While we can’t escape the constant reminders that we’re in the midst of a U.S. presidential election year, I didn’t realize 2024 is what WTW calls “the year of elections.” With “83 elections in 78 countries […] there will not be an equivalent number of elections held worldwide in any single year until 2048.” Yikes! Here’s more from this report by the Director of Political Risk Analytics at WTW:
Writing in early 2024, we cannot be certain how many of the elections scheduled for this year will in fact be held. Some of 2024’s contests will surely be postponed by budding autocrats. Other polling dates will be unexpectedly added to the annual calendar as parliamentary governments lose no-confidence votes and snap elections are called.
What is clearer, is that 2024 is very likely to play host to consequential elections. By some estimates, more than 4 billion votes will be cast in national polls in 2024 (owing in significant part to elections in India and the multinational elections for the European Parliament). That figure may not be reached again until after 2070.
What might these elections mean for macroeconomic and political conditions? Well, WTW says, generally speaking, soaring inflation means “it is not likely to be a good year for incumbents” and “changes of government are an opportunity for dramatic geopolitical realignments.” As an example, it cites the recent “change in the U.S. relationship with China,” which “has prompted companies to rethink their globalisation strategies.” In fact, Microsoft recently made the news after asking at least 100 employees in China to relocate given governmental tensions.
As Dave noted, the SEC’s rulemaking strategy can also be significantly impacted by changing administrations, but that doesn’t necessarily mean that we’ll see a slowing down or pausing in rulemaking activity.
Don’t miss PracticalESG.com’s virtual event “DEI Full Circle” featuring three panels of experts who will provide a comprehensive exploration of Diversity, Equity, and Inclusion from various angles – “Exploring Executive Viewpoints,” “Embedding DEI Throughout the Employee Life-Cycle” and “Understanding the Social Impact of DEI Work.” Join us at 12:00 pm eastern today, June 11. You can register here.
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Over at Radical Compliance, Matt Kelly discussed a new survey of vendor risk management processes at 156 companies from third-party risk management software provider Prevalent. While companies are improving their processes in some areas — for example, “cybersecurity and data privacy teams are now more involved in third-party risk management (TPRM) than they were a year ago” — generally, Prevalent found that third-party risk management programs were still struggling with limited resources and a hodgepodge of tools and practices:
– Resource Constraints: Many organizations struggle with inadequate resources, with only one-third of vendor relationships being managed in a TPRM program.
– Dependence on Outdated Tools: Half of the surveyed companies still rely on spreadsheets and multiple disparate tools to assess and manage their third-party relationships.
– Limited Remediation: Despite tracking risks across the vendor lifecycle, few companies actually do anything about what they find.
Matt highlighted some other statistics showing a piecemeal approach, leaving “the average company with too many TPs not RM’ed.”
Only 51% say they are able to assess risk at every stage of the vendor lifecycle (think a vendor not disposing of equipment or data as promised when a contract is terminated, or your own failure to disable their user access)
Only 49% say their TPRM program has the automation and reporting necessary to demonstrate compliance
While companies are making some strides in cybersecurity, it sounds like third-party risk management practices could use improvement across the board. As a reminder, the new cybersecurity disclosure rules include “whether the registrant has processes to oversee and identify such risks from cybersecurity threats associated with its use of any third-party service provider” in the non-exclusive list of matters to address when describing the company’s processes for assessing, identifying, and managing material risks from cybersecurity threats. So how are companies addressing this disclosure?
As Dave and John have observed, this year’s Form 10-K cybersecurity disclosures varied but tended to be shorter than expected, and most companies’ disclosure of their overall cybersecurity risk management approach wasn’t particularly detailed. The January-February 2024 issue of The Corporate Executive includes a deep dive into 10-K cybersecurity disclosures and makes this related observation:
Some companies simply stated that their cybersecurity risk management processes included assessing, identifying and managing material risks arising from threats associated with third-party vendors. Others provided a highly detailed discussion of their efforts to address third-party cyber risks. […]
More commonly, companies provided a general description of their efforts to identify and manage cybersecurity risks during the vendor approval and contracting process, and indicated that these efforts involved a combination of risk assessments and contractual commitments from their vendors.
