Yesterday, Nasdaq announced that it has filed with the SEC a proposal for new listing rules regarding board diversity and disclosure. If approved, it would likely be a game changer. The new listing rules would adopt a “comply or explain” mandate for board diversity for most listed companies and require companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards. The announcement indicates that the goal is to “provide stakeholders with a better understanding of the company’s current board composition and enhance investor confidence that all listed companies are considering diversity in the context of selecting directors, either by including at least two diverse directors on their boards or by explaining their rationale for not meeting that objective.” In its 271-page filing, Nasdaq explains its rationale by presenting an analysis of over two dozen studies that “found an association between diverse boards and better financial performance and corporate governance.” According to Nasdaq’s President and CEO, Adena Friedman, “Nasdaq’s purpose is to champion inclusive growth and prosperity to power stronger economies….Our goal with this proposal is to provide a transparent framework for Nasdaq-listed companies to present their board composition and diversity philosophy effectively to all stakeholders; we believe this listing rule is one step in a broader journey to achieve inclusive representation across corporate America.”
[This post revises and updates my earlier post primarily to reflect the contents of the adopting release.]
By a vote of three to two, the SEC has adopted new amendments to simplify, modernize and enhance Management’s Discussion and Analysis of Financial Condition and Results of Operations and the other financial disclosure requirements of Regulation S-K. The amendments were adopted largely as proposed in January, with some modifications intended to address comments received. Once again, like other recent rulemakings, these amendments tilt toward a more principles-based, company-specific approach, highlighting the importance of materiality and trend disclosures. MD&A discussions have long been the subject of criticism as too mechanical, with companies sometimes chided for just “doing the math” without more. A new provision describes the objectives of MD&A with the goal of encouraging a more thoughtful, less rote MD&A and allowing investors a better view of the company from management’s perspective. In some cases, the amendments eliminate prescriptive requirements in favor of more general disclosures that are integrated into the primary discussions. And some of the proposed changes are fairly dramatic—such as eliminating selected financial data and the Table of Contractual Obligations, and streamlining the requirement to disclose Supplementary Financial Information. Companies may also find the new explicit mandate to discuss critical accounting estimates to be a challenge. Whether the changes result in more nuanced, analytical disclosure remains to be seen. The amendments will become effective 30 days after publication in the Federal Register.
Included at the end of this post is a version of the SEC’s table of changes.
The term-end crunch continues! Yesterday, the SEC voted, without an open meeting, to issue two separate proposals to amend Rule 701 and Form S-8, both “substantially informed by public comment” received in response to the SEC’s July 2018 Concept Release on Compensatory Security Offerings and Sales. First, the SEC is proposing new amendments, on a temporary five-year trial basis, that would allow a company to provide equity compensation to a slice of “gig” workers—specifically only “platform workers” who provide services through the company’s technology-based platform—subject to percentage limits (no more than 15% of annual compensation), dollar limits (no more than $75,000 in three years) and other conditions. The proposal is structured as temporary to allow the SEC an opportunity to assess whether issuances are being made for legitimate compensatory purposes and not for capital-raising purposes, whether the issuances benefit companies, platform workers and other investors in the “gig economy,” and whether there are any unintended consequences. To help with that assessment, looking toward an evaluation of whether to make the rule permanent, the SEC will require participating companies to furnish certain information to the SEC at six-month intervals. Second, the SEC is also proposing amendments to Rule 701 and Form S-8 designed to modernize the framework for compensatory securities offerings in light of the significant evolution in compensatory offerings and composition of the workforce since the SEC last substantively amended those regulations. Both proposals will be open for public comment for 60 days.
Yesterday, Corp Fin posted CF Disclosure Guidance: Topic No. 10, Disclosure Considerations for China-Based Issuers, which provides guidance regarding disclosure considerations for companies based in or with the majority of their operations in the People’s Republic of China (China-based Issuers). You might recall that, in August, the President’s Working Group on Financial Markets, which includes Treasury Secretary Steven T. Mnuchin, Fed Chair Jerome H. Powell, SEC Chair Jay Clayton and CFTC Chair Heath P. Tarbert, issued a Report on Protecting United States Investors from Significant Risks from Chinese Companies, which made a number of recommendations, among them that regulators should require enhanced and prominent issuer disclosures of the risks of investing in China-based Issuers and should issue interpretive guidance to clarify these disclosure requirements and increase awareness of the risks of investing in these companies. (See this PubCo post.) This guidance appears designed to implement that recommendation. The clear implication of the guidance is that China-based Issuers need to consider beefing up their risk factor and related disclosures; in outlining risks and posing questions to consider, the guidance provides a great starting point.
