Yesterday, the SEC announced that it had settled charges against AT&T for alleged violations of Reg FD for $6.25 million, an amount that it characterized as a “record penalty”—the “largest ever in a Reg FD case.” The case involved allegations of one-on-one disclosures by three company executives of AT&T’s “projected and actual financial results” to a number of Wall Street research analysts in violation of Reg FD and Exchange Act 13(a). (See this PubCo post.) The three executives agreed to pay $25,000 each to settle charges. After the federal district court for the SDNY denied summary judgment for both sides in September (see this PubCo post), the case appeared to be on its way to trial, but that was headed off by this new settlement. According to Gurbir Grewal, Director of Enforcement, the “actions allegedly taken by AT&T executives to avoid falling short of analysts’ projections are precisely the type of conduct Regulation FD was designed to prevent….Compliance with Regulation FD ensures that issuers publicly disclose material information to the entire market and not just to select analysts.”
You may recall that, earlier this year, two Los Angeles Superior Courts struck down as unconstitutional two California laws mandating that boards of public companies achieve specified levels of board diversity and enjoined implementation and enforcement of the legislation. Those injunctions, however, were temporarily lifted as the state appealed. Now, the appeals court has vacated those temporary stays. What does it mean for the diversity legislation?
As discussed in this PubCo post, we’ve lately been witnessing a profusion of state and local legislation targeting companies that express public positions or adopt policies on sociopolitical issues or conduct their businesses in a manner disfavored by the government in power. Bloomberg observes that, while “companies usually faced mainly reputational damage for their social actions, politicians are increasingly eager to craft legislation that can be used as a cudgel against businesses that don’t share their social views.” And many of these state actions are aimed, not just at expressed political positions, but rather at environmental and social measures that companies may view as strictly responsive to investor or employee concerns, shareholder proposals, current or anticipated governmental regulation, identified business risks or even business opportunities. These laws are presumably detrimental to the targeted companies, but are there any adverse consequences for the state or locality adopting this legislation and its citizens? To better understand the phenomenon and its impact on financial market outcomes, this paper from authors at the University of Pennsylvania and the Federal Reserve Bank of Chicago looked at the impact of one example of this type of legislation—a law recently adopted in Texas that blocks banks from government contracts in the state if the banks restrict funding to oil and gas companies or gun manufacturers. The authors concluded that the Texas legislation has had, and is expected to continue to have, a “large negative impact on the ability for local governments to access external finance. Our results suggest that if economies around the world that are heavily reliant on fossil fuels attempt to undo ESG policies by imposing restrictions on the financial sector, local borrowers are likely to face significant adverse consequences such as decreased credit access and poor financial markets outcomes.”
Corporate Sustainability Reporting Directive receives final approval, applicable to US companies with EU presence
On Monday, according to this press release from the Council of the European Union, all 27 members of the European Council voted in favor of the adoption of the Corporate Sustainability Reporting Directive, the last step for the CSRD to become law in the EU. The new rules require subject companies […]
According to this report by The Conference Board, in collaboration with Semler Brossy and ESGAUGE, the vast majority (73% in 2021) of companies in the S&P 500 are “now tying executive compensation to some form of ESG performance.” To be sure, some companies have long tied executive comp to particular […]
As the SEC mulls its 10b5-1 proposal (see this PubCo post), neither its Enforcement Division nor the DOJ are waiting around to see what happens. According to Bloomberg, they are using data analytics “in a sweeping examination of preplanned equity sales by C-suite officials.” The question is whether executives “been gaming prearranged stock-sale programs designed to thwart the possibility of insider trading”? Of course, there have been countless studies and “exposés” of alleged 10b5-1 abuse over the years, the most recent being this front-page analysis of trading by insiders under Rule 10b5-1 plans in the WSJ (see this PubCo post). While these concerns have been percolating for quite some time, no legislation or rules have yet been adopted (although several bills have been introduced and the SEC proposed new regs at the end of 2021). Bloomberg reports that these investigations by Enforcement and the DOJ are consistent with the recent “tougher line on long-standing Wall Street trading practices during the Biden era. Federal officials requested information from executives early this year, said one person. They’re now preparing to bring multiple cases, said two other people.”
