In remarks today in London at the 18th Annual Institute on Securities Regulation in Europe, Corp Fin Director William Hinman discussed the application of a “Principles-Based Approach to Disclosing Complex, Uncertain and Evolving Risks,” specifically addressing Brexit and sustainability. With regard to Brexit disclosure, Hinman offers a very useful cheat sheet of good questions to consider in crafting appropriately tailored disclosure.
Happy International Women’s Day! To celebrate, let’s hear from Hester Peirce, the only woman SEC Commissioner. (Irony intended.)
In a speech delivered a few days ago to the Council of Institutional Investors, after expressing her gratitude for those contributions by CII to the public debate that Peirce views favorably (regarding proxy voting, stock buybacks and disclosure reform), she takes the opportunity to “air her grievances,” citing as a model Seinfeld’s 1997 Festivus episode. (“I got a lot of problems with you people, and now you’re gonna hear about it.”) What’s her complaint? It’s the focus of CII and other investors on what she views to be “non-investment matters at the expense of concentration on a sound allocation of resources to their highest and best use. Real dollars are being poured into adhering to an amorphous and shifting set of virtue markers.” And the pressure on the SEC “to get on the bandwagon and drag others with us is pretty intense. We are being asked more and more to shift securities disclosure to focus more on matters that do not go to an assessment of how effectively companies are putting investor money to work.”
As previously discussed in this PubCo post, one of the risk areas that SEC staff have advised they will be monitoring and have urged companies to address—and soon—is the effect of the LIBOR phase-out. LIBOR, the London Interbank Offered Rate, is calculated based on estimates submitted by banks of their own borrowing costs. In 2012, the revelation of LIBOR rigging scandals made clear that the benchmark was susceptible to manipulation, and British regulators decided to phase it out by 2021. 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. As cited by SEC Chair Jay Clayton, according to the Fed, “in the cash and derivatives markets, there are approximately $200 trillion in notional transactions referencing U.S Dollar LIBOR and…more than $35 trillion will not mature by the end of 2021.” (See also this PubCo post.)
A new bill that has been introduced in the House, H.R. 1053, would direct the SEC to issue regs to require public companies to disclose political expenditures in their annual reports and on their websites. While the bill’s chances for passage in the House are reasonably good, that is not the case in the Senate. In the absence of legislation, some proponents of political spending disclosure have turned instead to private ordering, often through shareholder proposals. So far, those proposals have rarely won the day, perhaps in large part because of the absence of support from large institutional investors. But that notable absence has recently come in for criticism from an influential jurist, Delaware Chief Justice Leo Strine. Will it make a difference?
In October last year, Corp Fin issued a new staff legal bulletin on shareholder proposals, 14J, that examined the exception under Rule 14a-8(i)(7), the “ordinary business” exception, addressing, among other topics, the application of the rule to proposals related to executive or director comp. Post-shutdown, Corp Fin has now posted several no-action responses that consider the exception in that context. Do they provide any color or insight?
The SEC has voted to propose a new rule, Rule 163B, that would expand the JOBS Act’s “test-the-waters” reform beyond emerging growth companies to apply to all issuers. If expanded as proposed, the new rule would allow a company (and its authorized representatives, including underwriters) to engage in oral or written communications, either prior to or following the filing of a registration statement, with potential investors that are, or are reasonably believed to be, qualified institutional buyers (QIBs) or institutional accredited investors (IAIs) to determine whether they might be interested in the contemplated registered offering. The proposed new rule is designed to allow the company to gauge market interest in the deal before committing to the time-consuming prospectus drafting and SEC review process or incurring many of the costs associated with an offering. According to the press release, SEC Chair Jay Clayton views the extension of this reform as a way to enhance the ability of companies “to conduct successful public securities offerings and lower their cost of capital, and ultimately to provide investors with more opportunities to invest in public companies…. [Clayton has] seen first-hand how the modernization reforms of the JOBS Act have helped companies and investors. The proposed rules would allow companies to more effectively consult with investors and better identify information that is important to them in advance of a public offering.”
The proposal is so uncontroversial that the SEC did not even hold an open meeting to vote on it. I’d don’t think I’d be going out on too much of a limb if I predicted that, although there may be tweaks to it, the proposed new rule is just about a done deal. The proposal will have a 60-day public comment period following its publication in the Federal Register.
In this report, Change the Conversation: Redefining How Companies Engage Investors on Sustainability, sustainability nonprofit Ceres provides some guidance on how companies should best engage with their investors on the issue of sustainability. While almost half of the 600 largest U.S. public companies communicate with investors about environmental, social and governance issues, according to Ceres, they could be doing a much better job of it. To that end, Ceres offers a set of nine recommendations “to guide companies toward more meaningful and effective investor engagement on ESG issues.” What is the key message? Don’t “fall into the trap of positioning sustainability as the ‘right thing to do,’ without making the connection to the business case.” And make the business case for sustainability by tying it to financial performance and demonstrating that it can drive business value. Whether or not you buy into the whole program, you may still find Ceres’ perspective and examples provided helpful in guiding your engagement efforts.