Category: Corporate Governance
SEC’s Investor Advisory Committee to consider recommendations regarding SPACs
Tomorrow, in addition to Rule 10b5-1 plan recommendations (see this PubCo post), the SEC’s Investor Advisory Committee is slated to take up draft subcommittee recommendations regarding SPACs. The new SPAC recommendations address SPAC regulatory and investor protection issues that have been under scrutiny as a result of the proliferation of SPACs in 2020 and 2021. The IAC subcommittee observes that the SEC and its staff have addressed many issues related to SPACs in staff guidance, and the topic’s appearance on the SEC’s most recent agenda signals that it may be headed for further regulatory action. With that in mind, the recommendations are focused “on the practical challenges SPAC investors face in fully assessing the risks and opportunities associated with these investment vehicles.” In light of the dynamic nature of the SPAC market in recent months, however, the subcommittee frames its recommendations as “preliminary,” and indicates an intent “to revisit the issue of SPAC governance” in the future as more data becomes available. [Update: this recommendation was approved by the Committee for submission to the SEC.]
SEC charges Kraft Heinz with improper expense management scheme
On Friday, the SEC announced settled charges against Kraft Heinz Company, its Chief Operating Officer and Chief Procurement Officer for “engaging in a long-running expense management scheme that resulted in the restatement of several years of financial reporting.” According to the SEC’s Order regarding the company and the COO, as well as the SEC’s complaint against the CPO, the company employed a number of expense management strategies that “misrepresented the true nature of transactions,” including recognizing unearned discounts from suppliers, maintaining false and misleading supplier contracts and engaging in other accounting misconduct, all of which resulted in accounting errors and misstatements. The misconduct, the SEC contended, was designed to allow the company to report sham cost savings consistent with the operational efficiencies it had touted would result from the 2015 merger of Kraft and Heinz, as well as to inflate EBITDA—a critical earnings measure for the market—and to achieve certain performance targets. And, once again, charges of failure to design and implement effective internal controls played a prominent role. After the SEC began its investigation, KHC restated its financials, reversing “$208 million in improperly-recognized cost savings arising out of nearly 300 transactions.” According to Anita B. Bandy, Associate Director of Enforcement, “Kraft and its former executives are charged with engaging in improper expense management practices that spanned many years and involved numerous misleading transactions, millions in bogus cost savings, and a pervasive breakdown in accounting controls. The violations harmed investors who ultimately bore the costs and burdens of a restatement and delayed financial reporting….Kraft and its former executives are being held accountable for placing the pursuit of cost savings above compliance with the law.” KHC agreed to pay a civil penalty of $62 million. Interestingly, this case comes on the heels of an earnings management case brought by the SEC against Healthcare Services Group, Inc. for alleged failures to properly accrue and disclose litigation loss contingencies.
How did COVID-19 affect financial reporting and financial health?
Audit Analytics has just released a deep dive into the impact of COVID-19 on financial reporting and financial wellbeing. To assess the effect of the pandemic, the report looked at going-concern audit opinions, impairment charges, late filings and changes in the control environment, as well as restatements. Some of the results might be surprising. For example, the pandemic had a significant impact on impairment charges, but the number of going-concern qualifications in audit opinions? Not so much.
SEC’s Investor Advisory Committee to consider Rule 10b5-1 plan recommendations
This month, the SEC’s Investor Advisory Committee will be taking up draft subcommittee recommendations regarding two hot topics—Rule 10b5-1 plans and SPACs—both of which have now been posted. The wide berth Rule 10b5-1 gives insiders to conduct transactions under Rule 10b5-1 plans, together with the absence of public information requirements, has long fueled controversy about these plans. Potential problems with 10b5-1 plans have been recognized in many quarters—including by former SEC Chair Jay Clayton and current Chair Gary Gensler—and the IAC subcommittee believes there is “strong bipartisan support” for improvements to Rule 10b5-1 that would enhance the rule’s effectiveness and “improve transparency regarding insider trades and enable effective investigation and enforcement of violations.” The IAC subcommittee recommends that the SEC “move quickly to close identified gaps in the current rule.” Given the widespread advocacy for modification of Rule 10b5-1, is it practically a fait accompli? This month, the SEC’s Investor Advisory Committee will be taking up draft subcommittee recommendations regarding two hot topics—Rule 10b5-1 plans and SPACs—both of which have now been posted. The wide berth Rule 10b5-1 gives insiders to conduct transactions under Rule 10b5-1 plans, together with the absence of public information requirements, has long fueled controversy about these plans. Potential problems with 10b5-1 plans have been recognized in many quarters—including by former SEC Chair Jay Clayton and current Chair Gary Gensler—and the IAC subcommittee believes there is “strong bipartisan support” for improvements to Rule 10b5-1 that would enhance the rule’s effectiveness and “improve transparency regarding insider trades and enable effective investigation and enforcement of violations.” The IAC subcommittee recommends that the SEC “move quickly to close identified gaps in the current rule.” Given the widespread advocacy for modification of Rule 10b5-1, is it practically a fait accompli? [Update: This recommendation was approved by the Committee for submission to the SEC, subject to the opportunity to reconsider after addition of a footnote clarifying that the recommendation was not intended to address corporate buybacks.]