Earlier this month, the SEC announced settled charges against former Wells Fargo CEO and Chairman, John G. Stumpf, as well as charges against former head of Wells Fargo’s Community Bank, Carrie L. Tolstedt, alleging that they misled investors about the success of the Community Bank, Wells Fargo’s core business. (Wells had already agreed to pay $3 billion to settle charges from the SEC and the Department of Justice.) The SEC charged that they made misleading public statements about the company’s strategy and a key performance indicator, the “cross-sell metric,” and signed misleading certifications and sub-certifications as to the accuracy of these and other public disclosures. In the Order, Stumpf has agreed to settle the action against him for $2.5 million, but Tolstedt has not agreed to settle, and the SEC has filed a complaint against her in Federal District Court, seeking an officer and director bar, a monetary penalty and disgorgement. The Order and complaint highlight, once again, problems that can arise out of public disclosure of misleading key performance indicators. Moreover, the SEC’s allegations provide a cautionary tale about the responsibility of those signing certifications (and sub-certifications) regarding the accuracy of periodic reports to heed clear alarm bells and question sub-certifications where appropriate to do so.
Today, the SEC staff issued a revised Statement regarding the extension, for an indeterminate period, of temporary relief related to authentication document retention requirements under Rule 302(b) of Reg S-T in light of light of public health and safety concerns regarding COVID-19. This staff Statement is temporary and remains in effect until the staff provides public notice that it no longer will be in effect; that notice will be published at least two weeks before the announced termination date. Nothing new there. But what is new is that the Statement indicates that the staff will not recommend enforcement action if filers take advantage of the new electronic signature rules even before the effective date of those rules.
Yesterday, the SEC announced that it has adopted, without an open meeting, final amendments designed to simplify and modernize MD&A and other financial disclosure requirements of Reg S-K. With SEC Chair Jay Clayton and Corp Fin Director William Hinman both having announced their intent to leave the SEC by year end, the adoption may well be part of a term-end crunch. As summed up in the press release, the amendments are “intended to enhance the focus of financial disclosures on material information for the benefit of investors, while simplifying compliance efforts for registrants.” The amendments are also designed to “improve disclosure by enhancing its readability, discouraging repetition and eliminating information that is not material.” Once again, like other recent rulemakings, these amendments tilt toward a more principles-based, company-specific approach, describing the objectives of MD&A with the goal of highlighting the importance of materiality and trend disclosures to a more thoughtful, less rote MD&A and allowing investors a better view of the company from management’s perspective. In some cases, the amendments eliminate prescriptive requirements in favor of more general disclosures that are integrated into the primary discussions. And some of the proposed changes are fairly dramatic—such as eliminating selected financial data and the Table of Contractual Obligations. Whether the changes result in more nuanced, analytical disclosure remains to be seen. The amendments will become effective 30 days after publication in the Federal Register.
Yesterday, in recognition of the widespread use of electronic signatures, the SEC adopted rules and amendments to permit the use of electronic signatures in signature “authentication documents” required under Reg S-T in connection with electronic SEC filings. In addition, the SEC adopted corresponding revisions to allow the use of electronic signatures for certain other filings. (Separately, the SEC also amended the Rules of Practice to require electronic filing and service of documents in the SEC’s administrative proceedings, not covered in this post.) The new rules were adopted following submission of an incredibly persuasive rulemaking petition from three Silicon Valley law firms—Cooley being one—which was supported in correspondence from almost 100 public companies. The changes will become effective upon publication in the Federal Register.
Commissioners Peirce and Roisman criticize “unduly broad view” of “internal accounting controls” in Andeavor
In October, the SEC settled charges against Andeavor, an energy company formerly traded on the NYSE and now wholly owned by Marathon Petroleum, in connection with stock repurchases authorized by its board in 2015 and 2016. (See this PubCo post.) Pursuant to that authorization, in 2018, Andeavor’s CEO had directed the legal department to establish a Rule 10b5-1 plan to repurchase company shares worth $250 million. At the time, however, Andeavor’s CEO was on the verge of meeting with the CEO of Marathon Petroleum to resume previously stalled negotiations on an acquisition of Andeavor at a substantial premium. After Andeavor’s legal department concluded that the company did not possess material nonpublic information about the acquisition, Andeavor went ahead with the stock repurchase. Rather than attempting to build a 10b-5 case based on a debatably defective 10b5-1 plan, the SEC opted instead to make its point with allegations that Andeavor had failed to maintain an effective system of internal control procedures in violation of Exchange Act Section 13(b)(2)(B). On Friday, the SEC posted the joint statement of SEC Commissioners Hester Peirce and Elad Roisman, who voted against the settled action, explaining the reasons for their dissents. In sum, they contend that, in the action, the SEC took an “unduly broad view of Section 13(b)(2)(B).”