T+2 goes to T+1—Is “T+evening” next?
Yesterday, the SEC adopted a number of new rule amendments intended to reduce risks in the clearance and settlement processes. Most significantly for this audience, the changes will reduce the standard settlement cycle for most broker-dealer transactions in securities from T+2 to T+1, that is, from two business days after the trade date to one business day after. According to the press release, the final rule is “designed to benefit investors and reduce the credit, market, and liquidity risks in securities transactions faced by market participants.” The rule changes also shorten the settlement cycle for firm commitment public offerings priced after 4:30 p.m. Eastern Time from T+4 to T+2, unless the parties expressly agree otherwise at the time of the transaction. The final rules will become effective 60 days following publication of the adopting release in the Federal Register; the compliance date is May 28, 2024, which turned out to be the most controversial aspect of the proposal, leading to two dissents. According to SEC Chair Gary Gensler, “[a]s they say, time is money. Halving these settlement cycles will reduce the amount of margin that counterparties need to place with the clearinghouse. This lowers risk in the system and frees up liquidity elsewhere in the market.”
SEC Enforcement’s “EPS Initiative” chalks up another one
Last week, the SEC announced settled charges against Gentex Corporation, a manufacturer of digital vision, connected car, dimmable glass and fire protection products, and its former Chief Accounting Officer and current CFO, Kevin Nash, related to financial reporting, books-and-records and internal accounting controls violations. Allegedly, these violations were the consequence of deficiencies in the company’s accounting practices for its bonus programs, which practices allowed the company to manage its earnings by adjusting its accruals for bonuses to ensure that publicly reported EPS was in line with consensus EPS estimates—without the required accounting analysis or adequate supporting documentation. According to the SEC, had the company not reduced the accrual for bonuses, it “would have missed consensus EPS estimates by one penny.” Gentex was ordered to pay a civil money penalty of $4 million and Nash to pay $75,000. These charges represent yet another case resulting from SEC Enforcement’s “Earnings-Per-Share Initiative,” which applies risk-based data analytics to detect potential violations from earnings management, among other things.
Corp Fin posts a slew of new CDIs on pay versus performance
On Friday afternoon, Corp Fin posted a slew of new CDIs—15 in total—regarding the new pay-versus-performance rule. You may recall that, in August last year, the SEC finally adopted a new rule that will require disclosure of information reflecting the relationship between executive compensation actually paid by a company and the company’s financial performance—a new rule that was originally mandated by Dodd-Frank in 2010. Lots of questions have arisen about implementation of the rule, and SEC representatives let it be known that CDIs on the topic would be forthcoming. (See this post from thecorporatecounsel.net blog.) Not surprisingly, most of the CDIs are about the complicated Pay Versus Performance table and are just as thorny as the rule, so get your Advil ready.
How do companies view the current political environment and what can they do about it?
According to a new survey and related report from The Conference Board, 78% of US companies characterized the current political environment as “extremely challenging” or “very challenging” for companies—and 20% more described the environment as merely “challenging.” That totals 98%. (Who are the 2% who don’t find the political environment challenging?) Most striking about that data point is the stark contrast with the results of a survey conducted in 2021, which showed that only—only?—47% of companies attached one of the “extremely challenging” or “very challenging” labels to the political environment. What’s more, 42% said that they expected a “more challenging landscape in the next three years.” What’s fueling this shift in perspective? The Conference Board explores the reasons underlying this political environment and suggests ways for companies to address it.
SEC floats dialing back climate disclosure rules
The SEC has apparently let it be known—or perhaps a few reporters are especially intrepid—that it may well pare down and loosen up some of its proposed rules on climate disclosure (see this PubCo post, this PubCo post and this PubCo post). In this article in Politico and this article in the WSJ, “three people familiar with the matter” and “people close to the agency” told reporters that SEC Chair Gary Gensler is “considering scaling back a potentially groundbreaking climate-risk disclosure rule that has drawn intense opposition from corporate America.” According to Politico, SEC officials “stress that no decision has yet been made,” so time will tell where the final rulemaking will end up.
