Category: Securities
World Economic Forum and Big Four propose new sustainability reporting framework
Last week, the NYT, reporting from Davos, said that the “business titans” at the annual World Economic Forum seemed to show a “newfound enthusiasm” for the cause of climate change, rallying “around a consensus that accelerating global temperatures pose a significant risk to society—and to business. Missing, though, was a clear answer to the question of what exactly they would do about it and how quickly. ‘It’s an increase in rhetoric, absolutely,’ said one commentator, ‘Will we see a walking of the talking? The jury is out.’” One way that a group of some of the largest businesses at Davos, together with the Big Four accounting firms, have been trying to “walk the talking” is through an effort “to develop a core set of common metrics to track environmental and social responsibility.” Is it just virtue-signaling or will the effort toward creation of new metrics make a difference?
Corp Fin posts new CDIs on omission from MD&A of earliest year discussion
You might recall that in the FAST Act Modernization and Simplification of Regulation S-K, adopted last year, the SEC amended Item 303 of Reg S-K to provide that, where a company includes in the filing financial statements covering three years, the company may omit “discussion about the earliest of the three years…if such discussion was already included in the registrant’s prior filings on EDGAR…, provided that registrants electing not to include a discussion of the earliest year must include a statement that identifies the location in the prior filing where the omitted discussion may be found.” (See this PubCo post.) Notably, there was no specific condition in the new amendment that discussion of the earliest year not be material, although MD&A continued to be subject to an overarching materiality analysis. Corp Fin has now issued three new CDIs that address omission of the earliest year, summarized below.
SEC’s Investor Advisory Committee critical of SEC proposals on proxy advisory firms and shareholder proposals
At a meeting on Friday of the SEC’s Investor Advisory Committee, the Committee members voted (ten in favor, five opposed, with two abstentions) to submit to the SEC a recommendation regarding SEC guidance and rule proposals on proxy advisory firms and shareholder proposals. The recommendation is highly critical of the guidance and of both proposals as unlikely to reliably achieve the SEC’s own stated goals, ultimately advising the SEC to rethink and republish the proposals and reconsider its guidance. (Apparently, the initial draft of the recommendations was even more of a scold, as the author, John Coates, indicated to the Committee that the current version reflected substantial revisions, including removing the word “failure” throughout.) The recommendation contends that the proposals and guidance are almost futile without addressing in parallel more basic proxy plumbing issues (as the Committee had previously recommended) (see this PubCo post), that none of the SEC’s actions at issue adequately identifies the underlying problems that are intended to be remedied, provides a sufficient cost/benefit analysis or discusses reasonable alternatives that might have been proposed. SEC advisory committees typically have a fair amount of sway, so time will tell whether the recommendation will lead the SEC to do any revamping of its actions.
McKinsey looks at socioeconomic impact of climate risk
If you need a good scare, take a look at this study on climate risk from consultant McKinsey. The study was the result of a year’s effort to measure the potential socioeconomic impact of climate change. As the risk of acute and chronic hazards intensifies, McKinsey assessed physical risk, looking at nine examples to illustrate the potential impact. Could this study focusing on socioeconomic impact have been one of factors driving BlackRock CEO Laurence Fink to put sustainability at the center of BlackRock’s investment strategy? (See this PubCo post.) According to the WSJ, “[c]limate crises in the next 30 years may resemble financial crises in recent decades: potentially quite destructive, largely unpredictable and, given the powerful underlying causes, inevitable. Climate has muscled to the top of business worries….Yet worrying about it isn’t the same as doing something about it.” McKinsey suggests that climate change will “need to feature as a major factor in decisions. For companies, this will mean taking climate considerations into account when looking at capital allocation, development of products or services, and supply chain management, among others.” As the study asks, “could climate become the weak link in your supply chain?” The study makes plain that companies will need to think carefully about climate risk and its “knock-on effects” in considering, planning for and describing for investors the risks of their businesses. McKinsey also provides some questions for companies to consider in that regard.
