In new SLB 14L, Corp Fin takes new (old) approach to “ordinary business” and “economic relevance” exceptions
Yesterday, Corp Fin issued Staff Legal Bulletin 14L, which outlines Corp Fin’s most recent interpretations of Rule 14a-8(i)(7), the ordinary business exception, and Rule 14a-8(i)(5), the economic relevance exception. The new SLB also rescinds SLBs 14I, 14J and 14K, following a “review of staff experience applying the guidance in them.” Generally, new SLB 14L presents its approach as a return to the perspective that historically prevailed prior to the issuance of the three rescinded SLBs. SEC Chair Gary Gensler said that “[t]oday’s bulletin will provide greater clarity to companies and shareholders on these matters, so they can better understand when exclusions may or may not apply. The updated staff legal bulletin, which replaces three previously issued bulletins, is consistent with the Commission’s original intention.” The effect of the new SLB is to relax some of the interpretations of “significant social policy,” “micromanagement” and “economic relevance” imposed under the rescinded SLBs, making exclusion of shareholder proposals—particularly proposals related to environmental and social issues—more of a challenge for companies. Needless to say, climate activists are pleased that their proposals will now likely find a more receptive audience at the SEC.
On Friday, in remarks before the L.A. County Bar Association, SEC Commissioner Elad Roisman addressed some of the challenges associated with cybersecurity and cyber breaches and similar events. In his presentation, Roisman considers cybersecurity in a variety of contexts, such as the exchanges, investment advisers and broker-dealers, but his discussion of cybersecurity in the context of public companies is of most interest here. Although the SEC has imposed some principles-based requirements and issued guidance about cybersecurity disclosure, Roisman believes that there is more in the way of guidance and even rulemaking that the SEC should consider “to ensure that companies understand [the SEC’s] expectations and investors get the benefit of increased disclosure and protections by companies.”
A new conference and a new public company resource!
As you probably recall, SOX 404 requires public reporting companies to disclose the effectiveness of their internal control over financial reporting. SOX 404(a) public companies to provide an assessment of ICFR by management; SOX 404(b) requires public companies—other than non-accelerated filers and emerging growth companies—to provide an auditor attestation regarding management’s assessment of the effectiveness of ICFR. A new study by Audit Analytics examining the most recent trends in SOX 404 disclosures over 17 years showed a decline in the number of adverse auditor attestations—auditor attestations indicating ineffective ICFR—and adverse management assessments, while the number of adverse management-only assessments increased. Why that variation? Could it reflect the effect of the recent SEC carve-out from the 404(b) requirement for low-revenue companies?
This week, 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.” The responsibility to monitor independence is a shared one: “[w]hile sourcing a high quality independent auditor is a key responsibility of the audit committee, compliance with auditor independence rules is a shared responsibility of the issuer, its audit committee, and the auditor.” That has long been the case. But what is happening in the current setting to prompt this statement? It is the recent trend toward the use of “new and innovative transactions” to access the public markets, such as SPACs, together with the continued expansion by audit firms of business relationships with non-audit clients. That is, gatekeepers must be especially vigilant to prevent an audit firm from unwittingly losing its independence in the event of a transaction by an audit client with a non-audit client, a risk that is enhanced as audit firms engage in consulting relationships with more non-audit clients. This environment, Munter cautions, requires audit committees to be especially attentive in considering “the sufficiency of the auditor’s and the issuer’s monitoring processes, including those that address corporate changes or other events that potentially affect auditor independence.” And it requires audit firms to consider “the impact of business relationships and non-audit services on existing and prospective audit relationships.” 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.
For years, many companies and business lobbies, such as the National Association of Manufacturers, repeatedly raised concerns about proxy advisory firms’ concentrated power and significant influence over corporate elections and other matters put to shareholder votes, leading to questions about whether these firms should be subject to more regulation and accountability. (See, e.g., this PubCo post, this PubCo post and this PubCo post.) In July 2020, the SEC adopted, by a vote of three to one, new amendments to the proxy rules regarding proxy advisory firms. At the time of adoption of the new rules, then-SEC Chair Jay Clayton observed that the final rules were the product of a 10-year effort—commencing with the SEC’s 2010 Concept Release on the U.S. Proxy System—which led to “robust discussion” from all market participants. Commissioner Allison Herren Lee, who dissented, objected to the rule changes as “unwarranted, unwanted, and unworkable.” When new SEC Chair Gary Gensler was confirmed, he asked the SEC staff to take another look at the rule amendments, and Corp Fin stated that, during the reconsideration period, it would not recommend enforcement action. Now, as reported on thecorporatecounsel.net blog, NAM has just announced that it has filed suit in federal court against the SEC for failure to enforce its final rules on proxy advisory firms.
On October 19, a federal district court judge held a hearing on a motion for a preliminary injunction in Meland v. Weber, a case challenging SB 826, California’s board gender diversity statute, on the basis that it is unconstitutional under the equal protection provisions of the 14th Amendment. The judge had previously dismissed the case on the basis of lack of standing, but was reversed by the 9th Circuit. What did the hearing reveal?
The Conference Board has just released a new report, Corporate Board Practices in the Russell 3000, S&P 500, and S&P MidCap 400: 2021 Edition, a primary focus of which is board diversity. According to the press release, the study is the “most current and comprehensive review of board composition, director demographics, and governance practices at US public companies.” Key to the study is that more companies are now actually disclosing the racial and ethnic composition of their boards (based on self-reporting by directors): companies providing data are up from 24% of the S&P 500 in 2020 to 59% in 2021, and from 7.7% of the Russell 3000 in 2020 to 26.9% in 2021. With regard to progress in board diversity, the data shows that women have made significant advances—on the Russell 3000 this year, women represented about 38% of this year’s newly elected class of directors, bringing total representation of women on Russell 3000 boards to 24.4%, up from 21.9% in 2020. However, boards have significant catching up to do when it comes to racial and ethnic diversity. Based on self-reported data, “boards remain overwhelmingly white,” and, for 2021, the class of new directors was 78.3% white, with only 11.5% African-American, 6.5% Latinx/Hispanic and 3.1% Asian, Hawaiian or Pacific Islander.
In a virtual “fireside chat”—is that an oxymoron?—hosted by NYU law, SEC Chair Gary Gensler was interviewed by former SEC Commissioner and current NYU professor Robert Jackson. Much of the discussion involved topics that Gensler has already addressed in the past, such as gamification and digital engagement practices (see e.g., this PubCo post and this PubCo post). Gensler was also quite reluctant to “get ahead of the rest of the SEC” on some issues and purposefully avoided discussion of actions by specific companies, such as Glass-Lewis’s recent announcement that it would offer equity plan advisory services—will that present a conflict?—and BlackRock’s recent decision to pass-through certain voting rights to institutional clients (see this PubCo post). However, he did offer some updates on various projects at the SEC.