty or delayed) and seems more comprehensive than its predecessors. That page shows, for example, that the SEC updated & expanded its website resources for potential whistleblowers on July 2 — including Information About Submitting a Whistleblower Tip and these FAQs. However, for certain Corp Fin posts — like the recent cyber CDIs — you need to check What’s New in the Division of Corporation Finance.
In mid-July, the Delaware Court of Chancery dismissed Caremark claims alleging board oversight failures related to compliance with Medicaid laws (core to the company’s business of administering Medicaid plans) in Bricklayers Pension Fund of Western Pennsylvania v. Brinkley (Del. Ch. 7/24). In the decision, Vice Chancellor Zurn clarified the circumstances in which a board reasonably relies on management to handle compliance issues and reinforced that there is a high bar to pleading Caremark claims. This Fried Frank alert identifies these key takeaways:
– The decision reaffirms that, generally, directors will not face Caremark liability unless the factual context is extreme. In this case, the Company had a compliance reporting system in place and the system appeared to be functioning at least to some extent. Also, we would note, while the regulatory noncompliance was ongoing over many years and resulted in significant financial losses (and reputational damage) to the Company, there was no loss of life or direct threat to human health. The court stated that the Plaintiff “ha[d] not painted the extreme picture present” in cases where it has found potential Caremark liability.
– The court indicated a high bar for a finding of the required element of bad faith for Caremark liability. The court found that, even if the Plaintiff’s alleged facts supported reasonable inferences that the Board had known about and failed to respond to the Company’s compliance problems, no facts were alleged that supported an inference that the Board failed to respond in bad faith. The Board accepted management’s statements that the compliance risks and issues “were being handled”—it “did not make a conscious decision to violate the law,” the court stated.
– The court found that the Board did not breach its Caremark duties although it had deferred to management to deal with the Company’s serious, longstanding compliance problems. In certain previous Caremark cases, the court has stressed that Caremark requires board-level oversight of compliance risks and that reliance on management alone to deal with critical compliance risks and problems is insufficient. Centene, however, indicates that the extent to which reliance on management may be sufficient for fulfillment of Caremark duties depends on the context. Here, the court found it reasonable to infer, from the facts the Plaintiff alleged, that the Board knew what steps management was taking to address the problems; and the court found the overall context was not so “extreme” that the Board was unreasonable in accepting management’s assurances that the problems “were being handled.”
In concluding, the alert notes that “Centene joins a list of recent cases— including NiSource; LendingClub; and MoneyGram—in which the court has dismissed Caremark claims at the pleading stage notwithstanding that the company had an extensive history of regulatory noncompliance. Successful defenses in these cases (that supported a lack of bad faith by directors) included that: the board was not aware of the regulatory noncompliance; the noncompliance was not sufficiently related to the corporate trauma that occurred; the noncompliance occurred at a different subsidiary of the company; the board had taken steps to remediate the noncompliance; and, now, in Centene, that the board reasonably relied on management’s assurances that it was handling the issues.”
It also makes recommendations to boards and management teams in light of these decisions, including that key risks are delegated to a board committee, that management regularly reports to the board on important developments, including “red flags” or “yellow flags,” and that a thorough record is created of the board’s risk monitoring and oversight efforts.
