Category: Securities
Two SEC commissioners: Is the Reg S-K modernization proposal too principles-based? And why no climate change disclosure?
Yesterday, Commissioners Robert Jackson and Allison Lee published a joint statement to encourage public comment about two aspects of the proposal to modernize Reg S-K (see this PubCo post), released on August 8, about which they had some, uh, reservations. They both indicated their support for release of the proposal, particularly its focus on adding “human capital” as a disclosure topic, but—and it’s a significant “but”— they took issue with the proposal’s “shift toward a principles-based approach to disclosure and the absence of the topic of climate risk.”
SEC increases fee rates for fiscal 2020, which begins October 1, 2019
On August 23, the SEC announced that it was raising the fees it charges issuers to register their securities. In fiscal 2020, the fee rates for registration of securities and certain other transactions will be $129.80 per million dollars, up from $121.20 per million dollars last year.
SEC adopts guidance for investment advisers and proxy advisory firms—will it make a difference?
At an open meeting yesterday, the SEC voted (three to two) to publish guidance aimed at addressing some of the long-simmering controversy surrounding the reliance by investment advisers on proxy advisory firms. Do investment advisers rely excessively on proxy advisory firms for voting recommendations? How can they rely on proxy advisory firms and still fulfill their own fiduciary obligations? Are issuers allowed a fair chance to raise concerns about proxy advisory firm recommendations, particularly errors and incomplete or outdated information that forms the basis of a recommendation? Are conflicts of interest sufficiently transparent or addressed? What about the argument expressed by some that proxy advisory firms are essentially faux regulators with too much power and little accountability? (Ok, sorry, that last one didn’t come up.)
Guidance directed at investment advisors, while redolent of earlier non-binding staff guidance, now has the benefit of legal force in light of its adoption by the SEC. The new guidance revisits the extent to which an investment adviser can “outsource” to proxy advisory firms and still fulfill its fiduciary duty to its clients by, as Chair Jay Clayton summed it up, conducting “reasonable due diligence, reasonably identifying and addressing conflicts, and full and fair disclosure.” And the interpretation and guidance directed at proxy advisory firms confirms that their vote recommendations are “solicitations” under the proxy rules and subject to the anti-fraud provisions, and provides some “suggestions” about disclosures that would help avoid liability. The guidance and interpretation will be effective upon publication in the Federal Register.
Corp Fin posts new CDIs on Inline XBRL
Corp Fin has posted some new CDIs on Inline XBRL summarized below:
Investors want more standardized sustainability disclosures
According to this recent study from consulting firm McKinsey, investors want to see a different kind of sustainability reporting. The authors observe that, in light of mounting evidence “that the financial performance of companies corresponds to how well they contend with environmental, social, governance (ESG), and other non-financial matters, more investors are seeking to determine whether executives are running their businesses with such issues in mind.” Although there has been an increase in sustainability reporting, McKinsey’s survey revealed that investors believe that “they cannot readily use companies’ sustainability disclosures to inform investment decisions and advice accurately.” Why not? Because, unlike regular SEC-mandated financial disclosures, ESG disclosures don’t conform to a common set of standards—in fact, they may well conform to any of a dozen major reporting frameworks and many more standards, selected at the discretion of the company. That leaves investors to try to sort things out before they can make any side-by-side comparisons—if that’s even possible. According to McKinsey, investors would really like to see some type of legal mandate around sustainability reporting. The rub is that, ironically, it’s the SEC that isn’t on board with that idea—at least, not yet.
SEC proposes to modernize descriptions of business, legal proceedings and risk factors (UPDATED)
At the end of last week, the SEC voted, without an open meeting, to propose amendments to modernize the descriptions of business, legal proceedings and risk factors in Reg S-K. The proposal is another component of the SEC’s “Disclosure Effectiveness Initiative.” In crafting the proposal, the SEC took into account comments received on the 2016 Concept Release on disclosure simplification and modernization (see this PubCo post), as well as Corp Fin staff experience in review of disclosures. The changes to the rules were proposed “in light of the many changes that have occurred in our capital markets and the domestic and global economy in the more than 30 years since their adoption, including changes in the mix of businesses that participate in our public markets, changes in the way businesses operate, which may affect the relevance of current disclosure requirements, changes in technology (in particular the availability of information), and changes such as inflation that have occurred simply with the passage of time.” There is a 60-day comment period.
SEC proposes amendments to modernize Reg S-K descriptions of business, legal proceedings and risk factors
Although the SEC cancelled the scheduled open meeting (again), it still went ahead and voted to propose amendments to modernize the descriptions of business, legal proceedings and risk factors in Reg S-K. The proposal is another component of the “Disclosure Effectiveness Initiative.” As described in the press release, to enable each business to focus on the matters that are material to that business, the proposed amendments take a more principles-based approach to the business and risk factors disclosure requirements. With regard to legal proceedings, the proposal would “continue the current prescriptive approach because that requirement depends less on the specific characteristics of registrants.” There is a 60-day comment period.
Secret sauce, sausages and cookie jars…
No, it’s not an episode of Top Chef, but it is about “cooking the books.” And those are just some of the ingredients and tools used by Brixmor Property Group, a publicly traded REIT, and four of its executives to do the cooking: manipulation of a key non-GAAP financial measure, according to this SEC complaint and order and, even more to the point, this SDNY criminal indictment of the executives. As alleged, management sought to create the impression that a static pool of its existing properties showed steady and predictable income growth across a number of quarters. In contrast, however, Brixmor’s actual income growth rate was “volatile and frequently fell above or below the company’s publically issued guidance range” for the period. So, according to the order, the company architected the desired illusion—touted as its “secret sauce”—by engaging in some “sausage-making” with regular hits to the “cookie jar.” While it doesn’t sound very appetizing, it did create the desired deception—until, of course, it didn’t. The lesson is that manipulation of a non-GAAP measure, together with violations of GAAP, to mislead the public can be trouble—and perhaps even criminal. Although cases of accounting fraud may not be as common as they once were, this case should serve as a reminder that the SEC and the Justice Department are still on the lookout for it.
Proxy season takeaways from PJT CamberView
In this article, the authors, from advisor PJT CamberView, talk about their takeaways from the 2019 proxy season, which they expect to see as part of the conversation in the fall.
LTSE proposes listing standards to support long-term value creation
As evidenced by Corp Fin’s most recent Roundtable, short-termism is a major concern of SEC officials, both in terms of its potential impact on Main Street investors—who are investing for the long term to fund their retirements and other long-term needs—and its potential to deter companies with a long-term focus from becoming public companies, instead driving them to seek funding in the private markets, where short-termism is less of a factor. (See e.g., this PubCo post and this PubCo post.) As SEC Chair Jay Clayton commented during the Roundtable, with so many companies delaying their IPOs or avoiding them altogether, at the end of the day, he was concerned that, in 10 years, the general public would not be able to participate in 70% of the economy because those companies would be privately held. (See this PubCo post.) Will the Long-Term Stock Exchange, a novel concept for a stock exchange that was approved by the SEC in May (see this PubCo post), come to the rescue?
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