SEC settles charges with McDonald’s and former CEO over deficient disclosures; two commissioners dissent
Inappropriate relationships with employees have landed a number of CEOs and other executives in hot water in the last few years, especially as the MeToo movement gained momentum. But these aren’t necessarily just employment issues, nor are they always limited to problems for the perpetrator. The SEC has just announced settled charges against McDonald’s and its former CEO, Stephen Easterbrook, arising out of the termination of Easterbrook “for exercising poor judgment and engaging in an inappropriate personal relationship with a McDonald’s employee in violation of company policy.” The SEC alleged that Easterbrook made “false and misleading statements to investors about the circumstances leading to his termination in November 2019.” But how was McDonald’s alleged to have violated the securities laws? The SEC charged that McDonald’s disclosures related to Easterbrook’s separation agreement were deficient in failing to disclose that the company “exercised discretion in terminating Easterbrook ‘without cause,’” allowing Easterbrook to “retain substantial equity compensation.” The SEC’s Director of Enforcement asserted that, “[w]hen corporate officers corrupt internal processes to manage their personal reputations or line their own pockets, they breach their fundamental duties to shareholders, who are entitled to transparency and fair dealing from executives….By allegedly concealing the extent of his misconduct during the company’s internal investigation, Easterbrook broke that trust with—and ultimately misled—shareholders.” According to the Associate Director of Enforcement, “[p]ublic issuers, like McDonalds’s, are required to disclose and explain all material elements of their CEO’s compensation, including factors regarding any separation agreements….Today’s order finds that McDonald’s failed to disclose that the company exercised discretion in treating Easterbrook’s termination as without cause in conjunction with the execution of a separation agreement valued at more than $40 million.” As reported by the WSJ, “[i]n a statement Monday, McDonald’s said, ‘The SEC’s order reinforces what we have previously said: McDonald’s held Steve Easterbrook accountable for his misconduct. We fired him, and then sued him upon learning that he lied about his behavior.’” Commissioners Hester Peirce and Mark Uyeda dissented from the Order, contending that the SEC’s interpretation of the disclosure rule was beyond the rule’s scope.
SEC crams much into packed Fall 2022 agenda
The SEC’s Fall 2022 Reg-Flex Agenda—according to the preamble, compiled as of October 6, 2022, reflecting “only the priorities of the Chair”—has just been posted, and it looks like the SEC will have another frenetic year ahead dealing with new and pending proposals—and so will we. Describing the new agenda, SEC Chair Gary Gensler said that it “reflects the need to modernize our ruleset, moving deliberately to update our rules in light of ever-changing technologies and business models in the securities markets. Our ability to meet our mission depends on having an up-to-date rulebook—consistent with our mandate from Congress, guided by economic analysis, and shaped by public input.” Here are the short-term and long-term lists, which show all Corp Fin agenda items scheduled for action by either April or October 2023, with the first four months looking especially jam-packed. There’s no dispute that the agenda is laden with major proposals, and many of these proposals—climate disclosure, cybersecurity, SPACs, share buybacks—are apparently at the final rule stage. Implementing all of these proposals, if adopted, would likely represent a challenge for many companies; whether overwhelmingly so remains to be seen.
Will companies need to provide more detailed country-by-country tax disclosure?
The topic of taxes—corporate, presidential and otherwise—seems to be trending these days, with calls for greater transparency coming from investors, analysts and others, including speakers at the SEC’s Investor Advisory Committee. They contend that some corporate tax practices may give rise to financial, legal and reputational risks that would be material for investors to understand. Currently, however, financial statements are required to include disclosure of the total taxes paid, but are not required to break out the amounts by country or state. Consequently, investors and analysts say that they do not have sufficient visibility to understand the impact on companies of changes in tax laws or the tax environment in different jurisdictions or to otherwise evaluate companies’ exposure to tax risks.
SEC adopts new rules on 10b5-1 plans [UPDATED]
[This post revises and updates my earlier post primarily to provide a more detailed discussion of the contents of the adopting release.]