One of the many challenges in a CEO transition is determining and defining the continuing role, if any, of an outgoing CEO. As this Semler Brossy article articulates, many factors are at play here — the new CEO’s experience, board dynamics, personal relationships and personalities and the reasons for the transition are all important to consider. Plus the length of time that the outgoing CEO will serve in any continuing role can be another point of contention, with these transition periods typically lasting less than two years.
The article addresses four common scenarios in CEO transitions and the prevalence of each among S&P 500 companies in 2022 and 2023. Here’s the data:
– Scenario 1: CEO Transitions to Executive Chair.
Prevalence: 48%
Typical Time Frame: 6-24 months (~65% < 12 months)
A slight variation on the executive chair role is the much less common vice chair role (used in only 5% of our studied S&P 500 CEO transitions).
– Scenario 2: CEO Transitions to Senior Advisor.
Prevalence: 28%
Typical Time Frame: 3-12 months (or longer)
– Scenario 3: CEO Transitions to Board Member.
Prevalence: 4%
Typical Time Frame: 6-18 months (anchored to annual meeting dates)
– Scenario 4: CEO Has No Affiliation with the Company.
Prevalence: 20%
This Spencer Stuart blog says boards in a CEO transition should prepare for the CEO’s “sophomore slump” (i.e., second-year downturn) since the firm’s CEO Life Cycle research indicates this phenomenon is “a very real thing.” The blog gives questions for consideration and stresses that any effective transition plan needs to include working towards strong year two performance as a key element. Since these outgoing CEO transitions typically last less than two years, it would be interesting to see data on whether and how the continued involvement of the outgoing CEO has any impact on this.
If you’ve perused the agenda for our Proxy Disclosure and Executive Compensation Conferences, you may have noticed that we’re planning a fun lightning-round game show with some SEC All-Stars — hosted by our own Dave Lynn! As the name suggests, the game show will be in the style of “Family Feud.”
Having never seen Family Feud before (I know, I live under a rock), I had to seek out a recent episode to understand the game. Most of you probably already know that the contestants compete to name the most popular answers to various survey questions. That’s where you come in! For our game show to be true to its namesake, we’re hoping our blog readers will help us generate the answers to various survey topics that are “securities law adjacent.”
From now until the Conferences, we’ll periodically share short quick polls. If you have 2 seconds to spare, please type in a response to each anonymous poll. We’ll gather and rank responses by popularity. Responses will be hidden, so you’ll have to join day 1 of our Conferences (in San Francisco or virtually) to hear whether your response made the list. As the first in this series, please participate in this anonymous poll on 2025 shareholder proposal hot topics.
Speaking of our Conferences, as John shared, we’re giving everyone more time to lock in our “early bird” deal for individual in-person registrations ($1,750, discounted from the regular $2,195 rate). This rate now ends July 26! We hope many of you decide to join us in San Francisco, but if traveling isn’t in the cards at that time, we also offer a virtual option (plus video replays & transcripts for both in-person and virtual attendees!) so you won’t miss out on the practical takeaways our speaker lineup will share. (Also check out our discounted rate options for groups of virtual attendees!)
You can register now by visiting our online store or by calling us at 800-737-1271.
While we do not cover developments with SEC fund rules that often here on TheCorporateCounsel.net, litigation over the SEC’s rules is on everyone’s mind these days, so the fate of the SEC’s controversial private funds rules in the courts is no doubt of interest. On Wednesday, a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit vacated the private funds rules that the SEC adopted on August 23, 2023. This Goodwin alert notes:
Yesterday, a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit vacated the “Private Funds Rules,” which the Securities and Exchange Commission (the “SEC”) adopted on August 23, 2023. The opinion of the Court (the “Opinion”) holds that the SEC lacked the rulemaking authority to issue these Rules under both Section 211(h) and Section 206(4) of the Investment Advisers Act of 1940 (the “Advisers Act”). As a result, the Opinion orders the Rules vacated. Once the Fifth Circuit decision formally takes effect—which should occur before the first compliance date, unless the SEC obtains some form of emergency relief or reconsideration—the Rules will be a nullity and all compliance dates will be moot. The SEC can seek further review of the Opinion, but review is not automatic: either the full Fifth Circuit or the Supreme Court would have to exercise discretion to hear the case.
