What happens when amplified SEC litigation challenges meet budget constraints?
Annually, the SEC’s Office of Inspector General offers its “independent perspective” on the “top management and performance challenges” facing the SEC. What stands out in the 2024 Inspector General’s Statement on the SEC’s Management and Performance Challenges? It’s that the SEC is confronting several serious challenges—particularly significant litigation challenges to its rulemaking—but, at the same time, is facing serious budget constraints. Not only have many of the recent rulemakings been challenged in court, but, in light of SCOTUS’s decision last term in Loper Bright, which put the kibosh on Chevron deference, the OIG expects that “SEC rulemaking will continue to face searching judicial scrutiny.” In addition, the OIG predicts that the “current regulatory environment may lead to increased forum shopping by petitioners and extended periods of uncertainty about the permissible scope of agency action.” In light of this heightened judicial scrutiny, the OIG advises, the SEC “must continue to develop a thorough administrative record, including meaningful opportunity for public participation and reasoned responses to public submissions. The SEC already invests considerable resources toward these ends, but should be prepared for additional litigation, as industry and public interest groups may take opportunities to challenge regulations.” At the same time, the OIG cautions, the dearth of resources under the current budget environment “may hinder the Agency’s ability to meet these challenges, mitigate its risks, and pursue its vital mission.” In particular, as a result of flat funding for fiscal 2024, the SEC was required to freeze hiring and eliminate certain employee benefits, while increased “personnel costs limit the resources available to update and improve legacy information systems, including information security.” Yet, “the changing regulatory environment will likely increase operational demands on the Agency and its staff,” rendering the financial constraints all the more problematic.
You can probably tell that this post was written prior to the vote count last night. The election results and coming change in
Administration will certainly affect the SEC’s rulemaking agenda and probably its litigation posture; however, to the extent that Democrats adopt a litigation strategy with regard to rulemaking by the new Administration that follows the current Republican playbook, many of the challenges identified by the OIG could well remain.
What’s happening with political spending disclosure and accountability?
In this fraught election season and just before tomorrow’s important election day, the Center for Political Accountability has released its annual study, The 2024 CPA-Zicklin Index of Corporate Political Disclosure and Accountability. The report concludes that, overall, leading companies in the S&P 500 have been maintaining “established norms of political disclosure and accountability.” And “companies are not backsliding,” with improvements showing throughout the Index. In 2016, the report discloses, “there were roughly three bottom-tier core companies for every two top-tier core companies. In 2024, over five times as many core companies placed in the top tier as in the bottom.” And keep in mind that those norms have held firm even in the face of “fierce headwinds” against ESG for U.S. companies. In the foreword to the report, former SEC Commissioner Robert Jackson, Jr. writes: “At a moment when our nation is narrowly divided on so much, nearly 90% of Americans agree that corporations should disclose to investors their use of corporate money on politics—even more than the 73% who took that view in 2006. The decades since have seen a financial crisis, a global pandemic and three Presidencies. Those events, and more, have divided voters. Yet the American people have grown even more firm in their conviction that, when corporations participate in the nation’s politics, it is incumbent upon those companies to carefully consider, and explain to investors, how and why they do so.” As Jackson observes, “today, more than 20% of S&P 500 firms scored 90% or above on the Index’s accountability measures, nearly double the number from 2016,” reflecting recognition of “the benefits of independent oversight, careful controls, and transparency.” This information, he maintains, is important for investors to enable them “to decide whether, and how, to invest in American public companies.”
Be sure to VOTE! Election day is tomorrow!
PwC’s 2024 Corporate Directors’ Survey—how are boards addressing the current uncertainty?
