Category: Securities
SEC to reconsider rules and guidance regarding proxy advisory firms
Whether and how to regulate proxy advisory firms, such as ISS and Glass Lewis, has long been a contentious issue, with some arguing that their vote recommendations were plagued by conflicts of interest and often erroneous, while others saw no reason for regulation given that the clients of these firms were satisfied with their services. In September 2019, the SEC published in the Federal Register a new interpretation and guidance directed at proxy advisory firms confirming that their vote recommendations were considered to be “solicitations” under the proxy rules and subject to the anti-fraud provisions, and providing some “suggestions” about disclosures that would help avoid liability. (See this PubCo post.) In July 2020, the SEC adopted new amendments to the proxy rules regarding proxy advisory firms, codifying the SEC’s interpretation that made proxy voting advice subject to the proxy solicitation rules. In addition, the SEC adopted two new conditions to the exemptions from those rules for proxy advisory firms, which required disclosure of conflicts of interest and adoption of principles-based policies to make proxy voting advice available to the subject companies and to notify clients of company responses. Compliance with the new conditions was not required prior to December 1, 2021. (See this PubCo post). Yesterday, SEC Chair Gary Gensler directed the staff to consider whether to recommend further regulatory action regarding proxy voting advice. In his statement, Gensler highlighted his direction that the staff consider “whether to recommend that the Commission revisit its 2020 codification of the definition of solicitation as encompassing proxy voting advice, the 2019 Interpretation and Guidance regarding that definition, and the conditions on exemptions from the information and filing requirements in the 2020 Rule Amendments, among other matters.” As a result, Corp Fin issued a Statement indicating that “it will not recommend enforcement action to the Commission based on the 2019 Interpretation and Guidance or the 2020 Rule Amendments during the period in which the Commission is considering further regulatory action in this area.” What approach will the SEC now take to proxy advisory firm regulation?
The House hears about SPACs
Congress now seems to be all over this SPAC phenomenon. Last week a subcommittee of the House Financial Services Committee held a hearing on “Going Public: SPACs, Direct Listings, Public Offerings, and the Need for Investor Protections.” What is the headline from the hearing? All the witnesses agreed that, to prevent regulatory arbitrage, all IPO vehicles, whether traditional IPOs or SPACs, should operate on a level playing field and be subject to the same type of regulation of disclosure and liability. Many House members also took the opportunity to promote their own proposed or pending legislation about the capital markets, and several House members offered their recommendations for a happy marriage. At a separate hearing, SEC Chair Gary Gensler gave testimony before a different subcommittee, which in part addressed SPACs. Is some kind of Congressional action in the offing?
SEC Commissioner Lee dispels myths about materiality
Earlier this week, SEC Commissioner Allison Lee delivered keynote remarks at the 2021 ESG Disclosure Priorities Event hosted by the AICPA, the Chartered Institute of Management Accountants, SASB and the Center for Audit Quality. Her topic: “Myths and Misconceptions about ‘Materiality.’” In the context of the discussion about potential mandatory ESG disclosures, Lee observed, there has been a lot of attention to the concept of materiality, which is fundamental to our securities laws. The public company disclosure system “is generally oriented around providing information that is important to reasonable investors,” and “the viewpoint of the reasonable investor is the lens through which we all are meant to operate.” Since investors are the ones who make the investment choices, “investors are also the ones who decide what information they need to make those choices.” But, in the course of the ongoing discourse about ESG, Lee has found that a number of myths have proliferated about the role and meaning of materiality; her purpose in these remarks is to dissect and dispel those myths, which she believes have hampered the “important debate on how best to craft a rule proposal on climate and ESG risks and opportunities.”
Why event-driven securities litigation has become a thing—and a lucrative one too
If Matt Levine has a mantra in his “Money Stuff” column on Bloomberg, it’s this: everything is securities fraud. “You know the basic idea,” he often says in his most acerbic voice,
“A company does something bad, or something bad happens to it. Its stock price goes down, because of the bad thing. Shareholders sue: Doing the bad thing and not immediately telling shareholders about it, the shareholders say, is securities fraud. Even if the company does immediately tell shareholders about the bad thing, which is not particularly common, the shareholders might sue, claiming that the company failed to disclose the conditions and vulnerabilities that allowed the bad thing to happen. And so contributing to global warming is securities fraud, and sexual harassment by executives is securities fraud, and customer data breaches are securities fraud, and mistreating killer whales is securities fraud, and whatever else you’ve got. Securities fraud is a universal regulatory regime; anything bad that is done by or happens to a public company is also securities fraud, and it is often easier to punish the bad thing as securities fraud than it is to regulate it directly.” (Money Stuff, 6/26/19)
(See this PubCo post.) But should everything really be securities fraud? An interesting new paper examines the phenomenon.
White House issues Executive Order on climate
The White House has issued an Executive Order expressing its policy “to advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk… including both physical and transition risks.” The EO states that the “intensifying impacts of climate change present physical risk to assets, publicly traded securities, private investments, and companies—such as increased extreme weather risk leading to supply chain disruptions. In addition, the global shift away from carbon-intensive energy sources and industrial processes presents transition risk to many companies, communities, and workers. At the same time, this global shift presents generational opportunities to enhance U.S. competitiveness and economic growth, while also creating well-paying job opportunities for workers.”
