Category: Securities
What were the major trends of the 2024 proxy season on ESG shareholder proposals?
This article from Morningstar published on the Harvard Law School Forum on Corporate Governance examines three major trends of the 2024 proxy season regarding environmental, social and governance shareholder proposals. The author, the Director of Investment Stewardship Research at Morningstar, reports that, while the number of ESG-related proposals increased, there was a “twist in the tale”: the increase primarily reflected a jump in anti-ESG proposals. Although support for ESG proposals on the whole was relatively flat at 23%, Morningstar found a “rebound in support for governance-focused proposals,” offsetting a decline in support for E&S proposals.
SEC approves Nasdaq corporate governance rule changes
In May, Nasdaq proposed to revise some of its corporate governance rules—specifically Rules 5605, 5615 and 5810—to modify the phase-in schedules for the independent director and committee requirements in connection with a slew of different circumstances: IPOs, spin-offs and carve-outs, companies emerging from bankruptcy, companies ceasing to qualify as Foreign Private Issuers, companies ceasing to be controlled companies, companies transferring from other national securities exchanges, and companies listing securities that were, immediately prior to listing, registered pursuant to Section 12(g) of the Act. In addition, Nasdaq proposed to codify or amend its practices regarding the applicability of certain cure periods. Many of the changes proposed by Nasdaq were similar to rules that had previously been approved for the NYSE. There were apparently no comments received on the proposal, even after the SEC designated a longer time period for approval. On Monday, the SEC approved Nasdaq’s proposal.
Are companies getting the clawback checkboxes right?
As you know, in 2022, the SEC adopted a new clawback rule, Exchange Act Rule 10D-1, which directed 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. Under the rules, the clawback policy had to provide that, in the event the listed issuer was required to prepare an accounting restatement—including not just “reissuance,” or “Big R,” restatements, but also “revision” or “little r” restatements—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. The recovery policy had to apply to incentive compensation received during the three completed fiscal years immediately preceding the date that the company was required to prepare a restatement. (See this PubCo post.) The clawback rules added a requirement to include new checkboxes on the cover pages of Form 10-K, Form 20-F and Form 40-F to indicate separately (a) whether the financial statements of the issuer included in the filing reflect correction of errors to previously issued financial statements, and (b) whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the issuer’s executive officers during the relevant recovery period. (See this PubCo post.) It’s worth noting here that the first box, which applies to correction of any errors in the financial statements filed, is broader in scope than the second, which applies if the restatements needed a potential clawback analysis, even if no actual recovery was required. Apparently, there hasn’t been much action for the second box. In this article, Bloomberg reports on a study by research firm Nonlinear Analytics LLC, which showed that of “the 205 companies that reported accounting corrections in their annual financial statements so far this year, just 29—less than 15%—said they reviewed the error to see if they needed to force a compensation clawback,” i.e., reported that they performed a potential recovery analysis. And, only two of the companies that performed an analysis ended up clawing back any executive bonuses.
What’s the impact of political spending from corporate treasuries?
This new report, Corporate Underwriters: Where the Rubber Hits the Road, from the nonpartisan Center for Political Accountability, examines “the scope of corporate political spending and its impact on state and national politics and policy” by taking a deeper dive into six highly influential “527” organizations. Who supports them and what is their impact? In particular, what is their impact on a state level—now viewed by many as a new “seat of power” for a number of key issues of the day, from reproductive healthcare rights to voting rights to the rules surrounding vote tabulation and certification of elections. According to the report, since 2010, more than $1 billion has been donated from the corporate treasuries of major U.S. companies and their trade associations to these six 527s, characterized in the report as “powerful but often overlooked political organizations that have funded the elections of state government officials across the country. These elections have reshaped policy and politics and, more fundamentally, have had a major impact on our democracy.” The CPA’s vice president of research told Bloomberg that “corporate funding of down-ballot races typically gets significantly less attention than contributions to federal candidates but…that’s changing. State attorneys general, ‘are increasingly more partisan in the way they wield their power on a national stage.’ That can create ‘riskier associations’ for companies that back such organizations.” The report concludes that corporate treasuries are “influential funder[s] of these elections and the dominant source of money for several of these committees. It examines the impact of corporate spending on some of the most controversial issues in the country. This spending poses serious risks to companies’ reputations, their profitability, and to the environment companies need to succeed.” Would adopting a code of political spending help? According to a recent survey, shareholders seem to think so.
SEC increases fee rates for fiscal 2025, which begins October 1, 2024
Yesterday, the SEC announced a fee increase for issuers registering their securities. In fiscal 2025, the fee rates for registration of securities and certain other transactions will be $153.10 per million dollars, up 3.7% from $147.60 per million dollars last year. Notably, the inflation adjustment is not nearly as high as last year— which was an increase from $110.20 per million dollars to $147.60 per million dollars, or 33.9%—kind of a stunner at the time. You might be interested to learn that, according to the Order, the SEC has determined that the “baseline estimate of the aggregate maximum offering price” for fiscal year 2025 is $5,647,140,476,572—kind of a stunning number on its own.