In overwhelming bipartisan vote, House passes bill to address the 8-K trading gap
In 2015, an academic study, reported in the WSJ, showed that corporate insiders consistently beat the market in their companies’ shares in the four days preceding 8-K filings, the period that the researchers called the “8-K trading gap.” The study also showed that, when insiders engaged in open market purchases—relatively unusual transactions for insiders—during that trading gap, insiders “are correct about the directional impact of the 8-K filing more often than not—and that the probability that this finding is the product of random chance is virtually zero.” The WSJ article reported that, after reviewing the study, Representative Carolyn Maloney, D.N.Y., a member of the House Financial Services Committee, characterized the results as “troubling” and said she was preparing legislation to address the issue. Five years later, in January 2020, by a vote of 384 to 7, the House has passed HR 4335, the “8-K Trading Gap Act of 2019.” A substantially similar bill has been introduced in the Senate. Given the remarkably bipartisan vote in the House—and assuming that the legislation isn’t suddenly tinged with politics—the bill appears likely to pass in the Senate as well…sometime.
Will the Delaware Supreme Court revive exclusive federal forum provisions for ’33 Act claims?
Yesterday, the Delaware Supreme Court heard the appeal in Sciabacucchi v. Salzberg (pronounced Shabacookie!) in which the Chancery Court held invalid exclusive federal forum provisions for ’33 Act litigation in the charters of three Delaware companies. Few of the justices revealed their inclinations, so it’s difficult to predict the outcome. We’ll have to wait for the Court’s final decision.
Trends and practices in director engagement with shareholders
In this article, representatives of The Conference Board and Rutgers Law School discuss the current phenomenon of director engagement with shareholders. While company managements have long engaged with shareholders at annual meetings and investor presentations, the notion of director engagement with shareholders is a more recent development. Why is shareholder engagement increasingly being added to the job description of the corporate director? The article posits several theories for the trend and, based on a survey of corporate secretaries, general counsel and investor relations officers at public companies, identifies the most common engagement topics, provides data on frequency of engagement and highlights emerging practices related to director engagement.
New Statement on Key Reminders for Audit Committees
Yesterday, SEC Chair Jay Clayton, SEC Chief Accountant Sagar Teotia and Corp Fin Director William Hinman posted a “Statement on Role of Audit Committees in Financial Reporting and Key Reminders Regarding Oversight Responsibilities.” As the year draws to a close, given the vital role of audit committees in the financial reporting system, the Statement is intended to provide “observations and reminders on a number of potential areas of focus for audit committees. Issuers and independent auditors also should be mindful of these considerations with an eye toward ensuring that audit committees have the resources and support they need to fulfill their obligations.”
Happy New Year Everyone!
SEC proposes to amend auditor independence rules
Recently, SEC Chief Accountant Sagar Teotia hinted at possible forthcoming changes to the auditor independence rules, remarking that, in connection with the recent changes related to lending relationships, the SEC “also received comments on other aspects of auditor independence rules. In conjunction with that feedback, the Chairman directed the staff to formulate recommendations to the Commission for possible additional changes to the auditor independence rules for potential rulemaking.” However, the nature of the potential changes remained something of a mystery. The proposal to amend the auditor independence rules has now been released. According to the press release issued today, the proposal is intended to modernize aspects of the independence rules to minimize the potential for “relationships and services that would not pose threats to an auditor’s objectivity and impartiality [to] trigger non-substantive rule breaches or potentially time consuming audit committee review of non-substantive matters.” It is important to keep in mind that violations of the auditor independence rules can have serious consequences not only for the audit firm, but also for the audit client. For example, an independence violation may cause the auditor to withdraw its audit report, requiring the audit client to have a re-audit by another audit firm. As a result, in most cases, inquiry into the topic of auditor independence should be a menu item on the audit committee’s plate. The comment period will be open for 60 days.
A female majority at the SEC?
Reuters is reporting that the next SEC Commissioner will be Caroline Crenshaw, who is expected to be the Democratic nominee to fill the spot currently held by Robert Jackson. He is expected to leave the SEC next year.
Happy holidays everyone!
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