Category: Securities
Political spending transparency from Russell 1000 companies? Not so much
In the wake of the events of January 6, a number of companies, highly sensitized to any misalignment between their political contributions and their public statements or announced core values, determined to suspend or discontinue some or all of their political donations (although many have since resumed business as usual). As social and political unrest and political polarization have continued, demand for disclosure about corporate political spending has increased. In the midst of an unusually fraught mid-term election season, the Center for Political Accountability and the Zicklin Center for Business Ethics Research at the Wharton School of the University of Pennsylvania released their annual CPA-Zicklin Index of Corporate Political Disclosure and Accountability for 2022. The Index annually benchmarks public companies’ disclosure, management and oversight of corporate political spending, and includes specific rankings for companies based on their Index scores, as well as best practice examples of disclosure and other helpful information. (See this PubCo post.) This year, accompanying the Index is a new CPA-Zicklin Model Code of Conduct for Corporate Political Spending, designed to provide a “thorough and ethical framework” for corporate political spending. CPA launched the Index in 2011 following the decision by SCOTUS in Citizens United, benchmarking only the S&P 100. In 2015, it began to benchmark the S&P 500. This year, the Index has expanded its coverage to the Russell 1000. The difference in the levels of transparency between the S&P 500 and the Russell 1000 (excluding companies in the S&P 500) is dramatic.
FASB issues proposed ASU on segment reporting
Last month, the FASB issued a proposed ASU on segment reporting. In its announcement, the FASB explained that investors find segment information to be critically important to understanding a company’s different business activities, as well as its overall performance and potential future cash flows. Although financial statements do provide information about segment revenue and a measure of profit or loss, not much information is disclosed about segment expenses. According to FASB Chair Richard Jones, the “proposed ASU would represent the FASB’s most significant change to segment reporting since 1997….On the basis of our extensive stakeholder outreach, the proposed ASU would provide investors and other allocators of capital with valuable insights into significant segment expenses, expand segment disclosures reported in interim periods, and require disclosures for single-segment entities.”
What happened at the 2022 PLI Securities Regulation Institute?
At the PLI Securities Regulation Institute last week, the plethora of SEC rulemaking took some hits. It wasn’t simply the quantity of SEC rules and proposals, although that was certainly a factor. But the SEC has issued a lot of proposals in the past. Rather, it was the difficulty and complexity of implementation of these new rules and proposals that seemed to have created the concern that affected companies may just be overwhelmed. Former Corp Fin Director Meredith Cross, a co-chair of the program, pronounced the SEC’s climate proposal “outrageously” difficult, complicated and expensive for companies to implement, and those problems, the panel worried, would only be compounded by the adoption of expected new rules in the EU that would be applicable to many US companies and their EU subsidiaries. (See this Cooley Alert.) The panel feared that companies would be bombarded with a broad, complicated and often inconsistent series of climate/ESG disclosure mandates. Single materiality/double materiality anyone? But it wasn’t just the proposed climate disclosure that contributed to the concern. Recent rulemakings or proposals on stock buybacks, pay versus performance and clawbacks were also singled out as especially challenging for companies to put into effect.
If you haven’t already done so, please be sure to vote!
SEC adopts final rules on compensation clawbacks in the event of financial restatements—“Big R” and “little r” [UPDATED]
[This post revises and updates my earlier post primarily to reflect in greater detail the contents of the adopting release. For a discussion of the comments and criticisms of the SEC Commissioners at the open meeting at which the rules were adopted, see my earlier post.]
