FASB plans to require supply chain financing disclosure beginning next year

For several years, the SEC staff and advisory committees, credit rating agencies, investors, the Big Four accounting firms and other interested parties have been making noise about a popular financing technique called “supply chain financing.” It can be a perfectly useful financing tool in the right hands—companies with healthy balance sheets. But it can also disguise shaky credit situations and allow companies to go deeper into debt, often unbeknownst to investors and analysts, with sometimes disastrous ends. Currently, there are no explicit GAAP disclosure requirements to provide transparency about a company’s use of supply chain financing. That may be why Bloomberg has referred to supply chain financing as “hidden debt.” In December, the FASB announced that it had issued a proposed Accounting Standards Update intended to help investors and others “better consider the effect of supplier finance programs on a buyer’s working capital, liquidity, and cash flows.” The proposed ASU would require the buyer in a supply chain financing program to “disclose sufficient information about the program to allow an investor to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude.” On Wednesday, the FASB finalized the details of the plan and gave the go-ahead to draft the new ASU (which is expected to be available later this year). The new ASU would apply to both public and private companies. Although the final ASU has not yet been issued and is still subject to a final ballot, companies with supply chain financing programs may want to take note of this anticipated new requirement now. According to Bloomberg, there “will be a shorter turnaround than usual for complying with new FASB requirements”; compliance will be required retrospectively for fiscal years beginning after December 15, 2022, i.e., the first quarter of 2023.

SEC cuts key provisions of proxy advisor regulations

[This post revises and updates my earlier post primarily to reflect the contents of the proposing release.]

At an open meeting last week, the SEC voted, three to two, to adopt new amendments to the rules regarding proxy advisory firms, such as ISS and Glass Lewis—which the SEC refers to as proxy voting advice businesses, or “PVABs”—terms that the commissioners seemed to think…hmmm… needed some work. The amendments to the PVAB rules reverse some of the key provisions governing proxy voting advice that were adopted in July 2020 (referred to as the 2020 Final Rules). Those rules had codified the SEC’s interpretation that made proxy voting advice subject to the proxy solicitation rules, but added to the exemptions from those solicitation rules two significant new conditions—one requiring disclosure of conflicts of interest and the second designed to facilitate effective engagement between PVABs and the companies that are the subjects of their advice. (See this PubCo post.) Under the new final amendments as adopted last week, proxy voting advice will still be considered a “solicitation” under the proxy rules and proxy advisory firms will still be subject to the requirement to disclose conflicts of interest; however, the new amendments rescind that second central condition designed to facilitate engagement—which some might characterize as a core element, if not the core element, of the 2020 amendments. The amendments also rescind a note to Rule 14a-9, also adopted as part of the 2020 Final Rules, which provided examples of situations in which the failure to disclose certain information in proxy voting advice may be considered misleading. According to the press release, institutional investors and other clients of proxy advisory firms had “continued to express concerns that these conditions could impose increased compliance costs on proxy voting advice businesses and impair the independence and timeliness of their proxy voting advice.” In his statement, SEC Chair Gary Gensler observed that many investors expressed concerns that “certain conditions in the 2020 rule might restrain independent proxy voting advice. Given those concerns, we have revisited certain conditions and determined that the risks they impose to the independence and timeliness of proxy voting advice are not justified by their informational benefits.”

SEC proposes to narrow three substantive exclusions in the shareholder proposal rule

[This post revises and updates my earlier post on this topic primarily to reflect the contents of the proposing release.]

At an open meeting last week, the SEC voted, three to two, to propose new amendments to Rule 14a-8, the shareholder proposal rule. Under Rule 14a-8, a shareholder proposal must be included in a company’s proxy materials “unless the proposal fails to satisfy any of several specified substantive requirements or the proposal or shareholder-proponent does not satisfy certain eligibility or procedural requirements.” The SEC last amended Rule 14a-8 in 2020 to, among other things, raise the eligibility criteria and resubmission thresholds. The SEC is now proposing to amend three of the substantive exclusions on which companies rely to omit shareholder proposals from their proxy materials: Rule 14a-8(i)(10), the “substantial implementation” exclusion, would be amended to specify that a proposal may be excluded as substantially implemented if “the company has already implemented the essential elements of the proposal.” Rule 14a-8(i)(11), the “substantial duplication” exclusion, would be amended to provide that a shareholder proposal substantially duplicates another proposal previously submitted by another proponent for a vote at the same meeting if it “addresses the same subject matter and seeks the same objective by the same means.” Rule 14a-8(i)(12), the resubmission exclusion, would be amended to provide that a shareholder proposal would constitute a “resubmission”—and therefore could be excluded if, among other things, the proposal did not reach specified minimum vote thresholds—if it “substantially duplicates” a prior proposal by “address[ing] the same subject matter and seek[ing] the same objective by the same means.” The SEC indicates that almost half of the no-action requests the staff received under Rule 14a-8 in 2021 were based on these three exclusions. In his statement, SEC Chair Gary Gensler indicated that the proposed amendments would “improve the shareholder proposal process” by providing “greater certainty as to the circumstances in which companies are able to exclude shareholder proposals from their proxy statements.” In the proposing release, the SEC contends that the amendments “are intended to improve the shareholder proposal process based on modern developments and the staff’s observations” and “would facilitate shareholder suffrage and communication between shareholders and the companies they own, as well as among a company’s shareholders, on important issues.” Notably, however, the two dissenting commissioners seemed to view the proposed changes—even though they stop well short of revamping the 2020 eligibility criteria and resubmission thresholds—as an effort to undo or circumvent the balance achieved by the 2020 amendments without actually modifying those aspects of the rules. For example, new Commissioner Mark Uyeda said that the proposed amendments could “effectively nullify the 2020 amendments to the resubmission exclusion and render this basis almost meaningless.”

