What is the SEC’s current end game on proxy advisory firms—guidance or regulation?
The newest SEC Commissioner, Elad Roisman, who has reportedly gotten the nod to head up the SEC’s efforts regarding proxy advisory firms, told the U.S. Chamber of Commerce in late March that he expects the SEC to issue new guidance, sometime after proxy season this year, regarding the use by institutional investors of proxy advisory firm recommendations, as reported in The Deal. And, according to the WSJ, Roisman has “also questioned whether it was appropriate for the SEC to exempt proxy advisers from some regulations on investment advice, including whether they can both advise a company and make recommendations to its shareholders at the same time.” However, as discussed in this PubCo post, the question of whether proxy advisory firms, such as ISS and Glass Lewis, have undue influence over the voting process and should be reined in has long been something of a political donnybrook. With the issue of proxy advisory firm regulation so politically freighted, will the SEC limit the scope of its effort to guidance to institutional investors or, more controversially, go further and impose regulation on proxy advisors, as many companies have advocated?
California’s board gender diversity mandate: will it matter?
As discussed in this article in Bloomberg Businessweek, a new analysis conducted by Bloomberg explores the potential impact of California’s new board gender diversity mandate, SB 826. And what does it show? The impact on the composition of boards could be substantial—perhaps even a “sea change.”
Help is here for audit committees—CAQ offers updated auditor assessment tool
To fulfill their oversight responsibilities, audit committees typically evaluate the outside auditor at least annually to determine, in part, whether the auditor should be engaged for the subsequent fiscal year. The Center for Audit Quality has just published a new updated External Auditor Assessment Tool, which is “designed to assist audit committees in carrying out their responsibilities of appointing, overseeing, and determining compensation for the external auditor.” Beyond oversight, the CAQ observes that a “[r]obust, two-way dialogue that includes providing constructive feedback to the external auditor may improve audit quality and enhance the relationship between the audit committee and the external auditor.” Like many other helpful CAQ tools, this tool provides a number of sample questions to help audit committees satisfy their oversight obligations with regard to the outside auditor. (The discussion below includes only a sampling of the CAQ’s questions provided in the Assessment Tool.) The CAQ also provides a sample form that can be used to solicit input about the outside auditor from company personnel who have had substantial contact with the auditor.
Corp Fin provides guidance on new confidential treatment process, which is effective today
The SEC’s new rules related to confidential treatment (part of FAST Act Modernization and Simplification of Regulation S-K) became effective today, April 2, when the adopting release was published in the Federal Register. With that in mind, Corp Fin has posted some guidance under the very descriptive title, New Rules and Procedures for Exhibits Containing Immaterial, Competitively Harmful Information, to help companies comply with the new confidential treatment process, discussed below. The remainder of the release (other than provisions related to data-tagging, which will be phased in) will become effective on May 2. (For a summary of the new rules, see this PubCo post, which, since the initial posting, has been revised and updated.)
SCOTUS finds primary securities fraud liability for disseminating statements made by others with intent to defraud
Last week, SCOTUS decided Lorenzo v. SEC, a case involving a claim that an investment banker was liable for securities fraud when, at the direction of his boss, he cut, pasted and disseminated to potential investors information that his boss had provided, even though the banker knew the information was false. In a 2011 case, Janus Capital Group, Inc. v. First Derivative Traders, SCOTUS had held that, an “investment adviser who had merely ‘participat[ed] in the drafting of a false statement’ ‘made’ by another could not be held liable in a private action under subsection (b) of Rule10b–5.” (Rule 10b–5(b) prohibits the “mak[ing]” of “any untrue statement of a material fact.”) In Lorenzo, the question before the Court was whether a person who did not “make” statements (that is, who did not have “ultimate authority” over the statements), but who knowingly disseminated false statements to potential investors with intent to defraud, could be found to have violated subsections (a) and (c) of Rule 10b–5. The answer, in an opinion written by Justice Breyer, was yes. Will this case embolden plaintiff’s counsel to push the envelope and assert claims against people who are only peripherally involved in the dissemination of allegedly false information? Time will tell what the ultimate impact of this case may be.
SEC Investor Advisory Committee wants SEC to consider human capital management disclosure — will it happen?
At a meeting today of the SEC’s Investor Advisory Committee, the Committee voted—14 to 6—to recommend that the SEC consider imposing human capital management disclosure requirements as a part of its Disclosure Effectiveness Review and disclosure modernization project. As the vote count suggests, with a significant bloc of votes against, the debate about the recommendation was quite contentious. Now that the recommendation moves to the SEC, the question is: whose views will prevail?
