Federal court holds unconstitutional California’s board diversity statute regarding “underrepresented communities”
There have been a number of challenges to California’s board diversity legislation, SB 826, the board gender diversity statute, and AB 979, the board diversity statute regarding “underrepresented communities.” In two cases, Crest v. Padilla I and II, filed in state court, the plaintiffs notched wins and the court issued injunctions against implementation and enforcement of these two statutes. Both of these cases are currently on appeal, and the injunctions remain in place. But there were also cases filed in federal court, and, in one of those cases, Alliance for Fair Board Recruitment v. Weber, the U.S. District Court for the Eastern District of California has just granted the Plaintiff’s motion for summary judgment, concluding that AB 979 is unconstitutional on its face. The federal court decision could have reverberations in other states and potentially influence the ongoing state court appeals (as could an earlier decision on SB 826 by the Court going the other way. See the third SideBar below.)
Corp Fin posts three new CDIs on Rule 10b5-1
Last week, Corp Fin posted (and then deleted and reposted—but that’s another story) three new CDIs regarding the affirmative defense under Rule 10b5-1. As you may recall, in December last year, the SEC adopted new amendments to the rules regarding Rule 10b5-1 plans. These amendments added new conditions to the affirmative defense of Rule 10b5-1(c) designed to address concerns about abuse of the rule by opportunistic trading on the basis of material non-public information. Among other changes, Rule 10b5-1(c)(1) was amended to apply a cooling-off period to persons other than the issuer, impose a good-faith certification requirement on directors and officers, limit the ability of persons other than the issuer to use multiple overlapping Rule 10b5-1 plans, limit the use of single-trade plans by persons other than the issuer to one single-trade plan in any 12-month period, and add a condition that all persons entering into Rule 10b5-1 plans must act in good faith with respect to those plans. In addition, the amendments included requirements for new disclosures regarding (1) companies’ insider trading policies and procedures, and the use of 10b5-1 plans and certain other similar trading arrangements by directors and officers; (2) director and officer equity compensation awards made close in time to company to disclosure of MNPI; and (3) bona fide gifts of securities on Forms 4 by Section 16 filers and transactions under 10b5-1 plans on Forms 4 and 5. (See this PubCo post.) The new CDIs relate to the timing of compliance and the use and termination of multiple plans.
SEC’s climate disclosure rules probably pushed back until fall
Here’s a scoop from S&P Global Market Intelligence : apparently, the climate disclosure rulemaking that was targeted for adoption in April 2023 has now been pushed back to the fall. At least that’s the information that former SEC Commissioner Robert Jackson has learned and revealed on a recent webinar. But given the thousands of comment letters and all the controversy over the climate disclosure rules, including pushback from politicians claiming the SEC had no authority to adopt climate disclosure rules, are you really surprised?
Steep increase in accounting enforcement activity reported —especially against individuals
In this report from Cornerstone Research, SEC Accounting and Auditing Enforcement Activity—Year in Review: FY 2022, Cornerstone tells us that accounting and auditing enforcement activity by the SEC increased sharply in FY 2022, although surprisingly, the aggregate amount of monetary settlements declined sharply. Perhaps most interesting is the steep increase in actions against individuals, reportedly reflecting the emphasis of SEC Chair Gary Gensler on imposing individual accountability and perhaps, by extension, spurring action by executives to prevent misconduct at their companies. The report found that over “half of all actions involved individual respondents only, a sharp increase from the FY 2017–FY 2021 average of 37%. Following Chair Gary Gensler’s swearing-in [in April 2021] through the end of FY 2022, approximately 49% of actions were initiated against individual respondents only.” According to one of the co-authors of the report, “[u]nder Chair Gensler’s leadership, the SEC has identified ‘holding individuals accountable’ as a ‘key priority area’ in its enforcement program”…. So, it is not a surprise that the percentage of actions initiated against individual respondents in FY 2022 was notably higher than those actions initiated during Jay Clayton’s administration.”
Will Chevron deference survive? Why you might really care about a case about fishing
On May 1, SCOTUS granted cert in the case of Loper Bright Enterprises v. Raimondo, a case about whether the National Marine Fisheries Service has the authority to require fishing vessels to pay some of the costs for onboard federal observers who are required to monitor regulatory compliance. So why is this relevant to public companies? Because one of the questions presented to SCOTUS was whether the Court should continue the decades-long deference of courts, under Chevron U.S.A., Inc. v. Nat. Res. Def. Council, to the reasonable interpretations of statutes by agencies (such as the SEC). The doctrine of Chevron deference, articulated in that case, mandated that, if there is ambiguity in how to interpret a statute, courts must accept an agency’s interpretation of a law unless it is arbitrary or manifestly contrary to the statute. The decision, expected next term, could narrow, or even completely undo, that deference. 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.”) But, in recent past cases, the Court has resolved issues and avoided addressing Chevron. This case, however, may well present that long-sought opportunity. Depending on the outcome, its impact could be felt far beyond the Marine Fisheries Service at many other agencies, including the SEC.
SEC adopts “better-than-it-might-have-been” final rules for stock buyback disclosure [UPDATED]
[This post revises and updates my earlier post primarily to reflect the contents of the adopting release.]