The SEC has announced its fiscal 2022 Enforcement stats, which hit new records. According to the press release, during the year, the SEC filed 760 total enforcement actions, representing a 9% increase over the prior year. That total included 462 new, or “stand-alone,” enforcement actions, which “ran the gamut of conduct, from ‘first-of-their-kind’ actions to cases charging traditional securities law violations.” The SEC also recovered a record $6.4 billion in civil penalties, disgorgement and pre-judgment interest in SEC actions, an increase of 68% from $3.8 billion in the prior year. Civil penalties, at $4.2 billion, were also the highest on record. The press release emphasized that the increase in penalties is intended to “deter future misconduct and enhance public accountability.” In a number of cases, the SEC “recalibrated penalties for certain violations, included prophylactic remedies, and required admissions where appropriate” to make “clear that the fines were not just a cost of doing business.” According to Director of Enforcement Gurbir Grewal, the SEC doesn’t “expect to break these records and set new ones each year because we expect behaviors to change. We expect compliance.” Interestingly, disgorgement, at $2.2 billion, declined 6% from last year. As reported by the WSJ, Grewal, speaking at a recent conference, highlighted the fact that the SEC imposed more penalties than disgorgements, which, in his view, “demonstrated that ‘the potential consequences of violating the law are significantly greater than the potential rewards.’… He added that the SEC ordered more than twice as much in disgorgements as it did in penalties for the five fiscal years before the last one. ‘So while disgorgement was slightly down from the prior year…it is the first time that the amount ordered to be paid in penalties has been double the amount ordered to be paid in disgorgement,’ he said. ‘The increased penalty-to-disgorgement ratio nonetheless demonstrates that the risk-reward calculation is not what it was even a few years ago.’”
In light of the billions that even the SEC’s economic analysis estimates would be spent complying with its proposed climate disclosure regulations (see this PubCo post, this PubCo post and this PubCo post), will those disclosures catalyze real climate action? In this recent EY Global Climate Risk Barometer, accounting firm EY analyzed why, notwithstanding the vast amounts spent on climate disclosures, they “are still not translating into practical strategies to accelerate decarbonization.” In fact, EY pointed out, “global energy-related carbon dioxide emissions rose by 6% in 2021 to 36.3 billion tonnes [a metric unit of mass equal to 2,240 lbs], their highest-ever level, according to the International Energy Agency.” Will companies be able to “close the major disconnect between the disclosures they are making” and “their own transformation journeys”? Is integrating climate risk into the financial statements the key? Is climate risk disclosure just a “box-ticking exercise” or, by enabling accountability, can climate disclosures help to accelerate “the decarbonization process”?
In the wake of the events of January 6, a number of companies, highly sensitized to any misalignment between their political contributions and their public statements or announced core values, determined to suspend or discontinue some or all of their political donations (although many have since resumed business as usual). As social and political unrest and political polarization have continued, demand for disclosure about corporate political spending has increased. In the midst of an unusually fraught mid-term election season, the Center for Political Accountability and the Zicklin Center for Business Ethics Research at the Wharton School of the University of Pennsylvania released their annual CPA-Zicklin Index of Corporate Political Disclosure and Accountability for 2022. The Index annually benchmarks public companies’ disclosure, management and oversight of corporate political spending, and includes specific rankings for companies based on their Index scores, as well as best practice examples of disclosure and other helpful information. (See this PubCo post.) This year, accompanying the Index is a new CPA-Zicklin Model Code of Conduct for Corporate Political Spending, designed to provide a “thorough and ethical framework” for corporate political spending. CPA launched the Index in 2011 following the decision by SCOTUS in Citizens United, benchmarking only the S&P 100. In 2015, it began to benchmark the S&P 500. This year, the Index has expanded its coverage to the Russell 1000. The difference in the levels of transparency between the S&P 500 and the Russell 1000 (excluding companies in the S&P 500) is dramatic.
Last month, the FASB issued a proposed ASU on segment reporting. In its announcement, the FASB explained that investors find segment information to be critically important to understanding a company’s different business activities, as well as its overall performance and potential future cash flows. Although financial statements do provide information about segment revenue and a measure of profit or loss, not much information is disclosed about segment expenses. According to FASB Chair Richard Jones, the “proposed ASU would represent the FASB’s most significant change to segment reporting since 1997….On the basis of our extensive stakeholder outreach, the proposed ASU would provide investors and other allocators of capital with valuable insights into significant segment expenses, expand segment disclosures reported in interim periods, and require disclosures for single-segment entities.”