Category: Securities

SEC adopts amendments to auditor independence rules

On Friday, the SEC announced adoption of final amendments to the auditor independence rules, largely as proposed at the end of 2019 (see this PubCo post). The changes to the rules make adjustments to address certain recurring fact patterns that came to light in the course of myriad staff consultations in which “certain relationships and services triggered technical independence rule violations without necessarily impairing an auditor’s objectivity and impartiality. These relationships either triggered non-substantive rule breaches or required potentially time-consuming audit committee review of non-substantive matters, thereby diverting time, attention, and other resources of audit clients, auditors, and audit committees from other investor protection efforts.” According to SEC Chair Jay Clayton, although “far-reaching and restrictive” auditor independence rules are necessary to maintain market confidence—as “even the appearance of inappropriate influence can undermine confidence”—they can still have “unintended, negative consequences” as markets evolve. The changes are designed to address these issues by “more effectively focus[ing] the analysis on relationships and services that may pose threats to an auditor’s objectivity and impartiality.” As noted in the adopting release, both auditors and audit clients “have a shared responsibility to monitor independence,” and it is important to keep in mind that violations of the auditor independence rules can have serious consequences not only for the audit firm, but also for the audit client. For example, an independence violation may cause the auditor to withdraw the firm’s audit report, requiring the audit client to have a re-audit by another audit firm. As a result, in most cases, inquiry into the topic of auditor independence should be a menu item on the audit committee’s plate. The amendments will be effective 180 days after publication in the Federal Register.

ISS proposes voting policy changes for 2021

Last week, ISS released for public comment a number of proposed voting policy changes to be applied for shareholder meetings taking place on or after February 1, 2021. The proposed changes for U.S. companies relate to board racial/ethnic diversity, director accountability for governance failures related to environmental or social issues and shareholder litigation rights, i.e., exclusive forum provisions. Comments may be submitted on the proposals through October 26, 2020.

Cooley Alert: SEC Adopts Amendments to Regulation S-K to Modernize Descriptions of Business, Legal Proceedings and Risk Factors

The SEC’s new amendments to Reg S-K will become effective November 9, 2020. With that in mind, check out this Cooley Alert: SEC Adopts Amendments to Regulation S-K to Modernize Descriptions of Business, Legal Proceedings and Risk Factors. Fascinating story arc that builds to an emotional conclusion!

World Economic Forum and Big Four present new framework for stakeholder capitalism metrics

Back in January, in Davos, the World Economic Forum International Business Council— a group of 120 of the largest businesses—together with the Big Four accounting firms, announced a new initiative “to develop a core set of common metrics to track environmental and social responsibility” and released a draft set of metrics for review and consideration. (See this PubCo post.) Last month, the final results, the IBC Stakeholder Capitalism Metrics, were presented in this whitepaper, “Measuring Stakeholder Capitalism—Towards Common Metrics and Consistent Reporting of Sustainable Value Creation.” The preface to the whitepaper observes that we are “in the midst of the most severe series of challenges the world has experienced since World War Two. The COVID-19 pandemic has exposed the fragility of our global systems. It has exacerbated underlying economic and social inequalities and is unfolding at the same time as a mounting climate crisis…. The private sector has a critical role to play.” The whitepaper is presented in that larger context, as an effort
“to improve the ways that companies measure and demonstrate their contributions towards creating more prosperous, fulfilled societies and a more sustainable relationship with our planet. It also recognizes that companies that hold themselves accountable to their stakeholders and increase transparency will be more viable—and valuable—in the long-term. The culmination of a year’s effort from contributors on every continent, this work defines the essence of stakeholder capitalism: it is the capacity of the private sector to harness the innovative, creative power of individuals and teams to generate long-term value for shareholders, for all members of society and for the planet we share. It is an idea whose time has come.”
Quite a heavy lift. But will the framework be widely adopted?

SEC Commissioner Lee makes her case for diversity and climate disclosure

SEC Commissioner Allison Lee has been speaking up quite a bit recently about diversity and inclusion and about climate change—and not just at SEC open meetings. In her recent dissents in voting on proposals regarding amendments to Reg S-K disclosure requirements related to the descriptions of business, legal proceedings and risk factors (see this PubCo post) and amendments to the SEC’s shareholder proposal rules (see this PubCo post), Lee did not hesitate to express her misgivings about the failure of the first proposal to mandate disclosure regarding diversity and climate change and the anticipated adverse impact of the second proposal on shareholder proposals related to ESG. In recent remarks to the Council of Institutional Investors Fall 2020 Conference, Diversity Matters, Disclosure Works, and the SEC Can Do More, and in this NYT op-ed, Lee reinforces her view that the SEC needs to do more in terms of a specific mandate for diversity and climate disclosure.

Enforcement again targets failure to disclose perks

Failure to disclose perks seems to be a fairly attractive target for SEC Enforcement these days. In another fiscal year-end action, Enforcement has charged Hilton Worldwide Holdings Inc. with failure to disclose in its proxy statements various perks and personal benefits provided to its executive officers. This action has the distinction of being the result of the staff’s use of risk-based data analytics to uncover potential violations related to corporate perks. The case serves as a reminder that the analysis of whether a benefit is a disclosable perk can be complicated and is not the same as the “business purpose” test used for tax purposes.

SEC charges HP with failure to disclose known trends and uncertainties

Enforcement has certainly been busy at the end of the SEC’s fiscal year, with disclosure violations receiving their fair of attention. In this action against HP Inc., the company was charged with failing to disclose known trends and uncertainties regarding the impact of sales and inventory practices, as well as failure to maintain adequate disclosure controls and procedures. HP was ordered to pay a penalty of $6 million.

SEC adopts amendments to the shareholder proposal rules (UPDATED)

[This post revises and updates my earlier post primarily to reflect the contents of the adopting release.]
At an open meeting last week, the SEC voted (once again, three to two) to adopt highly controversial amendments to the requirements for submission of shareholder proposals in Rule 14a-8. According to the adopting release, the final amendments are intended to “modernize and enhance the efficiency and integrity of the shareholder-proposal process for the benefit of all shareholders.” The final amendments modify the eligibility criteria for submission of proposals, as well as the resubmission thresholds; provide that a person may submit only one proposal per meeting, whether as a shareholder or acting as a representative; prohibit aggregation of holdings for purposes of satisfying the ownership thresholds; facilitate engagement with the proponent; and update other procedural requirements. Notably, the submission threshold has not been amended since 1998, and the resubmission threshold since 1954. The rulemaking generated an energetic—some might say heated—discussion among the Commissioners in the course of the long meeting, as well as substantial pushback through the public comment process, discussed in more detail in this PubCo post and this PubCo post.

NYSE again extends temporary waiver of shareholder approval requirements for certain equity issuances

In early April, the SEC approved and declared immediately effective an NYSE rule change to waive, through June 30, 2020 and subject to compliance with conditions, application of certain of the shareholder approval requirements in Section 312.03 of the NYSE Listed Company Manual. That waiver was extended through September 30. Now, the SEC has proposed to extend the waiver through December 31, 2020, and the SEC has declared the proposal immediately effective.

A couple of quick items regarding IPO alternatives

Here are two quick items regarding popular IPO alternatives, SPACs (special purpose acquisition corporations) and primary direct listings.