SEC staff speaks up on LIBOR transition
Last week, the SEC staff issued a new statement on the LIBOR transition. LIBOR, the London Interbank Offered Rate, is a widely used reference rate calculated based on estimates submitted by banks of their own borrowing costs. LIBOR has been used extensively as a benchmark reference for short-term interest rates for various commercial and financial contracts—including interest rate swaps and other derivatives, as well as floating rate mortgages and corporate debt. In 2012, the revelation of the LIBOR rigging scandals made clear that the benchmark was susceptible to manipulation, and British regulators decided to phase it out at the end of 2021. The staff statement addresses a wide variety of issues for various market participants, but central for many public companies is the discussion of applicable disclosure obligations with respect to the transition away from LIBOR.
Staff returns to responding by letter to Rule 14a-8 no-action requests
You might recall that, in 2019, Corp Fin discontinued its longstanding approach of responding by written letter to each no-action request to exclude a shareholder proposal. Instead, the staff responded by letter only when it believed “doing so would provide value, such as more broadly applicable guidance about complying with Rule 14a-8,” and declined to respond by letter to requests that it considered to be ordinary course. The vast majority of responses were publicly communicated on a chart posted on the Corp Fin website. At the time, the staff indicated that the change was intended to make the process more efficient and effective. (See this PubCo post.) On review, the staff has now decided to revert back to prior practice.
Gensler on SPACs: treat like cases alike
What could Aristotle possibly have to say about SPACs? In remarks on Thursday before the Healthy Markets Association, SEC Chair Gary Gensler shared his thoughts on the regulation of SPACs with a theme drawn from antiquity: Aristotle’s maxim that we must “treat like cases alike.” That concept, in Gensler’s view, should apply as finance evolves in response to new technologies and new business models. Take SPACs, for example—a type of transaction that, while not exactly new, has really “taken off in the last couple of years.” A SPAC, he said, is really an alternative method of conducting an IPO. The question addressed by Gensler in his remarks is how “this competitive market innovation [should] be treated under our public policy framework,” in effect, giving us a preview of what we may see in SPAC rulemaking, possibly next year.
ISS releases benchmark policy updates for 2022
This week, ISS issued its benchmark policy updates for 2022. The policy changes will apply to shareholder meetings held on or after February 1, 2022. The key changes for U.S. companies relate to say-on-climate proposals, board diversity, board accountability for climate disclosure by high GHG emitters, board accountability for unequal voting rights and shareholder proposals for racial equity audits, as well as the decidedly less buzzy topics of capital stock authorizations and burn rate methodology in compensation plans.
SEC charges company and finance executives with raiding the cookie jar
Just in time for the holidays—cookie jars full of…revenue adjustments! In this complaint, the SEC charged American Renal Associates Holdings, Inc., a national provider of dialysis services, and three of its finance executives with securities fraud and other misconduct. According to the SEC, the alleged fraudulent scheme involved a “series of revenue adjustments to make it appear that ARA had beat, met, or come close to meeting various predetermined financial metrics, when in fact its financial performance was materially worse.” After receiving an inquiry from the SEC, ARA conducted an internal investigation that led the company to restate its financials, which, according to the SEC, showed that the company had overstated its net income by over 30% for 2017 and by more than 200% for the first three quarters of 2018. The revenue adjustments in the cookie jar, the SEC charged, were one of the key ingredients used in this alleged effort to cook the company’s books.
SEC adopts final amendments under the Holding Foreign Companies Accountable Act
In December 2020, the Holding Foreign Companies Accountable Act, co-sponsored by Senators John Kennedy, a Republican from Louisiana, and Chris Van Hollen, a Democrat from Maryland, was signed into law. The HFCAA 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 SEC Chair Gary Gensler, “[w]e have a basic bargain in our securities regime, which came out of Congress on a bipartisan basis under the Sarbanes-Oxley Act of 2002. If you want to issue public securities in the U.S., the firms that audit your books have to be subject to inspection by the [PCAOB]….This final rule furthers the mandate that Congress laid out and gets to the heart of the SEC’s mission to protect investors….The Commission and the PCAOB will continue to work together to ensure that the auditors of foreign companies accessing U.S. capital markets play by our rules. We hope foreign governments will, working with the PCAOB, take action to make that possible.” Last week, the SEC adopted final amendments to implement the HFCAA. The amendments will be effective 30 days after publication in the Federal Register.