The title of PwC’s new 2024 Corporate Directors’ Survey, Uncertainty and transformation in the modern boardroom, might clue you in to one of its themes: uncertainty—anxiety?—arising out of the looming election. According to PwC, the “2024 election matters more than usual. Not only is the American electorate more polarized than anytime in modern history—making corporate leaders’ every statement and decision subject to public criticism—the results could rapidly reshape the business landscape. Which political party emerges victorious in November, in the White House and/or the houses of Congress, may prove enormously consequential for how every industry functions. The impacts could be dramatic.” We may see policy changes on “tariffs, sanctions, treaties and alliances” that might “upend international trade and disrupt supply chains.” We could see revised tax policy and enforcement priorities, transformed attitudes toward DEI and ESG programs, different views on antitrust enforcement, immigration and possibly, “most significant for many industries, the incentives that have fueled recent sustainability investments could grow further—or be diminished.” That makes “a board’s ability to be agile and stay current in the face of uncertainty” more important than ever. To assess the state of current boardrooms, PwC surveyed 500 public company directors, concluding that boards just might be evolving “too slowly to effectively meet the challenges facing companies today and tomorrow, irrespective of potential political disruptions.” PwC attempts to understand what is driving the results and recommends approaches to addressing the issues.
Are ESG performance metrics in comp plans just a layup with little impact?
There’s been a lot of attention lately to the use of ESG metrics as incentives in executive compensation, perhaps because the concept of ESG has become something of a lightning rod in the political landscape—particularly given the fallout from recent court decisions on diversity as well as escalating activity by anti-ESG groups. As discussed below, consultants have found that the use of ESG metrics seems to have levelled out, as some institutional investors have begun to view them cautiously and some academics studies have questioned their rigor and even their benefit. Companies employing ESG metrics as part of their comp plans may want to consider some of the issues raised by these studies, such as level of challenge and transparency, in designing their ESG metrics.
SEC Enforcement mini-sweep charges hypothetical risk factors and other misleading cyber disclosures
On Tuesday, the SEC announced settled charges against four companies for “making materially misleading disclosures regarding cybersecurity risks and intrusions. The charges against the companies, Unisys Corp., Avaya Holdings Corp., Check Point Software Technologies Ltd and Mimecast Limited, all resulted from an investigation of companies “potentially impacted by the compromise of SolarWinds’ Orion software and by other related activity.” (See this PubCo post and this PubCo post.) According to law.com, the SEC “began issuing sweep letters to potential SolarWinds hack victims back in 2021.” The SEC charged that each of these companies learned that the “threat actor” that was probably the cause of the SolarWinds hack had “accessed their systems without authorization, but each negligently minimized its cybersecurity incident in its public disclosures.” In two instances, the companies were alleged to have framed their disclosures as hypothetical or generic risks. Unisys was also charged with a disclosure controls violation. According to Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement, “[a]s today’s enforcement actions reflect, while public companies may become targets of cyberattacks, it is incumbent upon them to not further victimize their shareholders or other members of the investing public by providing misleading disclosures about the cybersecurity incidents they have encountered….Here, the SEC’s orders find that these companies provided misleading disclosures about the incidents at issue, leaving investors in the dark about the true scope of the incidents.” Jorge G. Tenreiro, Acting Chief of the Crypto Assets and Cyber Unit, cautioned that “[d]ownplaying the extent of a material cybersecurity breach is a bad strategy….In two of these cases, the relevant cybersecurity risk factors were framed hypothetically or generically when the companies knew the warned of risks had already materialized. The federal securities laws prohibit half-truths, and there is no exception for statements in risk-factor disclosures.” The companies were each charged with violations of the Securities Act, the Exchange Act and related rules, and agreed to pay civil penalties ranging from $990,000 (Mimecast) to $4 million (Unisys). Commissioners Hester Peirce and Mark Uyeda dissented, contending that the SEC “needs to start treating companies subject to cyberattacks as victims of a crime, rather than perpetrators of one.”
Cooley Alert: “SEC Adopts EDGAR Next: What’s New About Next, and What Should SEC Registrants Do Now to Comply?”
In September, the SEC adopted changes to the EDGAR system designed primarily to enhance EDGAR security, specifically related to EDGAR filer access and account management. (See this PubCo post.) While the SEC has updated EDGAR several times, it’s been over ten years since the SEC updated EDGAR login, password and other account access protocols in any significant way. The new rules involve substantial updates to those processes. This new Cooley Alert, “SEC Adopts EDGAR Next: What’s New About Next, and What Should SEC Registrants Do Now to Comply?,” from our Public Companies group, is designed to help you through that transition.
