A study of companies in the Russell 3000 just released by ISS showed that, for the first time, directors who self-identified as racial and ethnic minorities accounted for 20% of all board directorships. The study found that each of the minority groups analyzed experienced growth in the percentage of director seats held, with the greatest growth (90% over the study period) occurring among African-American directors, who now hold 8.3% of all board seats in the study group. According to the Head of ISS Corporate Solutions, these percentages “represent a watershed moment for minority corporate directors broadly and Black directors in particular….The analysis shows the impact of increasing and continual institutional investor engagement with portfolio companies on matters around board diversity coupled with growing stakeholder pressure from various quarters over the past two years.” Still, as she told Reuters, “[w]hile this is a huge sea change in terms of the percentages, it still falls short of the ethnic breakdown of the U.S. population….It’s a watershed moment but probably not something to pat ourselves on the back too much about.”
Here’s another earnings management case from SEC Enforcement, this time against Roadrunner Transportation Systems, Inc., a shipping and logistics company formerly traded on the NYSE, involving a veritable pu pu platter of alleged financial manipulations. As charged in the SEC’s Order, from July 2013 through January 2017, the company engaged in an “accounting fraud scheme by manipulating its financial reports to hit prior earnings guidance and analyst projections.” Among other things, Roadrunner was alleged to have improperly deferred and stretched out expenses over multiple quarters to minimize their impact on earnings, failed to write down worthless assets and uncollectable receivables, and manipulated earnout liabilities related to its numerous acquisitions. The company agreed to pay disgorgement of just over $7 million, with prejudgment interest of approximately $2.5 million—except that the company paid nothing additional: the penalties were deemed satisfied by the settlement payment the company made in connection with prior private securities litigation.
On Wednesday, the DOJ announced a new Voluntary Self-Disclosure Policy, which sets out the criteria for determining when a company is deemed to have made a voluntary self-disclosure of misconduct to a US Attorney’s Office and how the company might benefit from a “resolution under more favorable terms.” According to the press release, the policy is intended to provide “transparency and predictability to companies and the defense bar concerning the concrete benefits and potential outcomes in cases where companies voluntarily self-disclose misconduct, fully cooperate, and timely and appropriately remediate. The goal of the policy is to standardize how VSDs are defined and credited by USAOs nationwide, and to incentivize companies to maintain effective compliance programs capable of identifying misconduct, expeditiously and voluntarily disclose and remediate misconduct, and cooperate fully with the government in corporate criminal investigations.”
A couple of days ago, the SEC amended Reg S-T to extend the filing deadline for Form 144 from 5:30 p.m. to 10:00 p.m. Eastern Time. You may remember that, in June last year, the SEC adopted amendments to require electronic submission of several forms that could then be submitted on paper, including, for reporting companies, Form 144 (beginning April 13, 2023). (See this PubCo post.) Form 144 was then transformed into an online fillable document, similar to Form 4, designed to facilitate electronic filing and to be machine-readable and available for automated and efficient analysis. Prior to this week’s amendment to Reg S-T, a Form 144 submitted by direct transmission after 5:30 p.m. was deemed filed the next business day. Under the new amendments, effective March 20, a “Form 144 that otherwise complies with applicable filing requirements that is submitted by direct transmission after 5:30 p.m., but no later than 10:00 p.m., will be deemed filed the same business day.”
Did the SEC’s rule changes succeed in transforming the risk factors section? What about climate risk?
Remember back in 2020, when the SEC adopted major amendments to Reg S-K designed to modernize the descriptions of business, legal proceedings and risk factors? You might recall that the SEC had long grumbled about “the lengthy and generic nature of the risk factor disclosure presented by many registrants”; to address that concern, the SEC instituted a number of requirements and “incentives” to encourage companies to be, um, more succinct. (See this PubCo post.) Among these changes were a new requirement to include a risk factor summary if the risk factor section exceeded 15 pages and changing the disclosure standard from “most significant” factors to “material” factors. In addition, because the SEC considered untailored, generic risks to be less informative and to contribute to increased length, it sought to discourage their use by requiring companies to organize the risk factors under relevant headings, with generic risk factors located at the end under a separate caption, “General Risk Factors.” So how’d that go? Did the rule changes achieve their purpose? Apparently, not so much—at least not at the largest public companies—according to this paper, published on the Harvard Law School Forum on Corporate Governance, from a group of authors from Deloitte and the USC Marshall School of Business. The authors also drilled down more specifically on risk factors related to climate change, where the increase in prevalence was dramatic (and probably also contributed to the increased length of risk factor sections in general).
