Election Day is finally here. Boards (and those who advise them) will need to adapt to oversee whichever set of risks & opportunities accompany the outcome. It’s also very likely that the outcome remains unknown for a while – and that situation presents its own risks. This guide from the Erb Institute’s Corporate Political Responsibility Taskforce points out that although companies would prefer to stay above the fray, that doesn’t mean they can ignore foreseeable business risks. Here’s an excerpt:

Businesses face serious risks when democratic institutions erode; proactive risk management is critical: Our expert panel outlined three types of risks businesses may face during this year’s election cycle – Election Risks, Governing Risks and Societal Risks. It is critical to anticipate and plan for a context where the odds of serious disruption may be low but the stakes are very high, and the risks of inaction may equal the risks of action.

When it comes to “anticipating and planning,” the guide links to several resources, including a board deck from the Civic Business Initiative that identifies near-term foreseeable risks to have on your radar:

– Increased levels of stress, distraction, and disharmony among employees adversely impacting productivity and morale;

– Political violence and civil unrest posing threats to the safety of employees and customers;

– Civil unrest causing property damage and interruption of operations;

– Cyber attacks disrupting infrastructure, communications, and financial systems;

– Supply chain disruption;

– Increased market volatility; and

– Capital market disruption.

The deck suggests practical steps to take to manage these risks, identifies dates to be on “high alert,” and provides tools for scenario planning. Even if your board hasn’t had time to scenario plan, you can still use these tools to consider whether & how to escalate issues if the need arises.

Yesterday, for example, the Office of the Director of National Intelligence (ODNI), the Federal Bureau of Investigation (FBI), and the Cybersecurity and Infrastructure Security Agency (CISA) issued a joint statement warning that foreign actors like Russia and Iran are running disinformation campaigns to stoke violence. The statement encourages people to seek information from trusted, official sources, in particular, state and local election officials.

– Liz Dunshee

Last month, the Business Roundtable issued a brief statement entitled, “Voting is the Bedrock of Our Democracy,” which says:

“Voting is a fundamental right of American citizens. The strength of our nation’s democracy and the stability of America’s economy depend on free and fair elections.

“As voting in the 2024 election continues, Business Roundtable strongly encourages all eligible citizens to vote. Our members are committed to helping by providing flexibility for workers to vote and volunteer at polling locations across the country.

“It can take time to finalize election results, and we urge all Americans to respect the processes set out in federal and state laws for electoral determinations and an orderly transition.”

The statement was issued after the Interfaith Center on Corporate Responsibility sent a letter to CEOs of the 200+ companies that are BRT members, calling for the business community to publicly support democratic norms. The BRT’s comments track with recommended steps in the Erb Institute guide, which makes this point:

Business has a common interest and a legitimate role in in upholding American constitutional democracy but needs to articulate this and act on it thoughtfully. Companies depend on institutions, including the rule of law, a predictable, stable and impartial regulatory environment, and the general prosperity enabled by the American economic and political system. However, any external-facing initiatives need to be explicit about business’ legitimate role and the specific risks to their industry when institutions are doubted, disputed or unreliable. For many companies this involves a fresh look at their decision frameworks and the principles that guide their political engagement.

The guide urges companies to take action – internally and externally – but to focus on rules that apply no matter who is running or governing. As noted above, one recommended action is to review and upgrade governance related to political spending and other activities, which is something Dave blogged about last week.

– Liz Dunshee

The good news about Election Night (and beyond) is that each of us is in control of our own sanity. Although we all need to stay informed to some extent in order to do our jobs, we probably do not need to inflict ourselves with thousands of metaphorical paper cuts, imposed one by one as we consume every opinion piece, prediction, and statement. I don’t want that for myself, and I don’t want that for you!

It’s hard to accept that we won’t have immediate certainty about the election outcome. But just like planning ahead for business risks, that “not knowing” is a foreseeable scenario, and you can prepare now to address it head-on rather than being surprised next week by the amount of time and energy you’ve wasted by following each breathless play-by-play update. This article from Temple University shares ideas to get you through the week:

– Establish boundaries.

– Limit social media. Social media accounts can also be set up to reduce and/or restrict political content.

– Schedule a midday walk, and keep your phone in your pocket.

– Set up a scheduled time to block apps and notifications.

If you’re a lawyer and you want to put energy towards something election-related, the ABA Task Force for American Democracy recently published ways that individuals and bar associations can help support a fair and peaceful election – and promote civics education for the long-term.