At an open meeting last week, the SEC adopted, by a vote of—surprise—3 to 2, rules to implement Section 954 of Dodd-Frank, the clawback provision. Clawback rules were initially proposed by the SEC back in 2015, but were relegated to the long-term agenda, until they suddenly reemerged on the SEC’s short-term agenda in 2021 (see this PubCo post) with a target date for a re-proposal of April 2022. Instead of a re-proposal, however, a year ago, the SEC simply posted a notice announcing that it was re-opening the comment period and posing a number of questions for public comment. (See this PubCo post.) One possible change suggested by the SEC’s questions was a potential expansion of the concept of “restatement” to include not only “reissuance,” or “Big R,” restatements (which involve a material error and an 8-K), but also “revision” or “little r” restatements. Then, in June of this year, DERA issued a new staff memorandum addressing in part the restatement question, which led the SEC to once again re-open the comment period. Finally, the SEC concluded that, after more than seven years, the proposal had marinated long enough. Time to serve it up. The new rules direct the national securities exchanges to establish listing standards requiring listed issuers to adopt and comply with a clawback policy and to provide disclosure about the policy and its implementation. The clawback policy must provide that, in the event the listed issuer is required to prepare an accounting restatement—including a “little r” restatement—the issuer must recover the incentive-based compensation that was erroneously paid to its current or former executive officers based on the misstated financial reporting measure. Commissioners Hester Peirce and Mark Uyeda dissented, contending that, among other problems, the rule was too broad and too prescriptive. According to SEC Chair Gary Gensler, the key word here is “erroneously,” that is, the rule requires recovery of compensation to which the officers were never entitled in the first place. In his statement at the meeting, Gensler indicated that he believes “that these rules will strengthen the transparency and quality of corporate financial statements, investor confidence in those statements, and the accountability of corporate executives to investors….Through today’s action and working with the exchanges, we have the opportunity to fulfill Dodd-Frank’s mandate and Congress’s intention to prevent executives from keeping compensation received based on misstated financials.”
Spooktacular Cooley Alert on the new EU rules on ESG and their application to US companies
Trick or treat! Public companies in the US may be haunted by concerns about the breadth and complexity of the SEC’s climate disclosure proposal, but if you are a US company with a presence in the EU, you may have something new to spook you—and it‘s not a ghost. We’re talking about expansive ESG reporting requirements under new EU rules expected to be finalized this fall.
SEC adopts final rules on compensation clawbacks in the event of financial restatements—“Big R” and “little r”
You might remember back to 2015 when the SEC initially proposed rules to implement Section 954 of Dodd-Frank, the clawback provision. The SEC did not then consider adoption of the proposal in the ordinary course, instead relegating it to the long-term agenda, where it was never heard from again. Until, that is, the topic found a spot on the SEC’s short-term agenda in 2021 (see this PubCo post) with a target date for a re-proposal of April 2022. Instead of a re-proposal, however, a year ago, the SEC simply posted a notice announcing that it was re-opening the comment period and posing a number of questions for public comment. (See this PubCo post.) One possible change suggested by the SEC’s questions was a potential expansion of the concept of “restatement” to include not only “reissuance,” or “Big R,” restatements (which involve a material error and an 8-K), but also “revision” or “little r” restatements. Then, in June of this year, DERA issued a new staff memorandum addressing in part the restatement question, which led the SEC to once again re-open the comment period. Finally, the SEC has concluded that, after more than seven years, the proposal has marinated long enough. Time to serve it up. Accordingly, at an open meeting yesterday, the SEC adopted, by a vote of—surprise!—three to two, new rules that direct the national securities exchanges to establish listing standards requiring listed issuers to adopt and comply with a clawback policy and to provide disclosure about the policy and its implementation. The clawback policy must provide that, in the event the listed issuer is required to prepare an accounting restatement—including a “little r” restatement—the issuer must recover the incentive-based compensation that was erroneously paid to its current or former executive officers based on the misstated financial reporting measure. Commissioners Hester Peirce and Mark Uyeda dissented, contending that, among other problems, the rule was too broad and too prescriptive. According to SEC Chair Gary Gensler, the key word here is “erroneously,” that is, the rule requires recovery of compensation to which the officers were never entitled in the first place. In his statement at the meeting, Gensler indicated that he believes “that these rules will strengthen the transparency and quality of corporate financial statements, investor confidence in those statements, and the accountability of corporate executives to investors….Through today’s action and working with the exchanges, we have the opportunity to fulfill Dodd-Frank’s mandate and Congress’s intention to prevent executives from keeping compensation received based on misstated financials.”
