Month: September 2024
What’s going on with the SEC’s proxy advisor rules?
Shall we catch up on some of the recent developments regarding the SEC’s proxy advisor rules? First, let’s take a look at what’s happening with the appeal of the opinion of the D.C. Federal District Court in ISS v. SEC, which, in February of this year, vacated the SEC’s 2020 rule that advice from proxy advisory firms was a “solicitation” under the proxy rules. Both the SEC and National Association of Manufacturers had filed notices of appeal in that case, but the SEC has mysteriously dropped out of that contest. Then, with regard to the separate ongoing litigation over the 2022 amendments to the proxy advisor rules—which reversed some of the key provisions in the 2020 rules—a new decision has been rendered by a three-judge panel of the 6th circuit, U.S. Chamber of Commerce v. SEC, upholding the 2022 amendments, thus creating a split with the recent decision of the 5th Circuit, National Association of Manufacturers v. SEC, on the same issue.
In an Enforcement sweep, SEC charges seven companies with violations of whistleblower rule
On Monday, the SEC announced an Enforcement sweep involving settled charges against seven companies for violation of the whistleblower statute and rule. The charges stemmed from provisions that the SEC claimed impeded whistleblowers from reporting potential misconduct to the SEC contained in employment, separation and an array of other agreements. In some instances, according to the Orders, the provisions expressly stated that they did not preclude employees from filing an administrative charge or participating in whistleblower programs, but instead involved only a waiver of their rights to recover a monetary award for participating in an investigation by a government agency. At least one of the companies sought to qualify the waiver of the recovery right by adding “[t]o the extent permitted by law.” But, to no avail. In none of these cases was the SEC aware of actions by the charged company to enforce the waiver provisions or instances in which the affected employees declined to speak with the SEC about potential violations of securities laws. Nonetheless, the SEC viewed these agreements as creating impediments to participation in the SEC whistleblower program. The companies agreed to pay civil penalties of just over $3 million in the aggregate, revised their internal agreement forms and notified affected employees. According to the Director of the SEC’s Denver Regional Office, the “SEC’s whistleblower program strengthens market integrity by providing protection and incentives for those who come forward and report potential violations of the securities laws….According to the SEC’s orders, among other things, these companies required employees to waive their right to possible whistleblower monetary awards. This severely impedes would-be whistleblowers from reporting potential securities law violations to the SEC.” Reuters reported that a representative of TransUnion, one of the companies charged, characterized the “SEC’s engagement on this matter” as an example of “what good regulatory supervision can look like.”
At open meeting, SEC approves new PCAOB quality control standard
Yesterday, the SEC approved, by a vote of three to two, a new PCAOB quality control standard, QC 1000, A Firm’s System of Quality Control, and related amendments to its standards, rules and forms. According to the press release, the new standard
“establishes an integrated, risk-based quality control standard that will require all registered public accounting firms to identify specific risks to their practice and design a quality control system that includes appropriate responses to guard against those risks. Registered firms that perform engagements under PCAOB standards will be required to implement and operate the QC system. The new quality control standard focuses on an audit firm’s accountability and continuous improvement of its audit practice and will require an annual evaluation of the firm’s QC system and related reporting to the PCAOB, certified by key firm personnel. In addition, firms that annually issue audit reports for more than 100 issuers will be required to establish an external quality control function (EQCF) composed of one or more persons who can exercise independent judgment related to the firm’s QC system.”
According to SEC Chief Accountant, Paul Munter, “[e]ffective QC systems provide critical investor protections by driving continuous improvement in firms’ audit quality in support of the issuance of informative, accurate, and independent audit reports….QC 1000 is an integrated risk-based QC standard that strikes an appropriate balance that can be applied by firms of varying sizes and complexities along with a set of mandates tailored to the size of the firms’ audit practices, which should assure that QC systems are designed, implemented, and operated with an appropriate level of rigor.” SEC Chair Gary Gensler pointed out that the “auditing profession has changed in the 21st century, and the Amendments we are considering today are long overdue. To put in context how important it is to update the quality control standards, the PCAOB found that 46 percent—nearly half—of the auditing engagements it reviewed in 2023 fell short of obtaining sufficient appropriate audit evidence.” The two dissenters primarily took issue with, in their view, the too-brief time allotted by the SEC to the process of refining the standard, the requirement that every PCAOB-registered firm design a compliant QC system—even if they are not required to implement it—and the failure to address adequately commenters’ concerns about the new EQCF. QC 1000 and related amendments will take effect on December 15, 2025.
Center for Audit Quality comes to the rescue for audit committees tasked with AI oversight
In this 2023 article in Fortune, a survey of 2,800 managers and executives conducted by management consulting firm Aon showed that business leaders “weren’t very concerned about AI….Not only is AI not the top risk that they cited for their companies, it didn’t even make the top 20. AI ranked as the 49th biggest threat for businesses.” Has “the threat of AI been overhyped,” Aon asked, or could it be that the “survey participants might be getting it wrong”? If they were, it wasn’t for long. Fast forward less than a year, and another Fortune article, citing a report from research firm Arize AI, revealed that 281 of the Fortune 500 companies cited AI as a risk, representing “56.2% of the companies and a 473.5% increase from the prior year, when just 49 companies flagged AI risks. ‘If annual reports of the Fortune 500 make one thing clear, it’s that the impact of generative AI is being felt across a wide array of industries—even those not yet embracing the technology,’ the report said.” This widespread recognition of the potential risks of genAI will likely compel companies to focus their attention on risk oversight, and that will almost certainly entail oversight by the audit committee. To assist audit committees in that process, the Center for Audit Quality has released a new resource—an excellent new report, Audit Committee Oversight in the Age of Generative AI.
Are you ready for anti-anti-ESG?
You all remember the reams of anti-ESG bills that poured out of some of the states, not to mention the U.S. House? According to Reuters, some “states have unleashed a policy push to punish Wall Street for taking stances on gun control, climate change, diversity and other social issues, in a warning for companies that have waded in to fractious social debates.” A 2022 Reuters analysis found that there were at least 44 bills or new laws in 17 states “penalizing such company policies, compared with roughly a dozen such measures in 2021.” (See this PubCo post.) In 2023, an article in Institutional Investor reported, 198 pieces of legislation were introduced, 23 laws passed and 6 resolutions adopted. And in 2024, the article reports, state legislators wrote 161 bills and resolutions in 28 states for consideration, with six bills passed so far. (See this PubCo post.) Recently, however, ESG proponents have begun to employ a more aggressive strategy regarding anti-ESG legislation. They’re now playing in the same sandbox as the anti-ESG groups, pursuing anti-anti-ESG litigation—premised in part on…wait for it…the First Amendment, one of the favored legal strategies, of course, of the anti-ESG groups. What’s good for the goose is good for the gander? What goes around comes around? As the call, so the echo? A couple of cases may illustrate the phenomenon. Will we see more?
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