NYC Comptroller goes straight to court to compel inclusion of shareholder proposal—is this the Comptroller’s new normal?
Post-shutdown, the SEC is starting to catch up on no-action requests to exclude shareholder proposals, posting several new entries at the end of last week. While most of the responses reflected withdrawals of requests in light of withdrawal of the subject proposal, one of the more interesting withdrawal letters relates to a decision to include a shareholder proposal. The proposal, submitted by the New York City Employees’ Retirement System and other pension funds overseen by NYC Comptroller Scott Stringer, sought to have TransDigm Group Incorporated, a manufacturer of aerospace components, adopt a policy related to climate change. After the company sought no-action relief from the SEC staff—and notably well before the government shutdown and before the SEC had even responded to the company’s request—the proponent pension funds filed suit in the SDNY seeking to enjoin the company from soliciting proxies without including the shareholder proposal and declaratory relief that the exclusion of the proposal violated Section l4(a) and Rule l4a-8. Will the Comptroller use the same tactic of circumventing the traditional SEC process and commencing litigation for any proposal the pension funds submit in the future? Will going straight to court be the new normal?
Now back to work, SEC Enforcement once again takes up the issue of internal control over financial reporting. In this instance, the SEC announced settled charges against four public companies for failing to remediate internal control weaknesses—for years! We’re talking seven to ten years. The companies seemed to be under the misimpression that, as long as they disclosed the material weaknesses, they were in the clear. But they learned the hard way that that was not the case. According to Melissa Hodgman, an Associate Director in Enforcement, “Companies cannot hide behind disclosures as a way to meet their ICFR obligations. Disclosure of material weaknesses is not enough without meaningful remediation. We are committed to holding corporations accountable for failing to timely remediate material weaknesses.”
The Research and Education Fund of the Council of Institutional Investors has released a new report regarding disclosure of board evaluation processes in proxy statements. Robust board evaluation processes are considered a key element in strengthening board effectiveness and, as a result, institutional investors have expressed an intense interest in the review process. While companies have been discussing their board evaluation processes in their proxies with increasing frequency, CII suggests that these discussions could be more robust.
Today, Corp Fin posted a statement regarding its return to normal operations. For the most part, “absent compelling circumstances,” Corp Fin expects to address filings, submissions and requests in the order submitted. The message is this: expect everything to take longer than usual as the staff plays catch-up.
Unless you’ve been unplugged and hiding under a rock recently, you’ve heard that the federal government shutdown has ended—at least for the next three weeks. In a statement today, SEC Chair Jay Clayton said that the SEC has “resumed normal staffing levels and is returning to normal operations.” What that will mean in practice, we don’t really know yet, given the likelihood of significant backlogs that accumulated over the past month. Clayton advised that the leaders of Divisions, such as Corp Fin, are consulting with the staff and “are continuing to assess how to most effectively transition to normal operations.” Corp Fin is expected to publish a statement (as are other offices) “in the coming days regarding their transition plans,” which will be available on the SEC website.
As noted in thecorporatecounsel.net blog, the Chair of the House Financial Services Committee, Maxine Waters, has introduced H.R. 624, the “Promoting Transparent Standards for Corporate Insiders Act,” which could require some significant tweaks to Rule 10b5-1 plans and disclosure about them. Co-sponsored by the Ranking Republican Member on the Committee, Patrick McHenry, the legislation would require the SEC to conduct a study of whether specified amendments to the rules governing 10b5-1 plans should be adopted, report back within a year and then adopt rule amendments consistent with the findings of the study. The high-level bipartisan sponsorship of the legislation suggests that there is a reasonable chance that it could move forward, but certainly does not guarantee that it will survive in the Senate. You might recall that the JOBS and Investor Confidence Act of 2018 (the erstwhile JOBS Act 3.0), which included similar provisions regarding Rule 10b5-1, passed the House by a vote of 406 to 4, but made no progress in the Senate. (See this PubCo post.) The new leadership must think that the chances for enactment are better with a standalone bill.