At an open meeting in December last year—happy new year!—the SEC voted to adopt new rules regarding Rule 10b5-1 plans. The vote was unanimous—albeit somewhat grudgingly in one case. Still, the notion of unanimity on an important Corp Fin regulation has seemed like something of a pipe dream in the last several years. Commissioner Mark Uyeda was even complimentary of the process employed for this rulemaking—and he is typically quite critical of the process (see this PubCo post)—noting that the process employed this time facilitated the development of more responsive final rules. And did I detect a note of relief in the Chair’s voice? Perhaps the unanimity was in part the result of concerns long expressed about potential abuse of Rule 10b5-1 plans—from studies reported in media to letters from Senators to recent probes conducted by the SEC and DOJ (see this PubCo post, this PubCo post and this PubCo post). These concerns have been percolating for many years, and the adoption of rules adding new conditions to the use of the Rule 10b5-1 affirmative defense and new disclosure requirements for 10b5-1 plans has long been anticipated. After all, these plans were one of the first rulemaking targets that SEC Chair Gary Gensler identified after he was sworn in as Chair: Rule 10b5-1 plans, he said in 2021, “have led to real cracks in our insider trading regime” and called for a proposal to “freshen up” these rules. (See this PubCo post.) The final amendments add new conditions to the availability of the Rule 10b5-1(c) affirmative defense, including cooling-off periods for directors, officers and persons other than issuers, and create new disclosure requirements. According to Gensler, “[a]bout 20 years ago, the SEC established Exchange Act Rule 10b5-1. This rule provided affirmative defenses for corporate insiders and companies to buy and sell company stock as long as they adopted their trading plans in good faith—before becoming aware of material nonpublic information. Over the past two decades, though, we’ve heard from courts, commenters, and members of Congress that insiders have sought to benefit from the rule’s liability protections while trading securities opportunistically on the basis of material nonpublic information. I believe today’s amendments will help fill those potential gaps….These issues speak to the confidence that investors have in the markets. Anytime we can increase investor confidence in the markets, that’s a good thing. It helps investors decide where to put their money. It lowers the cost of capital for businesses seeking to raise capital, grow, and innovate, and thus facilitates capital formation.”
PCAOB gains “unprecedented access” to inspect audit firms in China
You might recall that, for well over a decade, the PCAOB has been unable to fulfill its SOX mandate to inspect audit firms in “Non-Cooperating Jurisdictions,” including China. Years of negotiation failed to resolve the deadlock over audit inspections and, in 2020, the Holding Foreign Companies Accountable Act amended SOX to prohibit trading on U.S. exchanges of public reporting companies audited by audit firms located in foreign jurisdictions that the PCAOB has been unable to inspect for three sequential years. (See this PubCo post.) According to the U.S.-China Economic and Security Review Commission, as of March 31, 2022, Chinese companies listed on the three largest U.S. exchanges had a total market capitalization of $1.4 trillion. (See this PubCo post.) As a result, the trading prohibitions of the HFCAA were poised to have a substantial impact. After passage of the HFCAA, more negotiations ensued, and, in August, the PCAOB took an initial step by signing a Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China governing inspections and investigations of audit firms based in China and Hong Kong. (See this PubCo post.) But that was viewed as just an opening; as SEC Chair Gary Gensler phrased it, the “proof will be in the pudding. While important, this framework is merely a step in the process. This agreement will be meaningful only if the PCAOB actually can inspect and investigate completely audit firms in China. If it cannot, roughly 200 China-based issuers will face prohibitions on trading of their securities in the U.S. if they continue to use those audit firms.” To the surprise of many, last week, the PCAOB announced that it had secured unprecedented access to conduct these inspections. According to PCAOB Chair Erica Williams, for “the first time in history, the PCAOB has secured complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong. And this morning the Board voted to vacate the previous determinations to the contrary. This historic and unprecedented access was only possible because of the leverage Congress created by passing the Holding Foreign Companies Accountable Act. Congress sent a clear message with that legislation that access to U.S. capital markets is a privilege and not a right, and China received that message loud and clear. Investors are more protected today because of Congress’ leadership….” However, she added, she wanted “to be clear: this is the beginning of our work to inspect and investigate firms in China, not the end. The PCAOB is continuing to demand complete access in mainland China and Hong Kong moving forward. Our teams are already making plans to resume regular inspections in early 2023 and beyond, as well as continuing to pursue investigations.” What is the impact? To remove, at least for now, the immediate peril of delisting from U.S. exchanges that was threatening many U.S.-listed China-based companies.
Happy Holidays!
Nasdaq simplifies “confusing” timing requirements for board diversity rules
A new rule change designed to simplify the rules regarding the timing of compliance with the Nasdaq board diversity listing rules has been filed by Nasdaq and declared immediately effective. As you probably remember, on August 6, 2021, the SEC approved Nasdaq’s proposal for new listing rules regarding board diversity and disclosure, along with a proposal to provide free access to a board recruiting service. The listing rules adopted a “comply or explain” mandate for board diversity for most listed companies and required companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards in a matrix format. (See this PubCo post.) Now, Nasdaq acknowledges that the formulation of the compliance deadlines, which were tied to the approval date of the proposal by the SEC, is “confusing and unnecessarily complicated.” Not Nasdaq’s fault though—it meant well! At the time of filing of the proposal, “Nasdaq and listed companies could not know when the proposal would be approved,” and Nasdaq “wanted to assure that listed companies had at least one year from the approval of the rules, or until their next annual meeting, to take necessary actions to satisfy the requirements” of the rules. Nasdaq is now making technical changes to several rules to address that problem by eliminating complicated references to the SEC approval date, and instead requiring compliance by December 31st of the applicable year (which, according to Nasdaq, is the fiscal year-end for approximately 80% of Nasdaq-listed companies subject to the rules).
