At last week’s PLI annual securities regulation institute, SEC Commissioner Allison Lee gave the keynote address, Playing the Long Game: The Intersection of Climate Change Risk and Financial Regulation. She began her remarks with the pandemic as metaphor: a global crisis that, before it struck, was “understood intellectually to be a serious risk,” but not fully appreciated as something we really needed to worry about. Now, we have experience of a crisis, no longer viewed “antiseptically through our TVs or phones, but firsthand as it unfolds in our homes, families, schools, and workplaces—not to mention in our economy. Seemingly theoretical risks have become very real.” Another dramatic risk that looms even larger with potential for more dire consequences is the topic of Lee’s remarks: climate change. According to a 2018 study by scientists in the U.K. and the Netherlands, the “point of no return” for achieving the goal of two degrees Celsius by 2100 set by the Paris Accord may arrive as soon as 2035. To be sure, the lesson from the pandemic is “not to wait in the face of a known threat. We should not wait for climate change to make its way from scientific journals, economic models, and news coverage of climate events directly into our daily lives, and those of our children and theirs. We can come together now to focus on solutions.” And while this is hardly Lee’s first rodeo when it comes to advocating that the SEC mandate climate risk disclosure, it seems much more likely now, with the imminent change in the administration in D.C., that the SEC may actually take steps toward implementing a regulatory solution.
Today, Corp Fin posted a few new FAQs regarding the transition to the new amendments to Reg S-K Items 101, 103 and 105, which are designed to modernize the disclosure requirements related to the descriptions of business, legal proceedings and risk factors (see this PubCo post). Those new rule amendments will become effective November 9.
Legislation—such as California’s board racial/ethnic diversity mandate (see this PubCo post) and board gender diversity mandate (see this PubCo post)—is not the only route that diversity advocates are employing to diversify the ranks of corporate directors. Moral suasion—together with implicit or explicit voting pressure—is another avenue that some groups are pursuing. One group following this path is the Russell 3000 Board Diversity Disclosure Initiative, a new initiative recently organized by the Illinois State Treasurer. At the end of October, the Initiative sent a letter to companies on the Russell 3000, urging that they all disclose board racial/ethnic/gender data. Signed by over 20 investor organizations representing more than $3 trillion in assets under management and advisement, the letter waited until the end to note that many of the signatories “either have or are examining policies to vote against nominating committees with no reported racial/ethnic diversity in their proxy statements and expanding more direct shareholder engagement.”
Yesterday, the SEC adopted, by a vote of three to two, amendments designed to harmonize and simplify the patchwork universe of private offering exemptions. The final amendments were informed by feedback received from the March 2020 proposal, the SEC’s advisory committees and the SEC’s Government-Business Forum on Small Business Capital Formation, as well as engagement with investors and companies. According to Chair Jay Clayton, the amendments “reflect a comprehensive, retrospective review of a framework that has, over time, unfortunately become difficult to navigate, for both investors and businesses, particularly smaller and medium-sized businesses…. Today’s amendments would rationalize that framework, increase efficiency and facilitate capital formation, while preserving or enhancing important investor protections.” Here is the almost 400-page adopting release. The final amendments will become effective 60 days after publication in the Federal Register.
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In October 2017, the SEC approved the PCAOB’s proposed new auditing standard for the auditor’s report, which requires auditors to include a discussion of “critical audit matters,” know colloquially as “CAMs.” CAMs are “matters communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved especially challenging, subjective, or complex auditor judgment.” Essentially, the concept is intended to capture the matters that kept the auditor up at night. As former Commissioner Kara Stein observed in her statement, the new “standard marks the first significant change to the auditor’s report in more than 70 years.” Changes related to CAMs became applicable to audits of large accelerated filers beginning with June 30, 2019 fiscal years and will apply to audits of all other companies to which the requirements apply for fiscal years ending on or after December 15, 2020. (See this PubCo post.) As a first step in analyzing the impact of CAM implementation before the requirement becomes more broadly applicable, the PCAOB undertook an interim analysis of the effect on key stakeholders in the audit process, including preparers (e.g., CFOs) at large accelerated filers, their audit firms, audit partners, audit committees and investors. That report is now available.
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ISS has provided some early guidance regarding how it will view pandemic-related changes to executive compensation as part of its pay-for-performance qualitative evaluation. According to ISS, the guidance was informed by direct discussions with investors as well as the results of its annual policy survey. The guidance is summarized below.
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According to Protiviti, in 2019, 90% of companies in the S&P 500 issued separate sustainability reports—not part of SEC filings—and, as of February 2020, over 1,000 companies with an aggregate market cap of $12 trillion have endorsed the Task Force on Climate-related Financial Disclosures (TCFD) recommendations for sustainability disclosure (see this PubCo post and this PubCo post). Similarly, use of the Sustainability Accounting Standards Board (SASB) framework has increased by 180% over the last two years (see this PubCo post). With this heightened focus on sustainability, how can boards best oversee ESG? To that end, in this article, consultant Protiviti offers ten questions about ESG reporting that boards should consider with their management teams.
A couple of weeks ago, the SEC settled charges against Andeavor, an energy company formerly traded on the NYSE and now wholly owned by Marathon Oil, in connection with stock repurchases, authorized by its board in 2015 and 2016. Pursuant to that authorization, in 2018, Andeavor’s CEO directed the legal department to establish a Rule 10b5-1 plan to repurchase company shares worth $250 million. At the time, however, the company’s CEO was on the verge of meeting with the CEO of Marathon Oil to resume previously stalled negotiations on an acquisition of Andeavor at a substantial premium. Of course, a 10b5-1 plan typically doesn’t work to protect against insider trading charges if you have material inside information when you establish the plan, and the SEC’s order highlights facts that, from the SEC’s perspective, make the information appear material—at least in hindsight. But wait—this isn’t even an insider trading case. No, it’s a case about inadequate internal controls—at least, that’s how it ended up. Instead of attempting to make a 10b-5 case based on a debatably defective 10b5-1 plan, the SEC opted instead to make its point by focusing on the failure to maintain effective internal control procedures and comply with them. Companies may want to take note that charges related to violations of the rules regarding internal controls and disclosure controls seem to be increasingly part of the SEC’s Enforcement playbook, making it worthwhile for companies to emphasize, in the words of SEC Chair Jay Clayton, the practice of “good corporate hygiene.”
For over a year, the SEC, credit rating agencies, investors, the Big Four accounting firms and other interested parties have been sounding the alarm about a popular financing technique called “supply chain financing”—not that there’s anything wrong with it, inherently at least. It can be a perfectly useful financing tool in the right hands—companies with healthy balance sheets. But it can also disguise shaky credit situations and allow companies to go deeper into debt, often unbeknownst to investors and analysts, with sometimes disastrous ends. This week, the FASB voted to add to its agenda a project to address the lack of transparency associated with the use of supplier finance programs.
Tuesday, at the CNBC Financial Advisor Summit, SEC Chair Jay Clayton was interviewed by CNBC’s Bob Pisani, touching on a variety of issues, including SPACs, proposed changes to Form 13F, ESG ratings and investing, emerging market listings and other topics of interest. No breaking news, but some insight into the SEC’s thinking on these subjects.