Personally, I’m making great use of my library card right now. I’ve queued up a few page-turners in Libby. When I want to doomscroll, I open one of those instead. I’ve also been revisiting the uplifting third entry in this 2020 blog from John.

– Liz Dunshee

We continue to pick up lessons from the SEC’s year-end enforcement activity. This Ropes & Gray memo flags a securities fraud action in which the Enforcement Division went beyond simply charging the company’s former CEO and CFO – they also went after the former Audit Committee Chair! Here’s the SEC announcement, the complaint against the CEO and the complaint against the CFO and Audit Committee Chair.

The Ropes memo summarizes the complaints, which are premised on allegations of improper revenue recognition that affected financial statements used in an IPO and follow-on offering. Here’s an excerpt:

According to the complaint against the CFO and AC Chair, the CFO and AC Chair first learned that the beta tests had not been performed on the day Kubient launched the follow-on offering. The SEC alleges that on that day an employee who had discovered that KAI had not scanned the customers’ data informed the AC Chair of this discovery, while questioning whether it could be indicative of fraud and suggesting that, if the wrong data had been scanned for the beta test, the company might need to restate its earnings. The AC Chair then relayed this information to the CFO on the same day.

The complaint further alleges that, despite learning this, neither the CFO nor the AC Chair investigated the circumstances of the $1.3 million revenue recognition; instead they both furthered the CEO-initiated fraudulent scheme by failing to correct the statements in the follow-on offering documents, signing the company’s subsequent public filings including the same statements, and lying to the company’s independent auditor about the revenue and their knowledge of concerns raised internally about the transactions supporting the revenue.

The memo goes on to detail the allegations against the Audit Committee Chair specifically, which included:

– Failing to investigate the circumstances surrounding the $1.3 million revenue recognition after learning that the customers’ data were not scanned by KAI;

– Failing to inform the independent auditor of that discovery;

– Failing to correct the KAI testing and revenue statements in the follow-on offering documents;

– Excluding the independent auditor from the audit committee meeting where concerns about the KAI contract were discussed (the “KAI Audit Committee Meeting”);

– Further concealing the KAI Audit Committee Meeting from the independent auditor by signing minutes (prepared by the CFO) of the immediately following audit committee meeting that disclosed another meeting, instead of the KAI Audit Committee Meeting, as the last audit committee meeting;

– Falsely stating to the auditor, during the 2020 year-end audit interview, that she was unaware of any tips or complaints regarding the company’s financial reporting, any fraud or suspected fraud affecting the company, or any other matters relevant to the audit; and

– Signing the company’s 2020 Form 10-K that included the statements in question.

Charges against audit committee chairs are rare, but statements from SEC officials about the important role of gatekeepers are not. Although there appear to have been some “bad facts” here, the charges reinforce the message that gatekeepers must take their role seriously, promptly investigate red flags, and oversee steps to correct material errors.

– Liz Dunshee

Clean audit reports on financials that later prove inaccurate may serve as the basis for a Rule 10b5-1 securities fraud claim against a company’s independent auditor, according to an amended opinion issued last week by a Second Circuit panel. The amendment reversed course from the court’s 2023 decision to dismiss the claim. The WSJ reports:

After the [2023] ruling, a trio of former Securities and Exchange Commission officials filed a brief with the court asking it to reconsider the decision. The court then asked the SEC to submit a brief expressing its views on the subject. The SEC did so and it, too, asked the court to reconsider, writing in a brief last February that “audit certifications convey crucial information to the investing public” and “audit certifications are not too general to be material.”

The appeals court on Thursday reissued its decision with amendments and ruled the investors’ claims against BDO could proceed.

The investors had alleged that the audit report was uniquely problematic because the audit partners failed to complete the necessary checks and audit work papers before issuing the audit opinion; that they signed several audit work papers without reviewing them; and that they failed to verify that all the necessary audit work was performed before issuing the opinion. In addition, the plaintiffs alleged shortcomings under PCAOB standards that require appropriate supervision, testing of audit procedures, and quality review.

The court determined that the plaintiffs adequately alleged that the audit report contained potentially actionable misstatements, because it was plausible that the partner who signed the audit opinion disbelieved the statement that the audit was conducted in accordance with PCAOB standards. Moreover, the court found adequate allegations that the misstatements were material. Here’s an excerpt (citations omitted):

Although the challenged audit certification reflects standardized language, it is not “so general that a reasonable investor would not depend on it as a guarantee.” Instead, BDO’s certification that the audit was conducted in accordance with PCAOB standards succinctly conveyed to investors that AmTrust’s audited financial statements were reliable. The absence of BDO’s certification would have been significant, for without it, BDO could not 49 have issued an unqualified opinion, AU 508.07, which then would have alerted investors to potential problems in the company’s financial reports.