At an open meeting last week, the SEC voted three to two to adopt a proposal intended to modernize and improve disclosure regarding company stock repurchases. Issuers have something to be relieved about and something to be mildly anxious about. The good news is what the SEC didn’t do: the new rule does away with the proposed Form SR for domestic companies and backs off the proposed requirement for almost real-time (daily) reporting of share repurchases. Instead, the final rule moves to quarterly reporting of detailed quantitative information on daily repurchase activity, filed as exhibits to issuers’ periodic reports. The more vexing aspect is that domestic issuers will be required to begin this reporting, along with the new narrative disclosure, starting with the first Form 10-Q or 10-K covering the first full fiscal quarter (i.e., for the 10-K, the 4th quarter) that begins on or after October 1, 2023. That means that companies will need to get on the stick to begin to develop processes and procedures for collection of that data. In addition, the information will be deemed “filed” and not “furnished,” as originally proposed, which means that it could be subject to Section 18 and Section 11 liability. The amendments will also revise and expand the narrative requirements and add a new requirement for disclosure regarding a company’s adoption and termination of Rule 10b5-1 trading arrangements. In the press release, Chair Gary Gensler observed that “[i]n 2021, buybacks amounted to nearly $950 billion and reportedly reached more than $1.25 trillion in 2022….Today’s amendments will increase the transparency and integrity of this significant means by which issuers transact in their own securities. Through these disclosures, investors will be able to better assess issuer buyback programs. The disclosures will also help lessen some of the information asymmetries inherent between issuers and investors in buybacks. That’s good for investors, issuers, and the markets.” Commissioners Hester Peirce and Mark Uyeda dissented, with Peirce remarking that “better-than-it-might-have-been is not my standard for supporting a final rule.”
SEC adopts “better-than-it-might-have-been” final rules for stock buyback disclosure
At an open meeting yesterday, the SEC voted three to two to adopt a proposal intended to modernize and improve disclosure regarding company stock repurchases. Issuers have something to be relieved about and something to be mildly anxious about. The good news is what the SEC didn’t do: the new rule does away with the proposed Form SR for domestic companies and backs off the proposed requirement for almost real-time (daily) reporting of share repurchases. Instead, the final rule moves to quarterly reporting of detailed quantitative information on daily repurchase activity, filed as exhibits to issuers’ periodic reports. The more vexing aspect is that domestic issuers will be required to begin this reporting, along with the new narrative disclosure, starting with the first Form 10-Q or 10-K covering the first full fiscal quarter (i.e., for the 10-K, the 4th quarter) that begins on or after October 1, 2023. That means that companies will need to get on the stick to begin to develop processes and procedures for collection of that data. The amendments will also revise and expand the narrative requirements and add a new requirement for disclosure regarding a company’s adoption and termination of Rule 10b5-1 trading arrangements. In the press release, Chair Gary Gensler observed that “[i]n 2021, buybacks amounted to nearly $950 billion and reportedly reached more than $1.25 trillion in 2022….Today’s amendments will increase the transparency and integrity of this significant means by which issuers transact in their own securities. Through these disclosures, investors will be able to better assess issuer buyback programs. The disclosures will also help lessen some of the information asymmetries inherent between issuers and investors in buybacks. That’s good for investors, issuers, and the markets.” Commissioners Hester Peirce and Mark Uyeda dissented, with Peirce remarking that “better-than-it-might-have-been is not my standard for supporting a final rule.”
How are companies reacting to anti-ESG efforts?
It’s not just Mickey Mouse that’s feeling the heat from anti-ESG efforts lately. Reuters reports that, so far this year, legislators have filed about 99 so-called “ESG backlash” bills compared with only 39 in 2022; as of April 3, they report, “seven of the bills had been enacted into law, 20 were effectively dead, and 72 were still pending.” What are they about? A number of them are designed to protect fossil fuel companies from climate-related demands of various investment funds, while others relate to “hot-button environmental, social and governance (ESG) topics like abortion rights and firearms.” Not to mention the 68 anti-ESG proposals submitted this year to date (compared to 45 in 2022) as reported by Axios, citing data from the nonprofit Sustainable Investments Institute. According to the article, about a third of these proposals relate to corporate diversity endeavors, requesting that companies “report on the ‘risks’ that their anti-discrimination or racial justice efforts pose to their business.” Several others request that companies “avoid public policy positions unless there’s a business justification” or report on the risks arising out of their attempts to “achieve net zero” or other “decarbonization goals.” What is the fallout from these anti-ESG attempts? How can companies address the growing investor demands for ESG disclosure without—or perhaps despite—creating the impression among ESG opponents that they are just pursuing “an agenda”—or “Satan’s plan” according to Utah’s State Treasurer (as quoted in Reuters)?
SEC reopens comment period for proposal to amend beneficial ownership reporting rules
In February last year, the SEC proposed to amend the complex beneficial ownership reporting rules—most notably, the timing of Schedules 13D and 13G filings. In the press release announcing the proposed changes in beneficial ownership reporting, SEC Chair Gary Gensler described the amendments as an update designed to modernize reporting requirements for today’s markets, including reducing “information asymmetries,” and addressing “the timeliness of Schedule 13D and 13G filings.” The proposal was on the SEC’s most recent agenda with a target date of April 2023 for final action. But so far, no action taken. Then, on Friday, the SEC announced that it was reopening the comment period for this proposal until June 27, 2023, or until 30 days after the date of publication of the reopening release in the Federal Register, whichever is later. Why? This memorandum from the Division of Economic and Risk Analysis may be the answer. The SEC believes that the information in the memo “has the potential to be informative for purposes of further evaluating the Proposed Amendments.”
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