Let’s just say that the SEC’s Investor Advocate, Rick Fleming, was none too pleased with the work of the SEC this year. Although, in his Annual Report on Activities, he complimented the SEC for its prompt and flexible response to COVID-19, that’s about where the accolades stopped. For the most part, Fleming found the SEC’s rulemaking agenda “disappointing.” While cloaked in language about modernization and streamlining, he lamented, the rulemakings that were adopted were too deregulatory in nature, with the effect of diminishing investor protections. But issues that definitely called for modernization—such as the antiquated proxy plumbing system—despite all good intentions, were not addressed, nor did the SEC establish a “coherent framework” for ESG disclosure. And the SEC “also selectively abandoned its deregulatory posture by erecting higher barriers for shareholders’ exercise of independent oversight over the management of public companies” through the use of shareholder proposals and by imposing regulation on proxy advisory firms. That regulation could allow management to interfere in the advice investors pay to receive from proxy advisory firms and was widely opposed by investors. What’s your bet that he’ll be a lot happier next year?
In this new Bulletin, consultant Protiviti identifies key issues for the 2021 audit committee agenda and—no surprise—at least half reflect the impact of COVID-19. The agenda includes four topics related to enterprise, process and technology risks and four related to financial reporting, with a reminder regarding ESG. Also available is an audit committee self-assessment questionnaire. The topics suggested for the audit committee agenda are summarized below.
The NYSE is proposing to relax the requirements for shareholder approval of related-party equity issuances and bring them closer into alignment with the comparable Nasdaq rules. The proposal, which would amend Sections 312.03, 312.04 and 314.00 of the NYSE Listed Company Manual, would provide more flexibility to raise capital and includes modifications that are largely identical to the temporary waiver in effect during the COVID-19 crisis. (See this PubCo post and this PubCo post.) In observing the impact of that temporary waiver (which has now been extended through March 31, 2021), the NYSE has seen “that a significant number of companies have benefited from the flexibility provided by the waiver and has not observed any significant problems associated with companies’ completion of transactions permitted by the waiver.”
Just in time for the new proxy season comes this Report of the 2020 Multi-Stakeholder Working Group on Practices for Virtual Shareholder Meetings from the Rutgers Center for Corporate Law and Governance, the Council of Institutional Investors and the Society for Corporate Governance. The report is replete with helpful guidance, detailing best and emerging practices for virtual shareholder meetings. The Working Group updates its 2018 report (see this PubCo post) in light of the deluge of pandemic-induced VSMs that were convened during the 2020 proxy season. Sorry to say, but it seems likely that this new proxy season will see a repeat for the same reason—at least in the first part of the season—so this report should be especially useful.
Happy holidays everyone! Good riddance to 2020! Hooray for science and scientists!
The SEC has just filed a complaint against Sequential Brands Group, Inc., a brand management company, for failing to take timely and appropriate goodwill impairment charges as required by GAAP and the federal securities laws, despite “clear evidence of goodwill impairment” (according to the press release). As a result, the SEC alleges, the company “materially understated its operating expenses and net loss and materially overstated its income from operations, goodwill, and total assets” in its SEC filings, turning “a net loss into income” for financial statement purposes.
In August, the SEC amended the Reg S-K disclosure requirements related to the descriptions of business, legal proceedings and risk factors. Probably the most significant change was the enhancement of the disclosure requirement for human capital, a topic that has recently been front-burnered by the impact of COVID-19 on the workforce. The amended rule requires companies to disclose, to the extent material, information about human capital resources, including any human capital measures or objectives that the company focuses on in managing the business. The new human capital disclosure requirement largely reflects the SEC’s historic “commitment to a principles-based, registrant-specific approach to disclosure” that is “rooted in materiality.” (See this PubCo post.) To emphasize that the requirement was “principles-based” did not mean that disclosure of vague generalities would suffice. Rather, in his Statement regarding the amendments, SEC Chair Jay Clayton remarked that, while the SEC was not prescribing “specific, rigid metrics,” under the principles-based approach, he did “expect to see meaningful qualitative and quantitative disclosure, including, as appropriate, disclosure of metrics that companies actually use in managing their affairs.” Although the principles-based approach offers the benefit of flexibility to allow disclosure to be adapted to each company, nevertheless, the absence of any prescriptive element left many companies searching for how best to address human capital disclosure. Now, independent standard-setting organization SASB, the Sustainability Accounting Standards Board, has issued a Human Capital Bulletin that summarizes the elements of the SASB Standards that relate to human capital and provides an overview of selected human capital-related topics and metrics that apply across all 77 SASB industry standards.
