It’s time to dig back into your mental archives for 2015. That’s when the SEC, by a vote of three to two, initially proposed rules to implement Section 954 of Dodd-Frank, the clawback provision. But the proposal was relegated to the SEC’s long-term agenda and never heard from again. Until, that is, the topic found a spot on the SEC’s short-term agenda this spring (see this PubCo post) with a target date for a re-proposal of April 2022. The SEC had scheduled an open meeting for Wednesday to consider re-opening the comment period, but instead cancelled the meeting and, on Thursday, simply posted a notice. Here is the original 2015 Proposing Release and here is the new fact sheet. SEC Chair Gary Gensler said that, with re-opening of the comment period, he believed “we have an opportunity to strengthen the transparency and quality of corporate financial statements as well as the accountability of corporate executives to their investors.” The questions posed by the SEC in the notice (discussed below) give us some insight into where the SEC may be headed with the proposal. It’s worth noting that one possible change suggested by the questions is a potential expansion of the concept of “restatement” to include not only “reissuance” restatements (which involve a material error and an 8-K), but also “revision” restatements (or some version thereof). The public comment period will remain open for 30 days following publication of the release in the Federal Register.
Yesterday afternoon, the SEC announced that it had—unanimously—adopted amendments, largely as originally proposed in 2019, to modernize filing fee disclosure and payment methods. How long has it been since the SEC adopted anything unanimously? Apparently it took a far-from-spellbinding 432-page adopting release about filing fee disclosure and Automated Clearing House payments to finally achieve that level of comity. Here is the brief fact sheet. The amendments revise almost everything—“most fee-bearing forms, schedules, statements, and related rules”—to require each fee table and accompanying explanatory notes (which will now be moved to a separate exhibit) to include “all required information for fee calculation in a structured format.” That means more XBRL. The amendments also add new options for fee payment using ACH and debit and credit cards, retain the current option for payment by wire transfer, but eliminate fee payment with paper checks and money orders. Most of the amendments will become effective on January 31, 2022 with extensive transition periods to allow filers time to comply with the Inline XBRL structuring requirements. The amendments related to ACH and debit and credit cards will become effective on May 31, 2022.
At yesterday’s “SEC Speaks” conference from PLI, SEC Chair Gary Gensler and Commissioners Allison Herren Lee, Elad Roisman and Caroline Crenshaw all delivered remarks on different topics. Gensler discussed the use of predictive digital analytics in finance, Lee examined the explosive growth of the private markets and proposed to address the lack of transparency by revising how we define “holders of record” under Section 12(g), Roisman focused on the SEC’s past efforts to facilitate capital formation by reviewing and streamlining existing regulation, and Crenshaw discussed crypto and the need for a meaningful exchange of ideas between innovators and regulators.
According to the Financial Times, “[p]ension funds and retail investors have complained for years over their lack of ability to vote at annual meetings when using an asset manager.” Last week, BlackRock, the largest asset manager in the galaxy with $9.5 trillion under management, announced that, beginning in 2022, it will begin to “expand the opportunity for clients to participate in proxy voting decisions.” BlackRock said that it has been developing this capability in response “to a growing interest in investment stewardship from our clients,” enabling clients “to have a greater say in proxy voting, if that is important to [them].” BlackRock will make the opportunity available initially to institutional clients invested in index strategies—almost $2 trillion of index equity assets in which over 60 million people invest across the globe. It is also looking at expanding “proxy voting choice to even more investors, including those invested in ETFs, index mutual funds and other products.” Will this be a good thing?
SEC Chair testifies before House Committee on Financial Services—climate, human capital and cybersecurity disclosure proposals likely delayed
On Tuesday, SEC Chair Gary Gensler testified for over four hours (without a break!) before the thousands (it seemed) of members of the House Committee on Financial Services. His formal testimony covered a number of topics on the SEC’s agenda that Gensler (and others) have addressed numerous times in past: market structure and equity markets, predictive analytics, crypto, issuer disclosure, China, SPACs and Rule 10b5-1 plans and was remarkably similar to his formal testimony in September before the Senate Committee on Banking, Housing and Urban Affairs. (See, e.g., this PubCo post and this PubCo post.) If you followed any of the coverage of Gensler’s testimony before the Senate committee (see this PubCo post), there was a Groundhog-Day feel to much of the questioning, but the five-minute limitation on questioning (because there are thousands of House committee members) did not really offer much opportunity for in-depth conversation about anything.