Happy Holidays!
Corp Fin posts revised and new non-GAAP CDIs
The Corp Fin staff has issued a group of revised and new compliance & disclosure interpretations on the use of non-GAAP financial measures. The CDIs are more detailed and expansive in describing disclosure that the staff considers to be misleading as well as presentations that the staff believes reflect excessive non-GAAP prominence over the comparable GAAP number under Reg S-K Item 10(e). Summaries are below.
Happy Holidays!
Finally, a unanimous vote—SEC adopts new rules on 10b5-1 plans
At an open meeting yesterday, the SEC voted to adopt new rules regarding Rule 10b5-1 plans. The vote was unanimous—albeit somewhat grudgingly in one case. Still, the notion of unanimity on an important Corp Fin regulation has seemed like something of a pipe dream in the last several years. Commissioner Mark Uyeda was even complimentary of the process employed for this rulemaking—and he is typically quite critical of the process (see this PubCo post)—noting that the process employed this time facilitated the development of more responsive final rules. Did I detect a note of relief in the Chair’s voice? Perhaps the unanimity was in part the result of concerns long expressed about potential abuse of Rule 10b5-1 plans—from studies reported in media to letters from Senators to probes conducted by the SEC and DOJ (see this PubCo post, this PubCo post and this PubCo post). These concerns have been percolating for many years, and the adoption of rules adding new conditions to the use of the Rule 10b5-1 affirmative defense and new disclosure requirements for 10b5-1 plans has long been anticipated. After all, these plans were one of the first rulemaking targets that SEC Chair Gary Gensler identified after he was sworn in as Chair: 10b5-1 plans, he said last year, “have led to real cracks in our insider trading regime” and called for a proposal to “freshen up” these rules. (See this PubCo post.) The final amendments add new conditions to the availability of the Rule 10b5-1(c) affirmative defense, including cooling-off periods for directors, officers, and persons other than issuers, and create new disclosure requirements. According to Gensler, “[a]bout 20 years ago, the SEC established Exchange Act Rule 10b5-1. This rule provided affirmative defenses for corporate insiders and companies to buy and sell company stock as long as they adopted their trading plans in good faith—before becoming aware of material nonpublic information. Over the past two decades, though, we’ve heard from courts, commenters, and members of Congress that insiders have sought to benefit from the rule’s liability protections while trading securities opportunistically on the basis of material nonpublic information. I believe today’s amendments will help fill those potential gaps….These issues speak to the confidence that investors have in the markets. Anytime we can increase investor confidence in the markets, that’s a good thing. It helps investors decide where to put their money. It lowers the cost of capital for businesses seeking to raise capital, grow, and innovate, and thus facilitates capital formation.”
Texas court jettisons NAM challenge to SEC’s proxy advisor rules
Is it ok for an agency to change its mind? The Federal District Court for the Western District of Texas seems to think so—at least if the agency’s decision is “reasonable and reasonably explained.” So says this Order granting summary judgment to the SEC and Chair Gary Gensler and denying summary judgment to the National Association of Manufacturers and the Natural Gas Services Group in the litigation surrounding the SEC’s adoption in 2022 of amendments to the rules regarding proxy advisory firms, such as ISS and Glass Lewis. Those 2022 rules reversed some of the key controversial provisions governing proxy voting advice that were adopted by the SEC in July 2020 and favored by NAM. In July of this year, NAM filed a complaint asking that the 2022 rules be set aside under the Administrative Procedure Act and declared unlawful and void, and, in September, NAM filed its motion for summary judgment, characterizing the case as “a study in capricious agency action.” The Court begged to differ. But, no surprise, we haven’t heard the last of this matter—NAM has already filed its notice of appeal.
Corp Fin urges companies to amp up disclosure on impact of crypto market developments
Last week, Corp Fin posted another sample comment letter—this one urging affected companies to provide “specific, tailored disclosure” about the “disruption” in the crypto markets and collateral events, the “company’s situation in relation to those events and conditions, and the potential impact on investors.” The sample comments focus on “the material impacts of crypto asset market developments, which may include a company’s exposure to counterparties and other market participants; risks related to a company’s liquidity and ability to obtain financing; and risks related to legal proceedings, investigations, or regulatory impacts in the crypto asset markets.” Below is a brief summary.
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