House passes Insider Trading Prohibition Act—will it pass the Senate?
On Tuesday, the Insider Trading Prohibition Act passed the house by a pretty big bipartisan majority—350 to 75. Currently, there is no explicit statutory prohibition on insider trading and prosecutors have relied on general fraud statutes to pursue charges. The bill would add to the Exchange Act a new Section 16A that would define insider trading and make it illegal. In an interview with Reuters, the bill’s sponsor, Jim Himes, said that “the legislation does not expand insider trading law but simpli?es and codi?es the law as articulated by courts through decades of opinions.” A version of the bill passed the House in 2019 by an even stronger vote, but never made it through the Republican-led Senate. No,w with Democrats in charge, will the bill be passed and signed into law?
Is there a resurgence in the use of non-GAAP financial measures?
In 2016 and early 2017, the SEC made a big push—through a series of staff oral admonitions and written guidance, as well as an enforcement action—to require issuers to be more transparent and more consistent in the use of non-GAAP financial measures and to avoid altogether non-GAAP measures that were misleading. In May 2016, the Corp Fin chief accountant, as reported in CFO.com, cautioned companies in neon lights that, with regard to non-GAAP financial measures, “[f]or lack of a better way to say it, we are going to crack down.” (See, e.g., this PubCo post and this PubCo post.) By early 2017, the SEC staff were apparently sufficiently satisfied (see this PubCo post) with the responses to their campaign that the pendulum swung back, and the relentless finger-wagging by the staff about non-GAAP financial measures appeared to have tailed off. (See this PubCo post.) And, according to this analysis from Audit Analytics, in 2018, SEC staff comments regarding non-GAAP financial measures actually began to decline. But, MarketWatch has reported, with the onset of COVID-19, there seems to have been something of a resurgence in the use of non-GAAP measures. Will we see another crackdown?
Acting Corp Fin Director Coates says ESG disclosure requirements “overdue”
As reported by Bloomberg, Acting Corp Fin Director John Coates told a webinar audience that mandatory ESG disclosures were “overdue,” and that the SEC was moving quickly on related rulemaking. In the webinar, sponsored by NYU’s Institute of Accounting Research and the Institute for Corporate Governance & Finance, Coates said that he expects the SEC to soon be in a position to review and consider staff proposals for mandatory prescriptive rules on ESG addressing both general and industry-specific requirements. These actions are expected to be the SEC’s most significant action on climate since the 2010 guidance. (See this PubCo post.)
BlackRock uses its voting power to support environmental and social issues
The outside pressure has been on. As reported by Bloomberg, “[e]nvironmental advocates in cities including New York, Miami, San Francisco, London and Zurich targeted BlackRock for a wave of protests in mid-April, holding up images of giant eyeballs to signal that ‘all eyes’ were on BlackRock’s voting decisions.” Of course, protests outside of the company’s offices by climate activists are nothing new. But why this pressure on BlackRock? BlackRock and its CEO, Laurence Fink, have played an outsized role in promoting corporate sustainability and social responsibility, announcing, in 2020, a number of initiatives designed to put “sustainability at the center of [BlackRock’s] investment approach.” (See this PubCo post.) Yet, BlackRock has historically conducted extensive engagement with companies and, in the end, voted with management much more often than activists preferred; for example, in the first quarter of 2020, the company supported less than 10% of environmental and social shareholder proposals and opposed three environmental proposals. As a result, as reflected in press reports like this one in the NYT, activists have reacted to the appearance of stark inconsistencies between the company’s advocacy positions and its proxy voting record. Even a group of Democratic Senators highlighted that inconsistency in this October 2020 letter, characterizing the company’s voting record on climate issues as “troubling and inconsistent.” But that impression may be about to change. In an interview with Reuters, BlackRock’s global head of investment stewardship since 2020 revealed that the company is “‘accelerating the pace of our stewardship activities; resulting in more engagement and more voting, reflecting heightened expectations, which … are just a function of the urgency of some of the issues.’” Indeed, in the first quarter of 2021, BlackRock supported 12 of 16 environmental and social shareholder proposals.
SEC to scrutinize company accounting for impact of climate
In February, then-Acting SEC Chair Allison Lee directed the staff of Corp Fin, in connection with the disclosure review process, to “enhance its focus on climate-related disclosure in public company filings,” starting with the extent to which public companies address the topics identified in the interpretive guidance the staff issued regarding climate change in 2010. (See this PubCo post.) In March, the SEC announced the creation of a new Climate and ESG Task Force in the Division of Enforcement. (See this PubCo post.) How else does this new ESG focus play out? On Wednesday, Bloomberg reported, Lindsay McCord, Corp Fin Chief Accountant, in remarks to the Baruch College spring financial reporting conference, said that the SEC staff are also “scrutinizing how public companies account for climate-related risks and impacts to their business based on existing accounting rules.” So, in addition to refreshing their understandings of the 2010 guidance, companies will also need to take a hard look at the how environmental issues could affect their financials.
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