In an Enforcement sweep, SEC charges seven companies with violations of whistleblower rule
On Monday, the SEC announced an Enforcement sweep involving settled charges against seven companies for violation of the whistleblower statute and rule. The charges stemmed from provisions that the SEC claimed impeded whistleblowers from reporting potential misconduct to the SEC contained in employment, separation and an array of other agreements. In some instances, according to the Orders, the provisions expressly stated that they did not preclude employees from filing an administrative charge or participating in whistleblower programs, but instead involved only a waiver of their rights to recover a monetary award for participating in an investigation by a government agency. At least one of the companies sought to qualify the waiver of the recovery right by adding “[t]o the extent permitted by law.” But, to no avail. In none of these cases was the SEC aware of actions by the charged company to enforce the waiver provisions or instances in which the affected employees declined to speak with the SEC about potential violations of securities laws. Nonetheless, the SEC viewed these agreements as creating impediments to participation in the SEC whistleblower program. The companies agreed to pay civil penalties of just over $3 million in the aggregate, revised their internal agreement forms and notified affected employees. According to the Director of the SEC’s Denver Regional Office, the “SEC’s whistleblower program strengthens market integrity by providing protection and incentives for those who come forward and report potential violations of the securities laws….According to the SEC’s orders, among other things, these companies required employees to waive their right to possible whistleblower monetary awards. This severely impedes would-be whistleblowers from reporting potential securities law violations to the SEC.” Reuters reported that a representative of TransUnion, one of the companies charged, characterized the “SEC’s engagement on this matter” as an example of “what good regulatory supervision can look like.”
At open meeting, SEC approves new PCAOB quality control standard
Yesterday, the SEC approved, by a vote of three to two, a new PCAOB quality control standard, QC 1000, A Firm’s System of Quality Control, and related amendments to its standards, rules and forms. According to the press release, the new standard
“establishes an integrated, risk-based quality control standard that will require all registered public accounting firms to identify specific risks to their practice and design a quality control system that includes appropriate responses to guard against those risks. Registered firms that perform engagements under PCAOB standards will be required to implement and operate the QC system. The new quality control standard focuses on an audit firm’s accountability and continuous improvement of its audit practice and will require an annual evaluation of the firm’s QC system and related reporting to the PCAOB, certified by key firm personnel. In addition, firms that annually issue audit reports for more than 100 issuers will be required to establish an external quality control function (EQCF) composed of one or more persons who can exercise independent judgment related to the firm’s QC system.”
According to SEC Chief Accountant, Paul Munter, “[e]ffective QC systems provide critical investor protections by driving continuous improvement in firms’ audit quality in support of the issuance of informative, accurate, and independent audit reports….QC 1000 is an integrated risk-based QC standard that strikes an appropriate balance that can be applied by firms of varying sizes and complexities along with a set of mandates tailored to the size of the firms’ audit practices, which should assure that QC systems are designed, implemented, and operated with an appropriate level of rigor.” SEC Chair Gary Gensler pointed out that the “auditing profession has changed in the 21st century, and the Amendments we are considering today are long overdue. To put in context how important it is to update the quality control standards, the PCAOB found that 46 percent—nearly half—of the auditing engagements it reviewed in 2023 fell short of obtaining sufficient appropriate audit evidence.” The two dissenters primarily took issue with, in their view, the too-brief time allotted by the SEC to the process of refining the standard, the requirement that every PCAOB-registered firm design a compliant QC system—even if they are not required to implement it—and the failure to address adequately commenters’ concerns about the new EQCF. QC 1000 and related amendments will take effect on December 15, 2025.
Center for Audit Quality comes to the rescue for audit committees tasked with AI oversight
In this 2023 article in Fortune, a survey of 2,800 managers and executives conducted by management consulting firm Aon showed that business leaders “weren’t very concerned about AI….Not only is AI not the top risk that they cited for their companies, it didn’t even make the top 20. AI ranked as the 49th biggest threat for businesses.” Has “the threat of AI been overhyped,” Aon asked, or could it be that the “survey participants might be getting it wrong”? If they were, it wasn’t for long. Fast forward less than a year, and another Fortune article, citing a report from research firm Arize AI, revealed that 281 of the Fortune 500 companies cited AI as a risk, representing “56.2% of the companies and a 473.5% increase from the prior year, when just 49 companies flagged AI risks. ‘If annual reports of the Fortune 500 make one thing clear, it’s that the impact of generative AI is being felt across a wide array of industries—even those not yet embracing the technology,’ the report said.” This widespread recognition of the potential risks of genAI will likely compel companies to focus their attention on risk oversight, and that will almost certainly entail oversight by the audit committee. To assist audit committees in that process, the Center for Audit Quality has released a new resource—an excellent new report, Audit Committee Oversight in the Age of Generative AI.
Are you ready for anti-anti-ESG?
You all remember the reams of anti-ESG bills that poured out of some of the states, not to mention the U.S. House? According to Reuters, some “states have unleashed a policy push to punish Wall Street for taking stances on gun control, climate change, diversity and other social issues, in a warning for companies that have waded in to fractious social debates.” A 2022 Reuters analysis found that there were at least 44 bills or new laws in 17 states “penalizing such company policies, compared with roughly a dozen such measures in 2021.” (See this PubCo post.) In 2023, an article in Institutional Investor reported, 198 pieces of legislation were introduced, 23 laws passed and 6 resolutions adopted. And in 2024, the article reports, state legislators wrote 161 bills and resolutions in 28 states for consideration, with six bills passed so far. (See this PubCo post.) Recently, however, ESG proponents have begun to employ a more aggressive strategy regarding anti-ESG legislation. They’re now playing in the same sandbox as the anti-ESG groups, pursuing anti-anti-ESG litigation—premised in part on…wait for it…the First Amendment, one of the favored legal strategies, of course, of the anti-ESG groups. What’s good for the goose is good for the gander? What goes around comes around? As the call, so the echo? A couple of cases may illustrate the phenomenon. Will we see more?