SEC cuts key provisions of proxy advisor regulations and proposes amendments to Rule 14a-8: will they create regulatory whiplash?

At an open meeting yesterday morning, the SEC welcomed new Commissioner Mark Uyeda and bid farewell to Commissioner Allison Herren Lee.  The SEC also voted to adopt new amendments to the rules regarding proxy advisory firms, such as ISS and Glass Lewis—which the SEC refers to as proxy voting advice businesses, or “PVABs”—and to propose new amendments to three of the exclusions in Rule 14a-8, the shareholder proposal rule. The amendments to the PVAB rules reverse some of the key provisions governing proxy voting advice that were adopted in July 2020. In his statement, SEC Chair Gary Gensler observed that many investors expressed concerns that “certain conditions in the 2020 rule might restrain independent proxy voting advice. Given those concerns, we have revisited certain conditions and determined that the risks they impose to the independence and timeliness of proxy voting advice are not justified by their informational benefits.” With regard to the shareholder proposal rule, according to the press release, the proposed amendments were designed to “promote more consistency and predictability in application.” In his statement, Gensler indicated that the proposed amendments would “improve the shareholder proposal process” by providing “greater certainty as to the circumstances in which companies are able to exclude shareholder proposals from their proxy statements.” Both of the SEC’s actions received three-to-two votes—about the only consensus reached in the meeting was that the term “proxy voting advice businesses” and its acronym “PVABs” were clumsy choices. Interestingly, in the case of both of these actions taken by the SEC, amendments to these same rules were adopted in 2020. From the Democratic commissioners’ perspective, these new amendments were intended to clarify and strike a better balance in response to public comments and staff experience, while from the perspective of the Republican commissioners, the amendments ensured only “regulatory whiplash” from the “regulatory seesaw.” 

Have we made much progress on board racial and ethnic diversity?

After the murder of George Floyd in 2020 and the national protests that it triggered, many of the country’s largest corporations expressed solidarity and pledged support for racial justice and racial and ethnic diversity, equity and inclusion. Some institutional investors also beefed up their proxy voting policies, demanding both greater transparency and more racial and ethnic diversity. One place that companies looked to implement their commitments to DEI was at the board level. Now, about two years after that horrific event, how much progress have companies made? Using the end of proxy season in 2020 as a starting point, ISS has some recent data. ISS concludes that, while substantial progress has been made in board racial and ethnic diversity, “many boards still do not reflect the diversity of their customer base or the demographics of the broader society in which they operate.”

What happened with shareholder proposals for political spending in the 2022 proxy season?

What happened with shareholder proposals for political spending and lobbying in the 2022 proxy season? In these two articles, ISS Corporate Solutions provides us with an update on shareholder proposals for political contributions and lobbying disclosures submitted for the 2022 proxy season. According to ISS, many shareholder proposals addressing political spending and lobbying reflected investor concerns that support of certain candidates and causes or certain lobbying activities may be inconsistent with the stated values or public positions of the company. Drilling down, we also look at more specific data from the Center for Political Accountability regarding shareholder proposals for election spending submitted by its proposal partners for the 2022 proxy season, as well as a preview of what’s on the agenda from CPA for next proxy season.

SEC Acting Chief Accountant cautions again about auditor independence concerns, especially the “checklist compliance mentality”

Auditor independence—or rather the potential absence of same—is apparently still a cause of significant agita at the SEC’s Office of Chief Accountant.   In October last year, Acting Chief Accountant Paul Munter issued a statement regarding the importance of auditor independence—a concept that is “foundational to the credibility of the financial statements.” That statement was prompted largely by the trend at that time toward the use of “new and innovative transactions” to access the public markets, such as SPACs, together with the potential effect on independence of increasingly complex tangles of business relationships among audit firms, audit clients and non-audit clients. (See this PubCo post.)  But that caution seems not to have been enough to slay the dragon. In this June statement, Munter again addresses auditor independence. The SEC, he observes, “has long-recognized that audits by professional, objective, and skilled accountants that are independent of their audit clients contribute to both investor protection and investor confidence in the financial statements.” This time, Munter focuses his statement on the critical importance of the general standard of auditor independence and recurring issues in recent auditor independence consultations.  He also addresses the value of firms’ treating accounting as a profession, one that fosters “a culture of ethical behavior in all their professional activities, but especially with respect to auditor independence.” Munter appears to be especially concerned about the “decreased vigilance” and “ethical deterioration” that may arise out of  “checklist compliance mentality,” an unfortunate state of mind he highlights in several contexts. It is important for companies 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 the firm’s 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 certainly be a recurring menu item on the audit committee’s plate.