As expected, the Fifth Circuit ruled that the SEC’s rulemaking authority under Section 211(h) of the Advisers Act is limited to “retail customers” and cannot be used in a rulemaking aimed at private funds and private fund investors. However, the Court also ruled that the SEC lacked rulemaking authority under Section 206(4) of the Advisers Act because (i) the SEC failed to define the “fraud” it was seeking to prevent and there were an insufficient number of enforcement actions to support the necessity of the rulemaking, (ii) Section 206(4) of the Advisers Act does not permit rulemaking concerning disclosures or reporting, (iii) Section 206(4) does not authorize the SEC to issue rulemakings that seeks to regulate the “internal corporate governance” of private funds (including with respect to investor reporting, fees and expenses, and redemption rights), and (iv) Section 206(4) only covers relationships with “clients” (e.g., the private funds) and not with the investors in private funds.
The SEC has a range of options in terms of next steps, none of which are likely to result in the Rules becoming effective in the near future. The SEC could theoretically propose new rules or re-open the existing rulemaking, which would likely be subject to a renewed challenge. The Opinion’s analysis, particularly with respect to Section 206(4), has potential ramifications beyond the Rules to a range of other current and future rulemaking. Thus, it appears more likely that the SEC would seek an “en banc” rehearing by the full Fifth Circuit (in a petition that would be due July 22, 2024) or skip that step and petition the Supreme Court to review the case.
The Fifth Circuit’s decision takes effect when the Fifth Circuit issues a formal order called a “mandate” to the SEC, which would ordinarily occur shortly after the time to seek rehearing expires (or shortly after rehearing is denied, if sought). Once that happens, the Private Fund Rules will be vacated, and all of the compliance dates from that point forward will no longer be effective. Although it is likely that the mandate will issue and the Rules will be vacated before the first compliance date, that is not guaranteed: for example, the SEC could seek emergency relief that delays the implementation of the Fifth Circuit’s decision and allows the Rules to take effect.
As you may recall, it was the Fifth Circuit that vacated the SEC’s share repurchase disclosure rules back in December 2023 on the grounds that the SEC acted arbitrarily and capriciously in adopting the final rules. And while the litigation over the climate disclosure rules has been consolidated in the U.S. Court of Appeals for the Eighth Circuit, that Court is notably comprised of conservative-leaning judges, similar to the Fifth Circuit.
One thing is for sure – the SEC’s recent rulemaking has been keeping the appellate group in the SEC General Counsel’s office very busy, and there are no signs of that slowing down.
The Committee of Sponsoring Organizations of the Treadway Commission (COSO), in collaboration with the National Association of Corporate Directors (NACD), has selected PwC US to assist with developing a Corporate Governance Framework. COSO’s recent announcement indicates that PwC was selected for the project pursuant to a competitive RFP process.
Originally announced back in February, COSO and NACD are collaborating to create “a principles-based governance framework that considers the interests of major stakeholders while maintaining an objective view of leading and desired practice.” This Corporate Governance Framework would be used by:
– public companies seeking to self-assess and enhance governance practices, and by start-up businesses desiring to build up their governance practices and processes;
– private organizations seeking best practices or as part of readiness activities related to initial public offering efforts; and
– external auditors, internal auditors, rating agencies, investors, listing agencies and/or regulators finding such a framework useful in assessing governance practices at related entities.
The announcement of the selection of PwC further explains:
“Good governance is a competitive advantage to every organization. Yet, boards and management may often struggle to effectively integrate good governance in how their organizations operate. For example, the design of incentives or the pursuit of major innovation might possibly create damaging blind spots,” said Peter Gleason, NACD President and CEO. “The CGF will help companies ensure that governance is cohesive in guiding behaviors from the boardroom to the frontlines. We look forward to working with COSO and the PwC team to help build trust in business and society on this important initiative.”
The project is expected to be completed in the fall of 2025.
How did Taylor Swift break all-time records with the Eras Tour?
Well, beyond her remarkable talent, there’s also a lot of value in sharing one’s story.
And here at the SEC there’s also lots of talent and history. So, as we celebrate the SEC’s 90th anniversary, let’s take an “eras tour” of our own.