SEC’s Small Business Advisory Committee hears glimmers of positive news about the IPO market
Recently, at a meeting of the SEC’s Small Business Advisory Committee, a panel provided an update on the state of play of the IPO market. While IPO activity—traditional IPOs, SPACs and direct listings—was off-the-charts in the second half of 2020 and throughout 2021, geopolitical upheavals, market volatility, inflationary pressure, economic uncertainty and fears of recession have put a dent in the data. Quite a dent—the number of equity capital markets offerings has decreased 73% compared to a year ago, according to one of the panelists. But does that mean the IPO market is broken? Not at all. Despite the recent relatively moribund market, companies are continuing to prepare for IPOs and submit confidential filings to the SEC with the intent of going forward when an opening is in sight. As one of the two panelists observed, “despite the 2022 IPO drought, the pipeline for companies looking to access the public markets at some point in the future remains strong.” According to SEC Chair Gary Gensler’s statement at the meeting, “naturally, the number of IPOs ebbs and flows over the course of different economic and market cycles. We are living in one of those transitional times right now, shaped by economic uncertainty relating to the war in Ukraine, the pandemic, and central banks shifting from an accommodating to a tightening policy stance. What I am most interested in is the advice you might have for the long-term regarding traditional IPOs, Special Purpose Acquisition Companies (SPACs), and direct listings.” And he did hear some of that advice, albeit preliminarily, from the Committee.
Final climate rules are months away, reports Bloomberg
Here’s a big scoop from Bloomberg: the “SEC is months away from finalizing expansive new climate disclosure requirements as the agency juggles investor demands for more transparency, tech glitches and a tough Republican legal threat.” Are you really surprised though? That was a substantial, complex undertaking that elicited thousands of comments and a lot of pressure from opponents and proponents. Then, in July, came another challenge, as SCOTUS handed down West Virginia v EPA, which, although not directly addressing the SEC’s climate proposal, sure seemed to put a bull’s eye on it. (See this PubCo post.) Not to mention the SEC’s technical glitch, which led to a reopening of the comment period for a couple of weeks until November 1. (See this PubCo post.) That alone would have been enough to smoke the October target date set in the most recent SEC agenda. (See this PubCo post.) But what is real timeframe? Well, who knows. According to Bloomberg, SEC Chair Gary “Gensler has declined to give a timeline for finishing the climate regulations in recent public appearances, repeatedly pointing to thousands of comments that still need to be reviewed.” Bloomberg also reports that SEC “officials in private conversations have given no indication they’ll finish the rules this year, according to several people in contact with the agency.”
Are auditors falling down on the job of detecting fraud?
Paul Munter, the SEC’s Acting Chief Accountant, seems to think so. In this Statement, Munter expresses his concern that, in conducting audits, auditors are not adequately making use of the “fraud lens”—a focus on the consideration of fraud in the audit—in fulfilling their gatekeeper role. That is, auditors may not be adequately responding to fraud risks and red flags or otherwise exercising “professional skepticism.” It is critical, he said, that auditors evaluate whether the audit has surfaced information that may be indicative of fraud and “how fraud could be perpetrated or concealed by management.” Are auditors exhibiting a type of bias, focusing risk assessments on risks of error and essentially overlooking or minimizing risks of fraud? In light of Munter’s statement, companies could well find that their auditors may be doubling down on their application of professional skepticism. What’s more, some of Munter’s recommendations may prove useful for companies in establishing their own ethics environments and conducting their own fraud risk assessments.
More heat about comment periods—is it a portent of something more?
SEC Chair Gary Gensler has certainly heard from Republicans with some frequency about proposal comment periods that they consider too abbreviated. The charge is that, under Gensler’s tenure, the time periods allowed for public responses to voluminous and complex proposals—which were initially set at 30 days, and then, in response to complaints, extended for a longer period under a slightly more complex formulation—just don’t leave enough time for public review and comment. (Of course, the not-very-secret secret is that the SEC typically accepts comments submitted well after the deadlines.) SEC Commissioners Hester Peirce and Mark Uyeda, as well as former Commissioner Elad Roisman, have all taken on the issue (see the SideBar below). And it’s not just commissioners that have tackled the comment period issue— Republicans in Congress have also voiced disapproval. Now, as reported by Politico, in a September 13 letter that has recently surfaced, a group of 12 Senate Democrats have joined the chorus. Although the letter is focused on the duration of comment periods, according to Politico, “Senate Democrats are privately urging SEC Chair Gary Gensler to slow work and take more time for feedback on a slew of regulations rattling Wall Street, as tensions surrounding the agency’s Biden-era agenda reach a boiling point.” Are problems with the comment period signaling a larger issue?