Yesterday, the SEC adopted a number of new rule amendments intended to reduce risks in the clearance and settlement processes. Most significantly for this audience, the changes will reduce the standard settlement cycle for most broker-dealer transactions in securities from T+2 to T+1, that is, from two business days after the trade date to one business day after. According to the press release, the final rule is “designed to benefit investors and reduce the credit, market, and liquidity risks in securities transactions faced by market participants.” The rule changes also shorten the settlement cycle for firm commitment public offerings priced after 4:30 p.m. Eastern Time from T+4 to T+2, unless the parties expressly agree otherwise at the time of the transaction. The final rules will become effective 60 days following publication of the adopting release in the Federal Register; the compliance date is May 28, 2024, which turned out to be the most controversial aspect of the proposal, leading to two dissents. According to SEC Chair Gary Gensler, “[a]s they say, time is money. Halving these settlement cycles will reduce the amount of margin that counterparties need to place with the clearinghouse. This lowers risk in the system and frees up liquidity elsewhere in the market.”
Last week, the SEC announced settled charges against Gentex Corporation, a manufacturer of digital vision, connected car, dimmable glass and fire protection products, and its former Chief Accounting Officer and current CFO, Kevin Nash, related to financial reporting, books-and-records and internal accounting controls violations. Allegedly, these violations were the consequence of deficiencies in the company’s accounting practices for its bonus programs, which practices allowed the company to manage its earnings by adjusting its accruals for bonuses to ensure that publicly reported EPS was in line with consensus EPS estimates—without the required accounting analysis or adequate supporting documentation. According to the SEC, had the company not reduced the accrual for bonuses, it “would have missed consensus EPS estimates by one penny.” Gentex was ordered to pay a civil money penalty of $4 million and Nash to pay $75,000. These charges represent yet another case resulting from SEC Enforcement’s “Earnings-Per-Share Initiative,” which applies risk-based data analytics to detect potential violations from earnings management, among other things.
On Friday afternoon, Corp Fin posted a slew of new CDIs—15 in total—regarding the new pay-versus-performance rule. You may recall that, in August last year, the SEC finally adopted a new rule that will require disclosure of information reflecting the relationship between executive compensation actually paid by a company and the company’s financial performance—a new rule that was originally mandated by Dodd-Frank in 2010. Lots of questions have arisen about implementation of the rule, and SEC representatives let it be known that CDIs on the topic would be forthcoming. (See this post from thecorporatecounsel.net blog.) Not surprisingly, most of the CDIs are about the complicated Pay Versus Performance table and are just as thorny as the rule, so get your Advil ready.
According to a new survey and related report from The Conference Board, 78% of US companies characterized the current political environment as “extremely challenging” or “very challenging” for companies—and 20% more described the environment as merely “challenging.” That totals 98%. (Who are the 2% who don’t find the political environment challenging?) Most striking about that data point is the stark contrast with the results of a survey conducted in 2021, which showed that only—only?—47% of companies attached one of the “extremely challenging” or “very challenging” labels to the political environment. What’s more, 42% said that they expected a “more challenging landscape in the next three years.” What’s fueling this shift in perspective? The Conference Board explores the reasons underlying this political environment and suggests ways for companies to address it.
The SEC has apparently let it be known—or perhaps a few reporters are especially intrepid—that it may well pare down and loosen up some of its proposed rules on climate disclosure (see this PubCo post, this PubCo post and this PubCo post). In this article in Politico and this article in the WSJ, “three people familiar with the matter” and “people close to the agency” told reporters that SEC Chair Gary Gensler is “considering scaling back a potentially groundbreaking climate-risk disclosure rule that has drawn intense opposition from corporate America.” According to Politico, SEC officials “stress that no decision has yet been made,” so time will tell where the final rulemaking will end up.