In other words, audit quality is important – and it’s been front & center in scandals & rules this year. We’ll be providing practical guidance on this topic in an upcoming webcast, “Audit Quality: Lessons from BF Borgers and Other Recent Developments.” Mark your calendars for Thursday, November 21st at 2:00 p.m. ET to hear Deloitte’s William Calder, Maynard Nexsen’s Bob Dow, and Nonlinear Analytics’ Olga Usvyatsky discuss what corporate attorneys need to know about the latest audit-quality developments to advise clients on financial reporting and corporate governance matters.

– Liz Dunshee

Earlier this fall, the SEC adopted a rule change that will (among other things) amend the minimum pricing increments for the quoting and trading of exchange-listed stocks. As Meredith wrote at the time, the rule is intended to address “tick-constrained stocks” – which have narrow bid-ask spreads. You may wonder, “How many stocks suffer from ‘tick constraints?'” A recent Sidley memo points out that the answer is “most of them.” Here’s an excerpt:

Once implemented, the changes to minimum tick size will cause a majority of stocks — approximately 74.3%, based on the SEC’s estimate using 2023 data — to be quoted in more granular half-penny (i.e., $0.005) increments, rather than the $0.01 minimum tick most prevalent today.

This will likely necessitate systems changes for a large number of market participants, including broker-dealers and exchanges, to allow for the submission, ranking and display of orders at more granular pricing increments.

Moreover, the applicable minimum tick sizes will vary by stock and may change for each stock on a biannual basis, which will require broker-dealer systems be able to accommodate such changes, and inform their customers.

The Sidley memo also notes that the amendments have been challenged by a retail investor advocacy group. This Bloomberg article reports that Nasdaq and Cboe have also filed a joint petition focused on challenging the “access fee” portions of the rule change.

– Liz Dunshee

I don’t know about you, but I can’t wait for next Wednesday when the relentless political advertising on television will cease. I much prefer the mindless advertising about bathroom renovations and big screen TV sales that dominate the airways when we are not in an election season. I also yearn for a time when politics is boring. Boring is good. We need more boring.

This week we saw the release of the 2024 CPA-Zicklin Index, a collaboration between the Center for Political Accountability (CPA) and The Carol and Lawrence Zicklin Center for Business Ethics Research. The CPA-Zicklin Index has been benchmarking political spending since the Citizens United decision in 2010. The Index highlights significant improvement in in corporate political disclosure and accountability, noting:

The 2024 CPA-Zicklin Index is published shortly before Election Day and at an unparalleled time in the nation’s political history. The Index’s data reflect leading companies holding firm overall to established norms of political disclosure and accountability, despite fierce headwinds against environmental, social, and governance (ESG) and related principles for investors and U.S. corporations.

Moreover, when the 2024 Index results are compared against the last presidential election years of 2020 and 2016, the picture is striking: Many large public companies have realized major gains in disclosure and accountability for their election-related spending from corporate funds, and the gains are permanent. Whether examining the overall number of S&P 500 companies in 2024 or the 331 companies that have been a constant in the Index since 2015, the Trump years (2017 to 2021) plus Biden years (2021 to the present) have seen solid and dramatic increases in corporate political disclosure and accountability.

Some of the highlights from this year’s Index include:

– The number of all S&P 500 companies scoring 90 percent or above for political disclosure and accountability was 103, an increase over last year’s 100, and comprising more than 20 percent of all S&P 500 companies evaluated.

– 206 companies in the overall S&P 500 (over 41 percent) placed in the first Index tier (scoring from 80 percent to 100 percent). This number was more than double the 94 top-tier companies in 2016 and well beyond the 156 companies in 2020.

– The number of core S&P 500 companies scoring lowest for disclosure and accountability – in the bottom 20 percent – has declined sharply. From 106 bottom tier companies in 2016 it has declined to 73 in 2020, 37 in 2023 and 31 this year.

– For Russell 1000 companies that do not belong to the S&P 500, the average score for political disclosure and accountability is 16.5 percent. This compares to an average score of 59.9 percent for all companies in the S&P 500.

This year’s CPA-Zicklin Index certainly highlights some considerable progress in corporate political disclosure and accountability, particularly among the largest companies. Presidential election years always put a lot of focus on political spending by public companies, and having good transparency and getting the governance right can go a long way toward dispelling concerns of investors and the public.