What were the major trends of the 2024 proxy season on ESG shareholder proposals?
This article from Morningstar published on the Harvard Law School Forum on Corporate Governance examines three major trends of the 2024 proxy season regarding environmental, social and governance shareholder proposals. The author, the Director of Investment Stewardship Research at Morningstar, reports that, while the number of ESG-related proposals increased, there was a “twist in the tale”: the increase primarily reflected a jump in anti-ESG proposals. Although support for ESG proposals on the whole was relatively flat at 23%, Morningstar found a “rebound in support for governance-focused proposals,” offsetting a decline in support for E&S proposals.
SEC approves Nasdaq corporate governance rule changes
In May, Nasdaq proposed to revise some of its corporate governance rules—specifically Rules 5605, 5615 and 5810—to modify the phase-in schedules for the independent director and committee requirements in connection with a slew of different circumstances: IPOs, spin-offs and carve-outs, companies emerging from bankruptcy, companies ceasing to qualify as Foreign Private Issuers, companies ceasing to be controlled companies, companies transferring from other national securities exchanges, and companies listing securities that were, immediately prior to listing, registered pursuant to Section 12(g) of the Act. In addition, Nasdaq proposed to codify or amend its practices regarding the applicability of certain cure periods. Many of the changes proposed by Nasdaq were similar to rules that had previously been approved for the NYSE. There were apparently no comments received on the proposal, even after the SEC designated a longer time period for approval. On Monday, the SEC approved Nasdaq’s proposal.
Are companies getting the clawback checkboxes right?
As you know, in 2022, the SEC adopted a new clawback rule, Exchange Act Rule 10D-1, which directed the national securities exchanges to establish listing standards requiring listed issuers to adopt and comply with a clawback policy and to provide disclosure about the policy and its implementation. Under the rules, the clawback policy had to provide that, in the event the listed issuer was required to prepare an accounting restatement—including not just “reissuance,” or “Big R,” restatements, but also “revision” or “little r” restatements—the issuer must recover the incentive-based compensation that was erroneously paid to its current or former executive officers based on the misstated financial reporting measure. The recovery policy had to apply to incentive compensation received during the three completed fiscal years immediately preceding the date that the company was required to prepare a restatement. (See this PubCo post.) The clawback rules added a requirement to include new checkboxes on the cover pages of Form 10-K, Form 20-F and Form 40-F to indicate separately (a) whether the financial statements of the issuer included in the filing reflect correction of errors to previously issued financial statements, and (b) whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the issuer’s executive officers during the relevant recovery period. (See this PubCo post.) It’s worth noting here that the first box, which applies to correction of any errors in the financial statements filed, is broader in scope than the second, which applies if the restatements needed a potential clawback analysis, even if no actual recovery was required. Apparently, there hasn’t been much action for the second box. In this article, Bloomberg reports on a study by research firm Nonlinear Analytics LLC, which showed that of “the 205 companies that reported accounting corrections in their annual financial statements so far this year, just 29—less than 15%—said they reviewed the error to see if they needed to force a compensation clawback,” i.e., reported that they performed a potential recovery analysis. And, only two of the companies that performed an analysis ended up clawing back any executive bonuses.
What’s the impact of political spending from corporate treasuries?
This new report, Corporate Underwriters: Where the Rubber Hits the Road, from the nonpartisan Center for Political Accountability, examines “the scope of corporate political spending and its impact on state and national politics and policy” by taking a deeper dive into six highly influential “527” organizations. Who supports them and what is their impact? In particular, what is their impact on a state level—now viewed by many as a new “seat of power” for a number of key issues of the day, from reproductive healthcare rights to voting rights to the rules surrounding vote tabulation and certification of elections. According to the report, since 2010, more than $1 billion has been donated from the corporate treasuries of major U.S. companies and their trade associations to these six 527s, characterized in the report as “powerful but often overlooked political organizations that have funded the elections of state government officials across the country. These elections have reshaped policy and politics and, more fundamentally, have had a major impact on our democracy.” The CPA’s vice president of research told Bloomberg that “corporate funding of down-ballot races typically gets significantly less attention than contributions to federal candidates but…that’s changing. State attorneys general, ‘are increasingly more partisan in the way they wield their power on a national stage.’ That can create ‘riskier associations’ for companies that back such organizations.” The report concludes that corporate treasuries are “influential funder[s] of these elections and the dominant source of money for several of these committees. It examines the impact of corporate spending on some of the most controversial issues in the country. This spending poses serious risks to companies’ reputations, their profitability, and to the environment companies need to succeed.” Would adopting a code of political spending help? According to a recent survey, shareholders seem to think so.
New Cooley Alert: Texas Court Blocks FTC’s Noncompete Ban
In April, the Federal Trade Commission voted, three to two, to prohibit post-employment noncompete agreements with workers (discussed in this April 2024 Cooley Alert). With some exceptions, the prohibition would have banned virtually all post-employment noncompete agreements in the U.S. beginning on September 4, 2024. But, as discussed in this timely new Cooley Alert, Texas Court Blocks FTC’s Noncompete Ban, from our Labor and Employment group, on August 20, 2024, the Northern District of Texas in Ryan LLC v. Federal Trade Commission issued an order blocking the FTC rule banning all post-employment noncompete agreements from taking effect. As a result, the Alert concludes, “for the time being, employers using noncompetes may continue to utilize them, subject to applicable state laws.”
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