West Virginia v. EPA: SCOTUS gives its imprimatur to the “major questions” doctrine, shaking up the “administrative state”

West Virginia v EPA, the next-to-final decision handed down by SCOTUS this term, is a significant decision regarding a rule that the EPA said was never even in effect, that it had no intention of enforcing and that it planned to later replace with a new still-to-be-developed rule.  As the NYT phrased it, “it’s a case about a regulation that doesn’t exist.” (Sort of like an episode of Seinfeld—the show about nothing—except that it’s not the least bit funny.) So SCOTUS could have stopped right there, but the Court forged ahead—an indicator by itself—with a decision that is nevertheless shaking up administrative law and the extent of rulemaking authority that federal agencies have—or thought they had.  Its impact will likely be felt, not just at the EPA, but also at many other agencies, including the SEC.  Of course, the  conservative members of the Court have long signaled their desire to rein in the dreaded “administrative state.” (See, for example, the dissent of Chief Justice John Roberts in City of Arlington v. FCC  back in 2013, where he worried that “the danger posed by the growing power of the administrative state cannot be dismissed.”) With this new decision by the Chief Justice (joined by five other justices), that desire has now been sated—for a while at least.  In the majority opinion, SCOTUS declared that this case “is a major questions case,” referring to a judicially created doctrine holding that courts must be “skeptical” of agency efforts to assert broad authority to regulate matters of “vast economic and political significance,” requiring, in those instances, that the agency “point to ‘clear congressional authorization’ to regulate.’” In addition to the blow that the decision deals to climate regulation—“Court  Decision Leaves Biden With Few Tools to Combat Climate Change,” is one of the headlines from the NYT—we can now expect the major questions doctrine to be brandished regularly against significant agency regulations across the board, and, with Congress perpetually at loggerheads and limited in its ability to authorize much of anything these days, it could well stymie much agency rulemaking. Does anyone question that, with SCOTUS’s new imprimatur, the doctrine will be raised in anticipated litigation against whatever version of the SEC’s climate disclosure regulation is adopted? As reported by Reuters, when asked  by Bloomberg TV on Thursday about the impact of the decision on other agencies, Senator Patrick Toomey “singled out the SEC rule,” claiming that the SEC is “attempting to impose this whole climate change disclosure regime…with no authority from Congress to do that.” To better understand the major questions doctrine, it may be useful to take a closer look at the case.

WSJ raises more concerns about potential insider trading under Rule 10b5-1 plans

When the WSJ performs a study and publishes the results on the front page, it often has consequences. It’s worth remembering that it was a study reported in the WSJ about stock option backdating that kicked off the option backdating scandal of the mid-2000s (see, e.g., this news brief, this news brief  and this news brief). Now, the WSJ has conducted a new front-page analysis of trading by insiders under Rule 10b5-1 plans that “shows that executives benefit when sales happen quickly after the plans’ adoption.” Academics and the SEC, the WSJ observes, suggest that “some corporate insiders might be using nonpublic information to game the system.” Under SEC Chair Gary Gensler, the SEC has already proposed new rules to “freshen up,” as Gensler likes to say, the rules on 10b5-1 plans, including mandatory cooling-off periods after adoption or modification of the plan—an aspect of the proposal designed to address precisely this issue. The WSJ analysis found that about 44% of the trades reviewed (about 33,000 stock sales), would not have been permitted under the cooling-off periods proposed in the SEC rule. The SEC has targeted April 2023 as the target date for adoption. (See this PubCo post.) In the light of some of the results shown, will the new study reinforce the SEC’s inclination to adopt its new proposal?

Will U.S. companies face ESG reporting requirements in the EU?

Some U.S. companies may well have to report on ESG—even if the SEC takes no action on climate or other ESG disclosure proposals!  How’s that?  According to this press release from the Council of the European Union, the Council and the European Parliament reached a provisional agreement last week on a corporate sustainability reporting directive (CSRD) that would require more detailed reporting on “sustainability issues such as environmental rights, social rights, human rights and governance factors.” The provisional agreement is subject to approval by the Council and the European Parliament. The press release indicates that the requirements would apply to all large companies and all companies listed on regulated markets, as well as to listed small- to medium-size companies (“taking into account their specific characteristics”). Importantly, for companies outside the EU, “the requirement to provide a sustainability report applies to all companies generating a net turnover of €150 million in the EU and which have at least one subsidiary or branch in the EU. These companies must provide a report on their ESG impacts, namely on environmental, social and governance impacts, as defined in this directive.”