Throughout the rest of the speech, Chair Gensler dropped in numerous Taylor Swift “Easter Eggs” for all of us Swifties, including “[t]he SEC’s mission is meant to last for evermore.” I would also note that, in his brief history of the SEC, Chair Gensler noted “[t]he 1980s brought us Wall Street the movie, and greedy villains like Gordon Gekko.” As I discussed in my reflections on the SEC’s 90th Anniversary yesterday, I became interested in working at the SEC after watching the movie Wall Street, so I feel like that Easter Egg was placed there just for me.
As John noted last week, the SEC turns 90 today, marking the anniversary of the enactment of the Securities Exchange Act of 1934. Prior to enactment of the Exchange Act, the Federal Trade Commission was tasked with implementing the Securities Act of 1933, so the creation of the SEC on June 6, 1934 no doubt came as welcome relief to the poor FTC staffers who were reportedly sleeping on cots in their office as they tried to deal with Securities Act registration statements that went effective within 20 days of filing per Securities Act Section 8(a). Over the years, the SEC came to be a much-admired agency, the protector of investors that also facilitated capital formation. On a personal note, the SEC became the center of my professional life for almost 30 years now.
The funny thing is that if Future Me went back in time to meet with Teenage Me as I was about to embark on my pursuit of higher education, and Future Me told Teenage Me that I would spend almost of all of my professional career working at the SEC, interacting with the SEC and writing and speaking about the SEC’s every move as it relates to the regulation of public disclosure, my reaction would have likely been: “What is the SEC?” In my blue collar upbringing, Wall Street, investing in public companies and the details of the administrative state were very distant concepts. Having grown up in Maryland and not being much of a college football fan at the time, Teenage Me would not have even assumed that Future Me was talking about the Southeastern Conference.
I believe that I first became interested in the SEC when I was in college, when the movie Wall Street came out in 1987. By the time of its premiere, I had been exposed to the broader world, and I had a cursory understanding of financial markets, accounting and financial reports. But the power of the SEC really caught my imagination when the SEC staffers were on hand to arrest Bud Fox for insider trading and to handle the wire when he had his fateful last meeting with Gordon Gekko. I thought then and there that, whatever it was that the SEC did, it seemed pretty exciting, and the seed was thus planted for me to ultimately go to law school for the express purpose of getting a job at the SEC.
As it turned out, I never got to tape a wire to anybody or to be present when an individual took a Bud Fox-style perp walk while I was working at the SEC. I got to sit at a gray metal desk and review Form 10 filings on an OS/2-powered computer. But that experience actually seemed very exciting to me, because I really wanted to be there to help carry out the SEC’s mission. And even though I am far removed from my SEC service today, I still believe in that mission, and I admire all of those who work at the agency to carry out that mission every day.
The SEC’s enduring esprit de corps and collegiality also gave me something for which I am forever grateful – a family. My kids were commenting just the other day about how so many of my friends and professional contacts are people that I know from the SEC community. I often refer to this group as my “SEC family,” and their friendship and kindness has been incredibly important to me on a professional and personal level. I think that says a lot about the SEC’s success, in that it is able to create such enduring bonds in a high pressure, professional environment that remains mission-focused.
So, on this 90th anniversary, I raise a toast to the SEC, its Commissioners and dedicated staff, past and present. Happy Birthday!
As John noted last week, the SEC will host a staff event this afternoon commemorating the 90-year anniversary of the Securities Exchange Act. The event will also be publicly webcast and include panel discussions featuring former SEC chairs and experts on the history of the SEC. The agenda is as follows:
1:00 – 1:15 p.m. | Opening Remarks by Chair Gary Gensler and Commissioners
1:15 – 2:15 p.m. | Panel 1: A Lookback from the Chair’s Seat
Moderator: Chair Gary Gensler
Panelists:
– The Hon. Richard C. Breeden (1989 –1993)
– The Hon. Mary Schapiro (2009 – 2012)
– The Hon. Mary Jo White (2013 – 2017)
2:15 – 3:15 p.m. | Panel 2: The Legacy of the SEC
Moderator: Chair Gary Gensler
Panelists:
– Michael Beschloss, American historian and bestselling author
– Joel Seligman, American legal scholar, author and leading expert of securities law
– Kathleen Kennedy Townsend, Advisor for Pensions and Retirement, U.S. Department of Labor, and former first female lieutenant governor of Maryland
