Category: Securities
House appropriations bill seeks to hamstring SEC on significant proposals and rules
You might think Congress would be too busy these days—what with a pandemic raging across the U.S., looming economic catastrophe and spiraling unemployment—to worry about the resubmission thresholds for shareholder proposals, but nope, they’re all over it. In the latest version of the appropriations bill passed in the House, known as the ‘‘Defense, Commerce, Justice, Science, Energy and Water Development, Financial Services and General Government, Homeland Security, Labor, Health and Human Services, Education, Transportation, Housing, and Urban Development Appropriations Act, 2021’’ for short, the bill authorizes funding for the SEC, while at the same time, putting the kibosh on various items on the SEC’s Spring RegFlex agenda (see this PubCo post)—and even on regulations that have already been adopted. But whether these provisions survive or are jettisoned in the Senate is another question.
Peirce and Crenshaw confirmed to SEC
Yesterday, the Senate confirmed the nominations of Hester Peirce, for her second term, and Caroline Crenshaw, for her first term, as SEC Commissioners.
Temporary secure file transfer process for electronic submission of supplemental materials and Rule 83 CTRs
In light of ongoing health and safety concerns arising out of the COVID-19 pandemic, Corp Fin has issued a statement regarding implementation of a new temporary secure file transfer process for the electronic submission of supplemental materials under Rule 418 and Rule 12b-4 and of information subject to Rule 83 confidential treatment requests.
How do companies cope with social risk?
How do companies cope with social risk? In “Blindsided by Social Risk—How Do Companies Survive a Storm of Their Own Making?” from the Rock Center for Corporate Governance at Stanford, the authors look at “social risk,” essentially, reputational risk that can impair a company’s social capital and, in some cases, its performance. These risks can arise from a variety of circumstances—a damaging statement or action by a company representative (a CEO, a board member, an employee) that triggers an adverse reaction from customers, employees, regulators or the public; a troubling interaction with a company’s services or a product name considered offensive; a damaging event at a competitor that fuels a broader inquiry across the industry. In these types of cases, “media attention (social or traditional) amplifies the impact, sparking a backlash that extends well beyond the directly affected parties.” Because social risks can be more nebulous and unpredictable than traditional operating or financial risks—and the extent of potential damage more difficult to gauge—companies may find it especially challenging to anticipate, prepare for and guard against them. Yet, the paper asserts, “so called ‘social risk’ can be just as material as any operating, financial, or strategic disruption.” What can companies and boards do to protect against these types of risk events or mitigate their impact?
Corporate political spending and its potential consequences
Has all of the current political unrest and social upheaval had any impact on the drive for political spending disclosure? Apparently so, according to the nonpartisan Center for Political Accountability, which reports in its June newsletter that support for shareholder proposals in favor of political spending disclosure hit record highs this past proxy season. But one risk potentially arising out of political spending is reputational, which could fracture a company’s relationship with its employees, customers and shareholders. As companies and CEOs increasingly offer welcome statements on important social issues such as climate change, healthcare crises and racial injustice, the current heated political climate has heightened sensitivity to any dissonance or conflict between those public statements and the company’s political contributions. When a conflict between action in the form of political spending and publicly announced core values is brought to light, will companies be perceived to be merely virtue-signaling or even hypocritical? To borrow a phrase from asset manager BlackRock, if the public perceives that these companies are not actually doing “the right thing”—even as they may be saying the right thing—will they lose their “social license” to operate? (See this PubCo post.) CPA’s brand new report on Conflicted Consequences explores just such risks.
SEC adopts amendments regarding proxy advisory firms (updated)
This post is a revision of my earlier post, updated to reflect the adopting release for the final rule and the supplemental guidance.
Earlier this week, at a virtual open meeting, the SEC, by a vote of three to one, adopted new amendments to the proxy rules, modified from the original proposal issued in November last year, regarding proxy advisory firms (see this PubCo post). The amendments make proxy voting advice subject to the proxy solicitation rules and condition exemptions from those rules for proxy advisory firms, such as ISS and Glass Lewis, on 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. The amendments also provide two non-exclusive safe harbors designed to satisfy the conditions to the exemptions. The SEC also voted by the same margin to publish new supplementary guidance for investment advisers addressing how advisers should consider company responses in light of the new amendments to the proxy rules. SEC Chair Jay Clayton observed that the final rules and guidance are the product of a 10-year effort—commencing with the SEC’s 2010 Concept Release on the U.S. Proxy System—which has led to “robust discussion” from all market participants. The original proposal issued in November generated substantial comment and criticism, and the SEC took much of it into account in developing the final rule, which now only “encourages” what had been imperative in the proposal—namely that proxy advisors conduct a review and feedback process with issuers.