SCOTUS denies cert. in case regarding agency independence
This PubCo post highlighted a petition for cert. filed this term to review the Fifth Circuit decision, Consumers’ Research v. Consumer Product Safety Commission. Below is a brief update on the outcome. The expectation was that, if the SCOTUS granted cert. in the case, the Court might take the opportunity to continue its shellacking of the administrative state. But would they? The case involved the concept of agency independence as established in a 1935 case, Humphrey’s Executor v. United States—more specifically, the president’s authority to remove commissioners of so-called “independent” agencies, in this instance, the Consumer Product Safety Commission. With the three-judge panel of the Fifth Circuit practically begging SCOTUS to review its decision, it sure seemed like a good bet that the Court would grant cert.
Are responses to failed say-on-pay votes consequential?
Are you ever surprised that more companies don’t fail their say-on-pay votes? Say on pay was adopted by the SEC under a Dodd-Frank mandate signed into law against the backdrop of the 2008 financial crisis. The mandate was enacted largely in reaction to the public’s railing against the runaway levels of compensation paid to some corporate executives despite poor performance by their companies, especially when those firms were viewed as contributors to the crisis itself. Say on pay was expected to help rein in excessive levels of compensation and, even though the vote was advisory only, ascribe some level of accountability to boards and compensation committees that set executive compensation levels. But, while say on pay may have driven more investor engagement—certainly a good thing—the anticipated say-on-pay challenge by shareholders to out-of-line pay packages did not really materialize. From the get-go, the average failure rate has only been about 2%. Instead, say-on-pay votes have served largely as confirmations of board decisions regarding executive compensation and not, in most cases, as the kind of rock-throwing exercises that many companies had feared and some governance activists had hoped. According to a 2011 Business Week article, Robert A.G. Monks, who founded ISS in 1985, concluded that say on pay was “‘at best a diversion and at worst a deception….You only have the appearance of reform, and it’s a cruel hoax.’” This paper, Failed Say on Pay: How Do Companies Course Correct after to a ‘No’ Vote?, from the Rock Center for Corporate Governance at Stanford University, with authors from Stanford and Equilar, looked at the 2% that fail the vote and what they did in response to pass muster with investors. But the underlying message is reflected in the authors’ questions: “Does this process reflect a healthy dynamic of the market correcting egregious practices, or does it simply reflect a standardization process whereby observed outlier practices are brought in line with industry norms? Do the changes companies make in response to a failed vote lead to substantive improvement in the managerial incentives of their pay programs?”
A few interesting items from the CCR proxy disclosure conference
Here are a few interesting snippets regarding shareholder proposals and Item 1.05 Form 8-K from this week’s 2024 Proxy Disclosure & 21st Annual Executive Compensation Conferences from CCR Corp. On the panels, the watchword of the day seemed to be consistency—given that some topics are increasingly required to be discussed in more than one SEC filing, location or context (e.g., cyber disclosures in the proxy and 10-K), the panelists urged the audience to make sure that the disclosures were consistent with each other and that the discussions of policies, charters and procedures were consistent with company’s conduct.
NYSE proposes to limit the use of reverse stock splits to regain price compliance
Not to be outdone by Nasdaq, the NYSE is now also proposing to take on the challenge of repeated reverse stock splits. More specifically, the NYSE proposes to limit the circumstances under which a listed company may use a reverse stock split to regain compliance with the minimum price criteria. Of course, Nasdaq has recently proposed or adopted similar rule changes limiting the use of reverse stock splits to satisfy the minimum bid price requirement. (See the SideBar below.) Although the NYSE had said in May that it had not experienced the same increased volume of reverse stock splits as Nasdaq, the exchanges are apparently seeking some consistency in their approaches to these issues.
You must be logged in to post a comment.