SEC approves new PCAOB proposals
Yesterday, the SEC held an open meeting to consider a number of PCAOB proposals addressing the “general responsibilities of an auditor conducting an audit as well as technology-assisted analysis and contributory liability rule for associated persons.” In his opening remarks, SEC Chair Gary Gensler put this initiative in the historic context of the adoption of SOX in 2002, which led to the establishment of the PCAOB as “an independent watchdog over the audits of public companies and registered broker-dealers and their auditors. The Enron crisis revealed a key problem: the quality of auditing standards. Candidly, the relationships between issuers and auditors, between standard-setters and auditing firms, were too clubby.” Auditing standards were set by the AICPA, which meant that, in effect, the “profession was writing its own rules. That’s an inherent conflict. To correct course, the PCAOB was tasked with setting enhanced auditing standards. For practical purposes, Congress permitted the newly established PCAOB to carry over existing AICPA standards on an interim basis. The expectation was that the Board would produce a more appropriate set of standards going forward.” Although these standards “were already decades-old when the Board adopted them in 2003,” before now, the PCAOB had adopted only seven new standards—“42 of these 49 so-called ‘interim standards’ remained in public company audit practice.” Yesterday, the SEC approved a proposed rule amendment and two proposals for new and updated audit standards adopted by the PCAOB: an amendment to PCAOB Rule 3502 governing contributory liability (approved three to two); AS 1000, regarding the general responsibilities of the auditor in conducting an audit (approved unanimously), and AS 1105 and AS 2301, amendments related to aspects of designing and performing audit procedures that involve technology-assisted analysis of information in electronic form (approved unanimously). According to the press release, Gensler said that he was “pleased that the PCAOB is fulfilling its obligations under the Sarbanes-Oxley Act by updating its standards and rules regarding the practice of auditing….I’m proud to support the PCAOB’s proposed changes to instill greater trust among investors and issuers in our markets.”
SEC charges Icahn and publicly traded partnership with failure to disclose pledged securities
Here’s a reminder for all of us about the need to disclose securities pledged as collateral for margin loans—a reminder that comes at the expense of Carl Icahn and his affiliated master limited partnership, Icahn Enterprises L.P. In these Orders, the SEC disclosed settled charges against Icahn and IEP for failure to “disclose information relating to Icahn’s pledges of IEP securities as collateral to secure personal margin loans worth billions of dollars under agreements with various lenders.” According to the Chief of SEC Enforcement’s Complex Financial Instruments Unit, the “federal securities laws imposed independent disclosure obligations on both Icahn and IEP. These disclosures would have revealed that Icahn pledged over half of IEP’s outstanding shares at any given time….Due to both disclosure failures, existing and prospective investors were deprived of required information.” To settle the charges against them, Icahn and IEP agreed to pay civil penalties of $500,000 and $1.5 million. According to this article in Axios, the loans cost Icahn a lot more than $2 million. See also, these articles from AP, Reuters and CNBC.
SEC charges Ideanomics for misleading revenue guidance
As discussed in this press release, the SEC has announced Orders settling charges against Ideanomics, Inc., its current CEO and former CFO, as well as its former Chair and CEO, for alleged misleading statements about the company’s financial performance between 2017 and 2019. There were multiple alleged fraudulent acts, but featured most prominently was an allegation that the Company and the former Chair/CEO reported 2017 revenue guidance that ended up being well off the mark, “despite numerous known issues indicating that the company would miss this guidance by a wide margin.” The Company later reported 2017 revenues that were less than half of the amount represented to the public in its guidance. According to the Associate Director of Enforcement, as the SEC alleged, “Ideanomics and its executives defrauded investors, including by misstating its financial statements and failing to disclose material information to investors….The investing public must be able to trust the accuracy of a company’s disclosures, and we will hold accountable executives who abuse that trust by engaging in fraud.”
New Cooley Alert: ISS Opens Survey for 2025 Policy Changes; Glass Lewis Seeks Informal Feedback
It’s that time again—ISS and Glass Lewis have launched their annual policy surveys, where they seek your feedback on some of their policies. That makes it just right time to get the scoop from this helpful new Cooley Alert, ISS Opens Survey for 2025 Policy Changes; Glass Lewis Seeks Informal Feedback, from our Compensation and Benefits and Public Companies groups. As discussed in the Alert, both surveys address executive comp issues; separately, ISS “focuses more on shareholder proposal-related policies,” and Glass Lewis asks “numerous questions regarding board oversight and performance, including director accountability.” The Alert suggests that the 2025 amendments “may be relatively low impact,” consistent with the “relatively minor policy amendments from ISS and Glass Lewis in 2024.” Be sure to check out the new Alert!
In litigation over the SEC climate disclosure rules, have petitioners created a strawman?
As soon as the SEC adopted final rules “to enhance and standardize climate-related disclosures by public companies and in public offerings” in March (see this PubCo post, this PubCo post, this PubCo post, and this PubCo post), there was a deluge of litigation—even though, in the final rules, the SEC scaled back significantly on the proposal, putting the kibosh on the controversial mandate for Scope 3 GHG emissions reporting and requiring disclosure of Scope 1 and/or Scope 2 GHG emissions on a phased-in basis only by accelerated and large accelerated filers and only when those emissions are material. Those cases were then consolidated in the Eighth Circuit (see this PubCo post) and, in April, the SEC determined to exercise its discretion to stay the final climate disclosure rules “pending the completion of judicial review of the consolidated Eighth Circuit petitions.” (See this PubCo post.) There are currently nine consolidated cases—with two of the original petitioners, the Sierra Club and the Natural Resources Defense Council, having voluntarily exited the litigation (see this PubCo post), and the National Center for Public Policy Research having filed a petition to join the litigation more recently. (See this PubCo post). In June, petitioners began to submit their briefs (see this PubCo post). Now, the SEC has filed its almost 25,000-word brief in the consolidated case, contending that petitioners have set up a “strawman—challenging reimagined rules that the Commission did not enact and criticizing a rationale that the Commission expressly disclaimed.” More specifically, the SEC’s brief defends its authority to adopt these rules and the reasonableness of its actions and process under the APA and contends that, as compelled commercial (or commercial-like) disclosure, the rules are consistent with the First Amendment.
You must be logged in to post a comment.