Nasdaq offers more answers on board diversity rule
As you probably know, on August 6, the SEC approved Nasdaq’s proposal for a new listing rule regarding board diversity and disclosure, along with a proposal to provide free access to a board recruiting service. The new listing rule adopts a “comply or explain” mandate for board diversity for most listed companies and requires 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.) Shortly after SEC approval, Nasdaq posted a series of FAQs here. Nasdaq has been expanding the FAQs to provide some additional useful answers, as summarized below.
Petition filed for review of SEC approval of Nasdaq board diversity rule
It should hardly come as a surprise to anyone that the new Nasdaq board diversity rule (see this PubCo post) would be challenged in the courts. The rule was approved by the SEC on Friday, August 6. On Monday, August 9, the Alliance for Fair Board Recruitment filed a slim petition under Section 25(a) of the Exchange Act in the Fifth Circuit Court of Appeals—the Alliance has its principal place of business in Texas—for review of the SEC’s final order approving the Nasdaq rule. The petition itself is not particularly revealing, but it’s notable that the petitioner is also the most recent plaintiff challenging California’s two board diversity laws.
Is this insider trading?
On Tuesday, the SEC announced that it had filed a complaint in the U.S. District Court charging a former employee of Medivation Inc., an oncology-focused biopharma, with insider trading in advance of Medivation’s announcement that it would be acquired by a big pharma company. But it’s not what you might think. The employee didn’t trade in shares of Medivation or shares of the acquiror, nor did he tip anyone about the transaction. No, according to the SEC, he used the information about his employer’s acquisition to purchase call options on a separate biopharma company, Incyte Corporation, which the SEC claims was comparable to Medivation. According to the SEC, the employee made that purchase based on an assumption that the acquisition of Medivation at a healthy premium would probably boost the share price of Incyte. Incyte’s stock price increased after the sale of Medivation was announced. The SEC charged that the employee breached his “duty to refrain from using Medivation’s proprietary information for his own personal gain” and traded ahead of the announcement, in violation of Rule 10b-5. Will the SEC succeed or is the factual basis of the charge just too attenuated?
SEC charges another company for misleading cybersecurity disclosure
It’s déjà vu all over again! On Monday, the SEC announced settled charges against Pearson plc, an NYSE-listed, educational publishing and services company based in London, for failure to disclose a cybersecurity breach. You might recall that just a few months ago, the SEC announced settled charges against another company for failure to timely disclose a cybersecurity vulnerability that led to a leak of data, with disclosure ultimately spurred by imminent media reports. Is there a trend here? In this instance, it wasn’t just a vulnerability—there was an actual known breach and exfiltration of private data. Nevertheless, Pearson decided not to disclose it and framed its cybersecurity risk factor disclosure as purely hypothetical. The SEC viewed that disclosure as misleading and imposed a civil penalty on Pearson of $1 million. The case serves as yet another reminder of the dangers of risk disclosures presented as hypothetical when those risks have actually come to fruition—a presentation that has now repeatedly drawn scrutiny in the context of cybersecurity disclosure.
How do companies approach climate disclosure?
So, what are the GHG emissions for a mega roll of Charmin Ultra Soft toilet paper? If you guessed 771 grams, you’d be right…or, at least, according to this article in the WSJ, you’d be consistent with the calculations of its carbon footprint made by the Natural Resources Defense Council. By comparison, a liter of Coke emits 346 grams from farm to supermarket, as calculated by the company. That’s the kind of calculation that many public companies may all need to be doing in a few years, depending on the requirements of the SEC’s expected rulemaking on climate. Of course, many companies are already doing those calculations and including them in their sustainability reports. But they generally have discretion in deciding what to include. A mandate from the SEC could be something else entirely. The WSJ calls it “the biggest potential expansion in corporate disclosure since the creation of the Depression-era rules over financial disclosures that underpin modern corporate statements. Already it has kicked off a confusing melee as companies, regulators and environmentalists argue over the proper way to account for carbon.”
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