SEC adopts amendments regarding proxy advisory firms
This morning, at an actual uncancelled open (virtual) meeting, the SEC, by a vote of three to one (I wrote that part before the meeting), adopted new amendments to the proxy rules, modified from the original proposal issued in November last year, regarding proxy advisory firms (see this PubCo post). The amendments make proxy voting advice subject to the proxy solicitation rules and condition exemptions from those rules for proxy advisory firms, such as ISS and Glass Lewis, on 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. The amendments also provide two non-exclusive safe harbors that satisfy the conditions to the exemptions. The SEC also voted by the same margin to publish new supplementary guidance to investment advisers addressing how advisers should consider company responses in light of the new amendments to the proxy rules. SEC Chair Jay Clayton observed that the final rules and guidance are the product of a 10-year effort—commencing with the SEC’s 2010 Concept Release on the U.S. Proxy System—which has led to “robust discussion” from all market participants. The original proposal issued in November generated substantial comment and criticism, and the SEC took much of it into account in developing the final rule, which now encourages what had been imperative in the proposal—namely that proxy advisors conduct a review and feedback process with issuers.
Will the California courts enforce a Delaware exclusive federal forum provision?
In Salzberg v. Sciabacucchi (pronounced Shabacookie), the Delaware Supreme Court unanimously held that charter provisions designating the federal courts as the exclusive forum for ’33 Act claims are “facially valid.” (See this PubCo post.) Given that Sciabacucchi involved a facial challenge, the Court had viewed the question of enforceability as a “separate, subsequent analysis” that depended “on the manner in which it was adopted and the circumstances under which it [is] invoked.” With regard to the question of enforceability of exclusive federal forum provisions if challenged in the courts of other states, the Court said that there were “persuasive arguments,” such as due process and the need for uniformity and predictability, that “could be made to our sister states that a provision in a Delaware corporation’s certificate of incorporation requiring Section 11 claims to be brought in a federal court does not offend principles of horizontal sovereignty,” and should be enforced. But would they be? Following Sciabacucchi, many Delaware companies that did not have FFPs adopted them, and companies with FFPs involved in current ’33 Act litigation tried to enforce them by moving to dismiss state court actions. One such case is currently being fought in California state court involving ’33 Act claims against Dropbox, and, as noted in this column in Reuters, a group of former Delaware jurists and a former SEC Commissioner have filed an amicus brief in support of the company’s effort to enforce the FFP in that case.
Will companies accede to calls for actions to improve racial and ethnic diversity in hiring and promotion? California considers a new mandate for racial/ethnic board diversity
In this excellent NYT article from early June, the author painfully explores the view of many African-American executives that, notwithstanding the public condemnations of racism by many public companies and the “multimillion-dollar pledges to anti-discrimination efforts and programs to support black businesses,” still, many of these companies “have contributed to systemic inequality, targeted the black community with unhealthy products and services, and failed to hire, promote and fairly compensate black men and women. ‘Corporate America has failed black America,” said [the African-American president of the Ford Foundation]. ‘Even after a generation of Ivy League educations and extraordinary talented African-Americans going into corporate America, we seem to have hit a wall.’” In the article, a number of Black executives offer recommendations for actions companies should take to begin to implement the needed systemic transformation. And now, third parties—from proxy advisors to institutional investors to legislators—are taking steps to induce companies to take some of these actions. Will they make a difference?
Petition requests SEC mandate disclosure to help assess climate risk
As you know, there has been a fairly sustained clamor for the SEC to impose a requirement for climate change and sustainability disclosure. For example, in May, the SEC’s Investor Advisory Committee recommended that the SEC “set the framework” for issuers to report on material environmental, social and governance information, concluding that “the time has come for the SEC to address this issue.” (See this PubCo post.) However, SEC Chair Jay Clayton and others at the SEC have been fairly vocal about their reluctance to impose a prescriptive sustainability disclosure requirement beyond principles-based materiality. But what about a narrower request? A mandate for just a single piece of information? This rulemaking petition filed by Impax Asset Management LLC, investment adviser to Pax World Funds, a “specialist asset manager investing in the transition to a more sustainable economy,” requests that the SEC “require that companies identify the specific locations of their significant assets, so that investors, analysts and financial markets can do a better job assessing the physical risks companies face related to climate change.”
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