Yesterday, Nasdaq announced that it has filed with the SEC a proposal for new listing rules regarding board diversity and disclosure. If approved, it would likely be a game changer. The new listing rules would adopt a “comply or explain” mandate for board diversity for most listed companies and require companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards. The announcement indicates that the goal is to “provide stakeholders with a better understanding of the company’s current board composition and enhance investor confidence that all listed companies are considering diversity in the context of selecting directors, either by including at least two diverse directors on their boards or by explaining their rationale for not meeting that objective.” In its 271-page filing, Nasdaq explains its rationale by presenting an analysis of over two dozen studies that “found an association between diverse boards and better financial performance and corporate governance.” According to Nasdaq’s President and CEO, Adena Friedman, “Nasdaq’s purpose is to champion inclusive growth and prosperity to power stronger economies….Our goal with this proposal is to provide a transparent framework for Nasdaq-listed companies to present their board composition and diversity philosophy effectively to all stakeholders; we believe this listing rule is one step in a broader journey to achieve inclusive representation across corporate America.”
Yesterday, Corp Fin posted CF Disclosure Guidance: Topic No. 10, Disclosure Considerations for China-Based Issuers, which provides guidance regarding disclosure considerations for companies based in or with the majority of their operations in the People’s Republic of China (China-based Issuers). You might recall that, in August, the President’s Working Group on Financial Markets, which includes Treasury Secretary Steven T. Mnuchin, Fed Chair Jerome H. Powell, SEC Chair Jay Clayton and CFTC Chair Heath P. Tarbert, issued a Report on Protecting United States Investors from Significant Risks from Chinese Companies, which made a number of recommendations, among them that regulators should require enhanced and prominent issuer disclosures of the risks of investing in China-based Issuers and should issue interpretive guidance to clarify these disclosure requirements and increase awareness of the risks of investing in these companies. (See this PubCo post.) This guidance appears designed to implement that recommendation. The clear implication of the guidance is that China-based Issuers need to consider beefing up their risk factor and related disclosures; in outlining risks and posing questions to consider, the guidance provides a great starting point.
Earlier this month, the SEC announced settled charges against former Wells Fargo CEO and Chairman, John G. Stumpf, as well as charges against former head of Wells Fargo’s Community Bank, Carrie L. Tolstedt, alleging that they misled investors about the success of the Community Bank, Wells Fargo’s core business. (Wells had already agreed to pay $3 billion to settle charges from the SEC and the Department of Justice.) The SEC charged that they made misleading public statements about the company’s strategy and a key performance indicator, the “cross-sell metric,” and signed misleading certifications and sub-certifications as to the accuracy of these and other public disclosures. In the Order, Stumpf has agreed to settle the action against him for $2.5 million, but Tolstedt has not agreed to settle, and the SEC has filed a complaint against her in Federal District Court, seeking an officer and director bar, a monetary penalty and disgorgement. The Order and complaint highlight, once again, problems that can arise out of public disclosure of misleading key performance indicators. Moreover, the SEC’s allegations provide a cautionary tale about the responsibility of those signing certifications (and sub-certifications) regarding the accuracy of periodic reports to heed clear alarm bells and question sub-certifications where appropriate to do so.
Commissioners Peirce and Roisman criticize “unduly broad view” of “internal accounting controls” in Andeavor
In October, the SEC settled charges against Andeavor, an energy company formerly traded on the NYSE and now wholly owned by Marathon Petroleum, in connection with stock repurchases authorized by its board in 2015 and 2016. (See this PubCo post.) Pursuant to that authorization, in 2018, Andeavor’s CEO had directed the legal department to establish a Rule 10b5-1 plan to repurchase company shares worth $250 million. At the time, however, Andeavor’s CEO was on the verge of meeting with the CEO of Marathon Petroleum to resume previously stalled negotiations on an acquisition of Andeavor at a substantial premium. After Andeavor’s legal department concluded that the company did not possess material nonpublic information about the acquisition, Andeavor went ahead with the stock repurchase. Rather than attempting to build a 10b-5 case based on a debatably defective 10b5-1 plan, the SEC opted instead to make its point with allegations that Andeavor had failed to maintain an effective system of internal control procedures in violation of Exchange Act Section 13(b)(2)(B). On Friday, the SEC posted the joint statement of SEC Commissioners Hester Peirce and Elad Roisman, who voted against the settled action, explaining the reasons for their dissents. In sum, they contend that, in the action, the SEC took an “unduly broad view of Section 13(b)(2)(B).”