Category: Securities
Under Armour’s failure to disclose order “pull forwards” comes under fire at the SEC
On Monday, the SEC announced settled charges against Under Armour, Inc., a manufacturer of sports apparel, for misleading investors by failing to disclose material information about its “revenue management practices.” According to the Order, Under Armour had established a reputation for consistent revenue growth that exceeded analysts’ consensus estimates. But when internal forecasts began to indicate that it would miss those estimates, the company sought to close the gap by accelerating—“pulling forward”—existing orders that had been scheduled by customers for future quarters. Although this practice continued for six quarters, the SEC charged, the company failed to disclose this pull-forward practice as a driver of its revenue growth nor did it disclose the “known uncertainty” that this practice created with regard to revenues in future quarters. It’s worth noting that the SEC’s charges related solely to disclosure failures; the Order expressly indicated that the SEC did “not make any findings that revenue from these sales was not recorded in accordance with [GAAP].” Under Armour agreed to pay $9 million to settle the action.
Not much data disclosed on human capital, according to new survey
When, in August 2020, the SEC considered adopting a new requirement to discuss human capital as part of an overhaul of Regulation S-K, the debate centered largely on principles-based versus prescriptive regulation—a debate that continues to this day. In that instance, notwithstanding a rulemaking petition and clamor from numerous institutional and other investors for transparency regarding workforce composition, health and safety, living wages and other specifics, the “principles-based” team carried the day; the SEC limited the requirement to a “description of the registrant’s human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).” What was the result? In this new Human Capital Disclosure Report: Learning on the Job, Intelligize took a look at how companies responded to the new disclosure mandate. Its conclusion: most companies made a “sincere effort to fulfill the scantly defined disclosure obligation”; nevertheless, the report contends, companies “capitalized on the fact that the new rule does not call for specific metrics,” as “[r]elatively few issuers provided meaningful numbers about their human capital, even when they had those numbers at hand.”
Is the SEC considering guidance on SPAC projections?
Reuters is reporting—exclusively—that the SEC is contemplating issuing more guidance that would “rein in growth projections” made by listed SPACs and clarify when the PSLRA would be available to protect SPAC projections, “according to three people with knowledge of the discussions.” According to Reuters, the SEC guidance “would escalate its crackdown on the deal frenzy” in SPACs and could exacerbate the slowdown that has already occurred in reaction to the SEC’s previous guidance on SPAC warrants. For 2021 so far, Reuters, citing data from Dealogic, reported the value of de-SPAC transactions at a record $263 billion; however, SPACs raised only $2.5 billion during the first 20 days of April compared to $17 billion raised during the first 20 days of January.
Russia’s treatment of Navalny could have implications for your disclosure obligations
You might recall that the Iran Threat Reduction and Syria Human Rights Act added Section 13(r) to the Exchange Act, which requires public reporting companies that knowingly engaged (directly or through affiliates) in certain transactions or dealings with Iran to report those transactions or dealings in their periodic reports and through separate filings with the SEC. But some sections of the statute are not necessarily limited to Iran. In fact, following the imposition on Russia of sanctions by the State Department in March, those disclosure and filing requirements could apply to dealings with certain Russian agencies and persons.
What role should the exchanges play in encouraging board diversity?
Board diversity and how (and whether) to try to achieve it is a topic that has certainly appeared on a lot of corporate governance agendas in the last few years. Institutional investors have applied pressure on corporations, shareholders have submitted precatory proposals for shareholder votes, investment banks have insisted on diverse boards as preconditions for taking companies public, and California and a number of other states have adopted legislation, whether it be a board diversity mandate, a soft target or simply a disclosure requirement. Most recently, Nasdaq filed with the SEC a proposal for new listing rules regarding board diversity and disclosure, adopting a comply-or-explain approach. According to Nasdaq’s President and CEO, Adena Friedman, “Nasdaq’s purpose is to champion inclusive growth and prosperity to power stronger economies….Our goal with this proposal is to provide a transparent framework for?Nasdaq-listed companies to present their board composition and diversity philosophy effectively to all stakeholders; we believe this listing rule is one step in a broader journey to achieve inclusive representation across corporate America.”? Interestingly, however, the NYSE has not followed suit. In fact, in an interview on Bloomberg TV in December, NYSE President Stacey Cunningham said, when asked about the Nasdaq proposal, that it was not something that they were considering adopting at the NYSE: “When we use exchange listing standards to require things like diversity profiles or others, we’re defining the investable universe…. We just don’t think we should be using our listing standards because that forces our views on investors and prevents them from being able to make the choices that they want to make and that they are making.” In contrast to the SEC, whose remit is largely disclosure, the exchanges regularly impose corporate governance requirements. Should board diversity be one of them?
