One area where SEC Enforcement appears to have focused its attention recently is whistleblower protections. In this Order against CBRE, Inc., the SEC brought settled charges against the commercial real estate services and investment firm for using an employee release form that the SEC alleged violated Exchange Act Rule 21F-17, the SEC’s whistleblower protection rule. The purpose of the whistleblower provisions in the Exchange Act, added in 2010 as part of Dodd-Frank, was to “encourage whistleblowers to report possible securities law violations by providing, among other things, financial incentives and confidentiality protections.” To prevent obstruction of that reporting, the SEC adopted Rule 21F-17, which provides that “[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.” The SEC’s order found that, “by conditioning separation pay on employees’ signing the release, CBRE took action to impede potential whistleblowers from reporting complaints to the Commission.” According to an SEC Regional Director, it “is critical that employees are able to communicate with SEC staff about potential violations of the federal securities laws without compromising their financial interests or the confidentiality protections of the SEC’s whistleblower program….We commend CBRE for its swift and far-reaching remediation and for its high level of cooperation with our staff, which is reflected in the terms of the resolution.” Is it time to take another look at your employee separation agreements and release forms?
Last week, the SEC proposed changes to the EDGAR system designed primarily to enhance EDGAR security, specifically related to EDGAR filer access and account management. In his Statement, SEC Chair Gary Gensler observed that a “lot has changed in the three decades since the Commission first required mandatory EDGAR filings in 1993.” While the SEC has updated EDGAR several times, it’s been over ten years since the SEC updated EDGAR login, password and other account access protocols in any significant way. Currently, Gensler reminded us, “registrants have one login per company. This is like having a family passing around one shared login and password for a movie streaming app. You know where that can lead. That’s simply not the most secure system—for filers and the Commission alike—when it comes to information relating to financial disclosure. By contrast, today’s actions would further secure login protocols by requiring every person filing something into EDGAR to login with individual credentials and to use multi-factor authentication.” Will the proposed new system, if finalized, put the kibosh on fake SEC Form 4s, fake Forms 8-K, fake Schedules 13D, fake SEC correspondence and other fake SEC filings? The proposal is open for comment for 60 days after publication in the Federal Register.
Alliance Advisors, a proxy solicitation and corporate advisory firm, has posted its 2023 Proxy Season Review, an analysis of trends from the 2023 proxy season. Its principal message: ESG proposals saw sagging results again this year, “continuing a downward trend” from 2021. Although the number of shareholder proposals submitted to U.S. public companies was substantial (958 as of June 30, 2023, compared with 987 for all of 2022), Alliance Advisors reports that there was a dramatic decline from last year in “average support across all categories of shareholder proposals,” and “the number of majority votes plunged from 80 in 2022 to 28 in the first half of 2023.” More specifically, according to Alliance, average support on governance proposals fell to 29.9% in 2023 from 37.4% in 2022 and 38.4% in 2021, and there was a bit of a roller-coaster effect on compensation-related proposals, where average support declined to 23.7% in 2023 from 31.4% in 2022 but increased from 21% in 2021. Most pronounced was the change in average support for environmental and social (E&S) proposals, which declined to 18.3% in 2023 from 27.3% in 2022 and 37.2% in 2021. Will it turn out that 2021 was the “high-water mark” for shareholder proposals on ESG? The report explores trends in shareholder proposals and examines what may account for the flagging voting results.
In this Order, the SEC brought settled charges against Fluor Corporation, a global engineering, procurement and construction company listed on the NYSE, in connection with alleged improper accounting on two large-scale, fixed-price construction projects. Five current and former Fluor officers and employees were also charged. (The press release includes links to the orders for the five individuals.) Fixed-price contracts mean that cost overruns are the contractor’s problem, not the customer’s, and Fluor’s bids on the two projects were based on “overly optimistic cost and timing estimates.” When Fluor experienced cost overruns, the SEC alleged, Fluor’s internal accounting controls failed, with the result that Fluor used improper accounting for these projects that did not comply with the percentage-of-completion accounting method under GAAP, leading Fluor to materially overstate its net earnings for several annual and quarterly periods. A restatement ultimately followed. Fluor agreed to pay a civil penalty of $14.5 million and the officers to pay civil penalties between $15,000 and $25,000. According to the Associate Director in the Division of Enforcement, “[d]ependable estimates and the internal accounting controls that facilitate them are the backbone of percentage of completion accounting and are critical to the accuracy of the financial statements that investors rely on….We will continue to hold companies and individuals accountable for serious controls failures and resulting recordkeeping and reporting violations.”
