Gensler announces departure from SEC—what’s next?
In a statement, the SEC has announced that Chair Gary Gensler will step down from his position at noon on January 20, 2025. That’s of course the time when the new president is sworn in, so it’s not exactly a surprise. According to the WSJ, “Gensler’s decision to remain until the very end of the Biden administration probably disappoints some Republicans who wanted to see him leave sooner. It means he could try to push through some additional measures since Democrats will retain a majority on the five-member SEC as long as he stays.” In the statement, Gensler said that the SEC “is a remarkable agency….The staff and the Commission are deeply mission-driven, focused on protecting investors, facilitating capital formation, and ensuring that the markets work for investors and issuers alike. The staff comprises true public servants. It has been an honor of a lifetime to serve with them on behalf of everyday Americans and ensure that our capital markets remain the best in the world.”
Just in time for Thanksgiving, SEC charges Elanco with undisclosed stuffing—channel stuffing, that is
In this settled action, In the Matter of Elanco Animal Health, Inc., Elanco, a manufacturer and seller of animal health products, such as flea and tick medications, was charged with “failure to disclose material information concerning its sales practices that rendered statements it made about its revenue growth misleading.” As alleged by the SEC, “Elanco would entice distributors to make end-of-quarter purchases in excess of then-existing customer demand by offering them incentives such as rebates and extended payment terms. These incentives allowed Elanco to improve its revenue each quarter, but caused distributors to purchase products ahead of end-user demand. Without these Incentivized Sales, Elanco would have missed its internal revenue and core growth targets in each quarter in 2019.” Essentially, we’re talking here about channel stuffing. As the practice continued, it contributed over the period to “channel inventory increasing by over $100 million in gross value…during 2019, creating a build-up of excess inventory at distributors and a reasonably likely risk of a decrease in revenue and revenue growth in future periods. But, for each quarter during the Relevant Period, Elanco failed to disclose the significant impact of its Quarter-End Incentivized Sales and the reasonably likely risk that these sales practices could have a negative impact on revenue in future quarters.” The SEC charged that these disclosure failures rendered the positive statements that Elanco made about revenue materially misleading. And let’s not forget the disclosure controls violations. In settling the action, Elanco agreed to pay a civil money penalty of $15 million.
PLI panel offers hot tips on accounting and auditing issues
At the PLI Securities Regulation Institute last week, the accounting and auditing update panel provided some useful insights—especially for non-accountants. The panel covered the new requirements for segment reporting, the intensified focus on controls, PCAOB activities (including NOCLAR) and errors and materiality. Below are some takeaways.
Fifth Circuit dismisses NCPPR appeal of Corp Fin’s Rule 14a-8 no-action relief
You might recall that, in 2023, the National Center for Public Policy Research submitted a shareholder proposal to The Kroger Co., which operates supermarkets, regarding the omission of consideration of “viewpoint” and “ideology” from its equal employment opportunity policy. Kroger sought to exclude the proposal as “ordinary business” under Rule 14a-8(i)(7), and Corp Fin concurred. After Corp Fin and the SEC refused reconsideration of the decision, NCPPR petitioned the Fifth Circuit for review. The SEC moved to dismiss the appeal. But after the NCPPR filed its appeal, Kroger filed its proxy materials with the SEC and included the NCPPR proposal in the proxy materials to be submitted for a shareholder vote. The proposal received less than two percent of the vote. Now, a three-judge panel of the Fifth Circuit has issued its opinion, dismissing the case for lack of jurisdiction; Judge Edith Jones dissented.
The return of Jay Clayton?
But not to the SEC. Reuters is reporting that former SEC Chair Jay Clayton “is in talks for several potential roles” in the new Administration, according to “several sources familiar with the matter.” Clayton, a political independent, is reportedly “seen as a contender for jobs including attorney general and treasury secretary, according to five sources. Two of the sources said Clayton has also expressed an interest in running the CIA.” According to Reuters, Clayton has advised the transition team that he would be ‘delighted to serve’ in any senior position where he could be effective.”
FASB adopts new ASU requiring disaggregation of expenses
Currently, companies typically include in their income statements expense captions for selling, general and administrative expenses, cost of services and other cost of revenues, and cost of tangible goods sold. But, as reported by Bloomberg, there has been a push for disaggregation of expenses on the income statement since at least 2016. As this piece in Bloomberg explained, investors complained that “companies lump expenses into catch-all financial statement categories like ‘selling, general, and administrative,’ without explaining the biggest cost drivers inside them.” But in 2019, the FASB voted (5 to 2) “to put its once-high priority financial reporting project on pause.” It was quite a lengthy pause, but, in February 2022—hearing the call again from investors and others in response to the FASB’s 2021 Invitation to Comment—the FASB decided to restart work on the project to “improve the decision usefulness of business entities’ income statements through the disaggregation of certain expense captions.” And, in 2023, FASB published a proposed Accounting Standards Update intended to provide investors with more decision-useful information about expenses on the income statement. (See this PubCo post and this PubCo post.) As reported, businesses “bristled against the plan,” contending that it was too expensive and time-consuming, with many raising, in particular, issues regarding the difficulty of providing more detailed inventory and manufacturing expense disclosures required in each relevant expense category. Companies also asked for specific industry carve-outs or exemptions for smaller reporting companies. But the FASB rejected that that request. Last week, the FASB announced that it had adopted a new Accounting Standards Update—ASU 2024-03—that will require “public companies to disclose, in interim and annual reporting periods, additional information about certain expenses in the notes to financial statements.” According to FASB Chair Richard Jones, the “project was one of the highest priority projects cited by investors in our extensive outreach with them as part of our 2021 agenda consultation initiative….We heard time and again from investors that additional expense detail is fundamental to understanding the performance of an entity and we believe that this standard is a practical way of providing that detail.”
Court denies Chamber’s motion for summary judgment that California climate disclosure laws violate First Amendment
Given the impending change in Administration in D.C.—and all that portends for regulation—the States may, in many ways, take on much larger significance. Case in point: California’s climate disclosure laws and the ongoing litigation challenges there. In January, the U.S. and California Chambers of Commerce, the American Farm Bureau Federation and others filed a complaint (and in February, an amended complaint) against two executives of the California Air Resources Board and the California Attorney General challenging these two California laws. The lawsuit seeks declaratory relief that the two laws are void because they violate the First Amendment, are precluded under the Supremacy Clause by the Clean Air Act, and are invalid under the Constitution’s limitations on extraterritorial regulation, particularly under the dormant Commerce Clause. The litigation also seeks injunctive relief to prevent CARB from taking any action to enforce these two laws. (See this PubCo post.) California then filed a motion to dismiss the amended complaint for lack of subject matter jurisdiction and failure to state a claim. Interestingly, however, the motion did not seek dismissal of Plaintiffs’ First Amendment claim (except as to the Attorney General, whom the motion seeks to exclude altogether on the basis of sovereign immunity), even though California asserted that Plaintiffs’ First Amendment challenge was “legally flawed.” The Plaintiffs then moved for summary judgment on the First Amendment claim, and California moved to deny that motion or to defer it, enabling the parties to conduct discovery. In this Order, issued on election day, the Federal District Court for the Central District of California denied Plaintiffs’ motion to dismiss and granted California’s motion to deny or defer the motion for summary judgment.
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.
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