Mandatory arbitration shareholder proposal goes to court—as Chair Clayton suggested
You might remember this no-action letter to Johnson & Johnson granting relief to the company if it relied on Rule 14a-8(i)(2) (violation of law) to exclude a shareholder proposal requesting adoption of mandatory shareholder arbitration bylaws. (See this PubCo post.) In that letter, the staff relied on an opinion from the Attorney General of the State of New Jersey, the state’s chief legal officer, which advised the SEC that the proposal was excludable under Rule 14a-8(i)(2) because “adoption of the proposed bylaw would cause Johnson & Johnson to violate applicable state law.” The issue was so fraught that SEC Chair Jay Clayton felt the need to issue a statement supporting the staff’s hands-off position: “The issue of mandatory arbitration provisions in the bylaws of U.S. publicly-listed companies has garnered a great deal of attention. As I have previously stated, the ability of domestic, publicly-listed companies to require shareholders to arbitrate claims against them arising under the federal securities laws is a complex matter that requires careful consideration,” consideration that would be more appropriate at the Commissioner level than at the staff level. However, mandatory arbitration was not an issue that he was anxious to have the SEC wade into at that time. To be sure, if the parties really wanted a binding answer on the merits, he suggested, they might be well advised to seek a judicial determination. And, you guessed it—Clayton’s words to the proponent’s ears—the proponent filed this complaint on March 21.
SEC approves changes to NYSE shareholder approval rule
On March 20, the SEC approved the 2018 NYSE proposal to amend Sections 312.03 and 312.04 of the NYSE Listed Company Manual, modifying the price requirements for purposes of determining whether shareholder approval is required for certain issuances. As previously noted in this PubCo post, this proposal is remarkably similar to the one that the SEC approved for Nasdaq in 2018 (see this PubCo post), so its approval here was not unexpected. Just like the Nasdaq rule, the NYSE modification:
changes the definition of market value for purposes of the shareholder approval rule to the lower of the closing price and five-day average closing price; and
eliminates the requirement for shareholder approval of issuances at a price less than book value but at least as great as market value.
SEC adopts amendments for FAST Act Modernization and Simplification of Regulation S-K (revised and updated)
Yesterday, once again without an open meeting, the SEC adopted changes to its rules and forms designed to modernize and simplify disclosure requirements. The final amendments, FAST Act Modernization and Simplification of Regulation S-K, which were adopted largely as originally proposed in October 2017 (see this PubCo post), are part of the SEC’s ambitious housekeeping effort, the Disclosure Effectiveness Initiative. (See this PubCo post and this PubCo post.) The amendments are intended to eliminate outdated, repetitive and unnecessary disclosure, lower costs and burdens on companies and improve readability and navigability for investors and other readers. Here is the SEC’s press release.
The final amendments make a number of useful changes, such as eliminating the need to include discussion in MD&A about the earliest of three years of financial statements, permit omission of schedules and attachments from most exhibits, limiting the two-year lookback for material contracts, and streamlining the rules regarding incorporation by reference and other matters. The final amendments also impose some new obligations, such as a requirement to file as an exhibit to Form 10-K a description of the securities registered under Section 12 of the Exchange Act and a requirement to data-tag cover page information and hyperlink to information incorporated by reference. .
Certainly one of the most welcome changes is the SEC’s innovative new approach to confidential treatment, which will allow companies to redact confidential information from exhibits without the need to submit in advance formal confidential treatment requests. This new approach will become effective immediately upon publication of the final amendments in the Federal Register. The remainder of the final amendments will become effective 30 days after publication in the Federal Register, with the exception of new cover page data-tagging requirements, which are subject to a three-year phase-in.
Micromanagement? Significant policy issue? Staff no-action letters address Rule 14a-8(i)(7) exclusion
What seems to be the Rule 14a-8 exclusion du jour? My vote goes to Rule 14a-8(i)(7), the “ordinary business” exclusion—sort of a perpetual home renovation project for the staff. As you may recall, in Staff Legal Bulletins 14H, 14I and 14J issued over the last few years, the staff has addressed the scope and application of the exclusion—specifically the “significant policy exception,” the need for a board analysis, “micromanagement” as a basis for exclusion and the availability of the exclusion in the context of executive comp. (See this PubCo post, this PubCo post and this PubCo post. Some recent no-action letters related to use of the exclusion in connection with executive comp are discussed in this PubCo post.) Some of the staff’s most recent guidance has been viewed to expand the potential for companies to rely on the exclusion, and a slew of letters addressing requests for no-action relief under Rule14a-8(i)(7) has recently been posted. Not surprisingly, many of the proposals address current topics in the news: climate change, sexual harassment and mandatory employee arbitration, allocation of corporate tax savings, and even immigrant detention. As BlackRock CEO Laurence Fink has previously observed, in the face of political dysfunction “and the failure of government to provide lasting solutions, society is increasingly looking to companies, both public and private, to address pressing social and economic issues.” (See this PubCo post.) To provide a flavor of current trends, this post discusses several of these letters below.
You must be logged in to post a comment.