Corp Fin has posted a sample comment letter to companies about their XBRL disclosures. I don’t pretend to know or understand a thing about XBRL, much less Inline XBRL, so I won’t even try to elaborate but, for your reading pleasure, here are the comments.
Are springing penalties a thing? SEC charges Plug Power with accounting, reporting and control failures
In this Order, the SEC brought settled charges against Plug Power, Inc., a provider of green hydrogen and hydrogen-fuel-cell solutions, for financial reporting, accounting and controls failures in connection with a variety of the Company’s complex business transactions. The failures required Plug to restate its financial statements for several years. In the restatement, Company management identified a material weakness in internal control over financial reporting and ineffective disclosure controls and procedures, allegedly “due to Plug Power’s failure to maintain a sufficient complement of trained, knowledgeable personnel to execute their responsibilities for certain financial statement accounts and disclosures. Despite these control deficiencies, the Company raised over $5 billion from investors during the relevant Filing Period.” According to the SEC, Plug’s “material weakness in ICFR and ineffective DCP have not been fully remediated,” and the Company is continuing its remediation efforts. Plug agreed to pay a civil penalty of $1.25 million and to implement a number of undertakings, including an undertaking “to fully remediate the Company’s material weakness in ICFR and ineffective DCP within one year” of the SEC’s Order. Should Plug fail to comply with those undertakings, the Company will be required to pay a “springing penalty,” an additional civil penalty of $5 million.
Yesterday, the SEC posted, and declared immediately effective, a Nasdaq rule proposal that would modify the requirements related to waiver of the code of conduct in Listing Rules 5610 and IM-5610. Under current listing rules, all listed companies must adopt a code of conduct (which must meet the definition of a “code of ethics” in SOX 406(c)), applicable to all directors, officers and employees, and make that code publicly available. Each code of conduct must also contain an enforcement mechanism that ensures prompt and consistent enforcement of the code, protection for persons reporting questionable behavior, clear and objective standards for compliance, and a fair process by which to determine violations. Under current listing rules, waivers of the code for directors or executive officers must be approved by the Board and must be publicly disclosed. The proposal expands the approval authority for code waivers and adds new time deadlines for disclosure of code waivers by foreign private issuers. Companies may want to review their codes of conduct to make changes as appropriate.
In an article in 2022, Politico reported that SEC Chair Gary “Gensler has come under fire for the pace of rulemaking coming out of the agency, with critics claiming that dissecting the flood of new proposals in such short periods of time is impractical. Gensler has pointed out that the number of proposals [is] largely on par with what former SEC chairs like Clayton have done. The latest proposals have just been more clustered than in the past, Gensler said.” That’s a response that I’m sure I’ve heard any number of times during Congressional hearings. Is that still the case? To find out, Bloomberg performed a count of SEC records from 2001 to 2023 to assess the extent of rulemaking in the first two years, four months and one week into the tenures of several of the SEC Chairs over that period who were confirmed to lead the SEC at the start of a new administration. The answer? Yes and no. According to Bloomberg, the “SEC under Chair Gary Gensler is issuing regulations at its slowest pace in decades for a new presidential administration,” having adopted just 22 final rules since his tenure began in 2021. By comparison, over the same periods, the SEC under Jay Clayton had adopted 25 final rules, under Mary Schapiro, 28 rules, and under Harvey Pitt, a whopping 34 rules (many implementing the SOX mandate). So were all the complaints about the tsunami of rulemaking just misguided? Not exactly. As Bloomberg notes, “[d]espite trailing his recent predecessors on final rules, Gensler’s proposal tally of 49 exceeds Clayton’s 28 and Pitt’s 48, but is less than Schapiro’s 65.” [Emphasis added.] For the agenda of the Gensler administration, that leaves quite a chasm at this point between rules that are final and rules that are just proposed. What might that mean for SEC priorities? Bloomberg takes a deep dive.