Can SEC Commissioner Hester Peirce avert adoption of ESG metrics?
It’s widely anticipated that we’ll soon be seeing more action from the SEC on sustainability disclosure, including possibly a prescriptive ESG framework that draws on some global metrics. (See, e.g., this PubCo post and this PubCo post.) Trying to head those prescriptive ESG metrics off at the pass is Commissioner Hester Peirce—yes, she who once described “ESG” as standing for “enabling shareholder graft”—in her statement, Rethinking Global ESG Metrics. With Gary Gensler now sworn in as SEC Chair, the revised composition of the SEC does not bode well for Peirce’s mission. Peirce concludes her statement with the admonition, “[l]et us rethink the path we are taking before it is too late.” But has the train already left that station?
Has universal proxy been resuscitated?
In remarks in March to the Center for American Progress, Acting SEC Chair Allison Lee said that she had asked the staff to consider whether the SEC should “re-open the comment file on the 2016 universal proxy rule proposal to take into account market developments since then and move towards finalization.” Under that proposal, in a contested election, universal proxy cards identifying all the candidates for director on both slates would be required, more closely replicating in-person voting. In Lee’s view, the proposal would be “a common-sense step forward in modernizing our proxy rules and protecting shareholder rights. The proposal has been outstanding for far too long and should be finalized.” (See this PubCo post.) On Friday, the SEC announced that it had voted to reopen the comment period for the universal proxy proposal for 30 days following publication of the reopening release in the Federal Register. According to Corp Fin Acting Director John Coates, “[r]eopening the comment period will allow the public to share additional views on the use of universal proxy cards in director elections, particularly in light of the corporate governance developments that have occurred since the Commission issued its proposal.”
Gensler sworn in
Gary Gensler was sworn in today, Saturday, as a member of the SEC. He was confirmed by the Senate to be the Chair of the SEC on April 14, 2021. According to the SEC’s press release, Gensler said: “I feel incredibly privileged to join the SEC’s team of remarkable public servants….As Chair, every day I will be animated by our mission: protecting investors, facilitating capital formation, and promoting fair, orderly, and efficient markets. It is that mission that has helped make American capital markets the most robust in the world.”
Gensler confirmed as SEC Chair
Today, the Senate, by a vote of 53 to 45, confirmed Gary Gensler as SEC Chair—for a little while anyway. Presumably, he will be sworn in in the next several days. The current SEC Commissioners offered their congratulations here. The pivot from the approach taken by former SEC Chair Jay Clayton on issues such as adoption of standardized mandatory climate disclosure and other ESG disclosure issues could be head-spinning, so stay tuned.
What’s ahead for this proxy season?
Alliance Advisors, a proxy solicitation and corporate advisory firm, has just posted its 2021 Proxy Season Preview, a useful introduction into the major themes of this season—well worth a read. First, and most obviously, there is COVID-19 and its direct and indirect impact. The pandemic is having a significant direct impact this year—not just in necessitating recourse to virtual-only annual meetings again this season—but also in focusing the attention of investors and proxy advisors on “how well corporate leaders navigated the crisis and protected business operations, liquidity and the health and welfare of employees.” But the pandemic has also had a somewhat surprising broader indirect impact. While it was widely anticipated that the challenges of COVID-19 would overwhelm any other concerns, the impact appears to be otherwise, as the pandemic has highlighted our increasingly precarious condition, including the effects of climate change, and intensified our social and economic inequality—all issues that are front and center this season. The Preview predicts that environmental and social proposals “are likely to see stronger levels of support in view of last year’s record 21 majority votes… and more assertive investor policies on diversity, climate change and political spending.”
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