2021 CPA-Zicklin Index shows steady rise in board oversight and disclosure of political spending
In the aftermath of January 6, a number of companies, highly sensitized to any dissonance or conflict between their public statements or announced core values and their political contributions, determined to pause or discontinue some or all of their political donations. Notwithstanding those actions—or perhaps to some extent because of them—the clamor for disclosure regarding corporate political spending has continued. To that end, in March, Senators Chris Van Hollen and Robert Menendez reintroduced the Shareholder Protection Act of 2021, a bill to mandate not only political spending disclosure, but also shareholder votes to authorize corporate political spending. (See this PubCo post.) The chances that this bill will pass in this Senate? Not great. Nevertheless, even in the absence of legislation, investor pressure and public sentiment may well be having some effect. As shown in the new 2021 CPA-Zicklin Index of Corporate Political Disclosure and Accountability (from the Center for Political Accountability and the Zicklin Center for Business Ethics Research at the Wharton School of the University of Pennsylvania), the number of companies increasing transparency and enhancing board oversight of corporate political spending, whether on their own initiative or prodded by shareholder proposals, is on a gradual but determined rise.
Enforcement again brings charges for failure to disclose perks
Failure to disclose executive perks continues to be a flashing target for SEC Enforcement. Just last year, there were two actions against companies for disclosure failures regarding perks—Hilton Worldwide Holdings Inc. (see this PubCo post) and Argo Group International Holdings, Ltd. (see this PubCo post). And earlier this year, Enforcement brought settled charges against Gulfport Energy Corporation and its former CEO, Michael G. Moore, for failure to disclose some of the perks provided to Moore (see this PubCo post). Now, the SEC has once again filed settled charges against a company, ProPetro Holding Corp., and its co-founder and former CEO, Dale Redman, for failure to properly disclose executive perks—including, once again, personal use of aircraft at the company’s expense—as well as two stock pledges. While the topic is not new, the different types of blunders and slip-ups—which seem to be unique to each case—can be instructive. In this case, the focus was—in addition to absence of a policy regarding personal travel reimbursement, inadequate internal controls around perks and failure to disclose paid personal travel expenses—an inadequate process for completion and review of D&O questionnaires.
SEC staff issues SAB No. 120 regarding “spring-loaded” awards to executives
Yesterday, the staff of the SEC’s Office of the Chief Accountant and Corp Fin released Staff Accounting Bulletin No. 120, which provides guidance about proper recognition and disclosure of compensation cost for “spring-loaded” awards made to executives. According to the SEC press release, “[s]pring-loaded awards are share-based compensation arrangements where a company grants stock options or other awards shortly before it announces market-moving information such as an earnings release with better-than-expected results or the disclosure of a significant transaction.” When these grants are not routine, according to the staff, they “merit particular scrutiny.” Notably, the staff advises that, in measuring compensation actually paid to executives, companies “must consider the impact that the material nonpublic information will have upon release. In other words, companies should not grant spring-loaded awards under any mistaken belief that they do not have to reflect any of the additional value conveyed to the recipients from the anticipated announcement of material information when recognizing compensation cost for the awards.”
SEC proposes to undo key provisions of 2020 proxy advisory firm rules
[This post revises and updates my earlier post primarily to reflect the contents of the proposing release.]
At an open meeting on November 17, the SEC voted, three to two, to propose amendments to the proxy rules that would reverse some of the key provisions governing proxy voting advice that were adopted in July 2020. Those amendments had codified the SEC’s interpretation that made proxy voting advice subject to the proxy solicitation rules. The intent was not, however, to cause ISS and other proxy voting advice businesses, which the SEC refers to as “PVABs,” to file a slew of proxy statements. To address the real issue that the SEC was targeting, the 2020 rules added to the exemptions from those solicitation rules two significant new conditions—one requiring disclosure of conflicts of interest and the second calling for PVABs to engage with the companies that are the subjects of their advice. The proposed amendments would rescind that second central condition—which some might characterize as a core element, if not the core element, of the 2020 amendments. The proposal would also rescind a note to Rule 14a-9, adopted as part of the 2020 rules, that provided examples of situations in which the failure to disclose certain information in proxy voting advice may be considered misleading. According to SEC Chair Gary Gensler, PVABs “play an important role in the proxy process. Their clients deserve to receive independent proxy voting advice in a timely manner.” The U.S. Chamber of Commerce had quite a different take on the proposal, contending that the “rules finalized by the SEC last year created a level playing field and ensured that investors would have access to high quality information free of bias. If the SEC decides to roll back these rules, it will signal that it is not serious about rooting out and eliminating misinformation and conflicts of interest in the proxy process and will instead place special interests at the head of the line, harming investors and markets. We will engage with the SEC to stop these misguided proposals from moving forward.” The proposal will be open for public comment for 30 days after publication of the proposing release in the Federal Register.
You must be logged in to post a comment.