– Dave Lynn

Yesterday, ISS-Corporate released a well-timed report on a very scary topic for many companies: shareholder proposals. The report is titled “U.S. Shareholder Proposals: A Decade in Motion,” and the press release announcing the report notes:

ISS-Corporate, a leading provider of compensation, governance, cyber risk monitoring, and sustainability offerings to help companies improve shareholder value and reduce risk, today announced the findings of an in-depth analysis of shareholder proposals submitted at U.S. public companies over a 10-year period running from July 2014 through June 2024. The analysis examines investor sentiment around assessing environmental, social, and governance (ESG) risks via the volume and support levels of different types of such proposals and looks at the underlying patterns of corporate behavior and disclosures driving shareholders’ ESG campaigns. Amid intensifying debate around the value of ESG and the emergence of shareholder campaigns that seek to counter corporate action on environmental and sustainability topics, the report investigates how the debate around ESG has impacted investor sentiment and shaped corporate practices more broadly.

Some of the key finding of the report include:

– Proposals related to E&S topics accounted for 62 percent of the total proposals submitted by shareholders in 2024, up from 44 percent a decade earlier.

– Support levels for E&S shareholder proposals have decreased since peaking in 2021, but this does not necessarily indicate a de-prioritization of sustainability factors for many investors.

– Shareholder campaigns tend to target large-cap firms, and these companies have made particularly significant strides over the last several years in the quality of their sustainability disclosures and practices and corporate governance practices.

– Anti-ESG proposals made up approximately 11 percent of the total shareholder proposals submitted in 2024 – up from around 2 percent of submitted requests from July 2014 to June 2021 – but average support levels remain in the low single digits at 1.7 percent of votes cast during the last three years.

All signs point to yet another very active proxy season for shareholder proposals, so buckle up and get ready!

– Dave Lynn

Mark your calendars today for our upcoming webcast, “SEC Enforcement: Priorities and Trends,” which is coming up on Wednesday, November 13, 2024 here on TheCorporateCounsel.net. Joining us for the program are Scott Kimpel of Andrews Kurth LLP, Allison O’Neil of Locke Lord LLP and Kurt Wolfe of Quinn Emanuel Urquhart & Sullivan, LLP. They plan to address the very active SEC enforcement environment we are experiencing, including:

1. SEC Enforcement Activities in 2024 and Priorities for 2025
2. Implications of Jarkesy for SEC’s Enforcement Program
3. Monetary and Non-Monetary Penalties
4. Accounting and Disclosure Actions
5. Actions Targeting “Internal Controls”
6. Self-Reporting and Cooperation Credit
7. Coordination with DOJ Investigations

Members of TheCorporateCounsel.net are able to attend this critical webcast at no charge. If you’re not yet a member, subscribe now. The webcast cost for non-members is $595.

– Dave Lynn

I kick off my Halloween-themed blogs with a scary horror story:

The opening scene is set in the 1990s, and a company has filed a registration statement with the SEC. The Staff review process is taking longer than expected, and the company desperately needs to raise money through a private placement so it can keep the lights on through the completion of the IPO. The company completes the private placement and discloses it in an amendment to its Form S-1, but then, a jump scare! The Staff raises a comment questioning whether the company has a valid exemption from registration for the private placement when it occurred while the Form S-1 was on file. Suffice it to say, this horror story does not end well – the Metaphysics monster exacts its revenge on the poor unsuspecting company.

This week, while I was teaching my exempt offerings class the concept of integration, it really hit me how the Commission’s thoughtful approach in 2020 to adopting a comprehensive integration rule really changed the landscape for public and private offerings, making the scary horror story above a relic of the past. Securities lawyers of a certain vintage will no doubt remember many stressful evenings analyzing an integration issue utilizing the unwieldy five factor test, while trying to piece together all of the random Commission and Staff integration lore to see if something could bring some level of certainty to the situation. Today, a securities lawyer need only pull up Rule 152, without being burdened with the five factor test and the numerous interpretations that made integration a pretty scary realm to navigate.

I have the advantage of being able to tell a significant piece of the story of integration’s evolution in the first person, as I worked with Marty Dunn to bring his “integration manifesto” into being (much like Frankenstein’s monster) through interpretive guidance that was included in a 2007 Regulation D proposing release. That guidance went on to serve as the foundation for the Commission’s approach in Rule 152, bringing about much needed relief to a scary part of the regulatory landscape.

If you would like to read the full story of Marty’s integration manifesto and the evolution of the integration doctrine, I encourage you to review the article “Wither the Integration Doctrine? A New Approach Dawns This Spring” in the January-February 2021 issue of The Corporate Counsel.

– Dave Lynn