A new petition has been filed challenging the Nasdaq board diversity rule (see this PubCo post). The National Center for Public Policy Research filed the petition on Tuesday with the U.S. Court of Appeals for the Third Circuit, but asked the court to transfer the proceeding to the Fifth Circuit, where an earlier petition filed by the Alliance for Fair Board Recruitment is pending. (See this PubCo post.) The new Nasdaq listing rules, which were approved by the SEC on August 6, adopt a “comply or explain” mandate for board diversity for most listed companies and require companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards.
ISS has just released the results of its 2021 global benchmark policy survey, which, this year, actually comprises two surveys—one related to a broad array of policies and the other specifically addressing climate change. Along with issues related to executive pay and governance, the broad survey also addressed issues such as non-financial ESG performance metrics in executive compensation, racial equity audits and virtual-only shareholder meetings. The climate survey solicited views on topics such as board oversight of climate risks, say-on-climate proposals and other issues relevant to ISS’ climate voting policy.
In this new paper by a group of academics from the University of Richmond (and elsewhere), the authors explore whether companies might be timing when they record changes in their accounting estimates (CAEs) to meet earnings benchmarks. Because accounting estimates are “by their nature forward-looking, often subjective and difficult to quantify with precision,” they would seem to offer an excellent “opportunity for management to misrepresent the firm’s financial performance.” CAEs, the authors suggest, may be used to meet or beat earnings benchmarks or, alternatively, to smooth earnings or take a “big bath” when the current period’s earnings are particularly low. For purposes of the study, the authors assumed that “most CAEs are fully justified and reasonable, and the ‘manipulation’ stems primarily from their timing, not the nature or appropriateness of the CAEs themselves.” The study concludes, particularly with respect to analyst forecast earnings, that companies do indeed “appear to time CAEs to meet earnings benchmarks or achieve other reporting objectives.” It’s worth noting that the SEC has recently brought charges in a couple of cases involving earnings or expense management (see this PubCo post and this PubCo post), so violations resulting from earnings management practices appear to be a focus for Enforcement.
You might remember that the first legal challenge to California’s board gender diversity statute, Crest v. Alex Padilla, was a complaint filed in 2019 in California state court by three California taxpayers seeking to prevent implementation and enforcement of the law. Framed as a “taxpayer suit,” the litigation sought to enjoin Alex Padilla, the then-California Secretary of State (now U.S. Senator), from expending taxpayer funds and taxpayer-financed resources to enforce or implement the law, SB 826, alleging that the law’s mandate is an unconstitutional gender-based quota and violates the California constitution. The court in that case has just denied each side’s motion for summary judgment after concluding that there were triable issues of material fact. The case will now be going to trial, which is currently set for October 25. Stay tuned.
Currently, where a matter requires shareholder approval under NYSE rules, the minimum vote required is a majority of the votes cast on the matter. But how do you count votes cast? Do you count abstentions? What about broker non-votes? The NYSE has historically advised that broker non-votes do not count as votes cast, but abstentions do. That means that, under the NYSE rules, approval requires that the votes in favor exceed the aggregate of the votes cast against the proposal plus abstentions. Unfortunately, that’s not how “votes cast” is typically defined for Delaware corporations. If Delaware corporations elect in their charter or bylaws to use a “votes cast” standard, abstentions are generally not counted as “votes cast”—because an abstention reflects a decision not to vote on the matter and the holder has not cast those votes—with the result that, for a proposal to be approved, the votes in favor of the proposal must exceed the votes cast against. Confused? You’re not alone. The NYSE has “observed that this approach has caused confusion among listed companies.” That’s why the NYSE has just filed with the SEC a proposal to amend that provision of the NYSE Listed Company Manual.