Workplace misconduct again! SEC charges failure of disclosure controls
Alleged workplace misconduct—and the obligation to collect information and report up about it—rears its head again in yet another case, this time involving Activision Blizzard, Inc. Just last month, in In re McDonald’s Corporation, the former “Chief People Officer” of McDonald’s Corporation was alleged to have breached his fiduciary duty of oversight by consciously ignoring red flags about sexual harassment and misconduct in the workplace. According to the court in that case, the defendant “had an obligation to make a good faith effort to put in place reasonable information systems so that he obtained the information necessary to do his job and report to the CEO and the board, and he could not consciously ignore red flags indicating that the corporation was going to suffer harm.” (See this PubCo post.) Now, the SEC has issued an Order in connection with a settled action alleging that Activision Blizzard, Inc., a videogame developer and publisher, violated the Exchange Act’s disclosure controls rule because it “lacked controls and procedures designed to ensure that information related to employee complaints of workplace misconduct would be communicated to Activision Blizzard’s disclosure personnel to allow for timely assessment on its disclosures.” In addition, the SEC alleged that the company violated the whistleblower protection rules by requiring, in separation agreements, that former employees “notify the company if they received a request from a government administrative agency in connection with a report or complaint.” As a result, Activision Blizzard agreed to pay a $35 million civil penalty. These cases suggest that company actions (or lack thereof) around workplace misconduct and information gathering and reporting about it have resonance far beyond employment law. It’s also noteworthy that this Order represents yet another case (see this PubCo post) where a “control failure” is a lever used by SEC Enforcement to bring charges against a company notwithstanding the absence of any specific allegations of material misrepresentation or misleading disclosure, a point underscored by Commissioner Hester Peirce in her dissenting statement, discussed below.
Is the SEC going to revamp Reg D?
At the Northwestern/Pritzker 50th Annual Securities Regulation Institute in San Diego this week, SEC Commissioner Caroline Crenshaw gave the Alan B. Levenson Keynote Address. Her topic: exempt offerings and the private capital markets. The rapid growth of the private markets in recent decades, Crenshaw observes, has been “hotly debated”; private offerings have increased at a faster rate than public offerings, as companies delay public offerings or eschew them altogether and instead turn to the private markets to raise enormous amounts of capital, essentially through Reg D. According to Crenshaw, “Reg D, among other legal and regulatory mechanisms, has allowed for the development of pools of private capital sufficient to satisfy the needs of even the largest private issuers.” Hence the unicorn! But are these exemptions serving the purpose they were originally intended to provide? Are they providing adequate safeguards for investors? For example, should large private issuers be required to provide more disclosure? Crenshaw has some ideas for, as she characterized it, “modest reforms.”
Corp Fin issues new CDIs regarding the clawback rules
In October last year, 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. The clawback policy must provide that, in the event the listed issuer is required to prepare an accounting restatement—including not only a “reissuance,” or “Big R,” restatement (which involves a material error and an 8-K), but also a “revision” or “little r” restatement—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. (See this PubCo post.) Now, the Corp Fin staff has issued some new CDIs, summarized below, providing guidance about the timing of the new required disclosure, which officers of foreign private issuers are subject to the disclosure rule and plans subject to the clawback.
Delaware VC Laster finds a “black swan”—a fiduciary duty of oversight for officers
In In re McDonald’s Corporation, defendant David Fairhurst, who formerly served as Executive Vice President and Global Chief People Officer of McDonald’s Corporation, contested a stockholders’ claim that he had breached his fiduciary duty of oversight by arguing that there is no fiduciary duty of oversight for officers, only for directors. VC Laster of the Delaware Chancery Court responded this way: “That observation is descriptively accurate, but it does not follow that officers do not owe oversight duties. For centuries dating back to the Roman satirist Juvenal, Europeans used the phrase ‘black swan’ as a figure of speech for something that did not exist. Then in the late eighteen century, Europeans arrived on the shores of Australia, where they found black swans. The fact that no one had seen one before did not mean that they could not or did not exist…. Framed in terms of the issue in this case, decisions recognizing director oversight duties confirm that directors owe those duties; those decisions do not rule out the possibility that officers also owe oversight duties.” With that—and a lengthy exposition—Laster confirmed that Fairhurst did indeed have a duty of oversight, much like the Caremark duties applicable to corporate directors.
Has the “internal affairs” doctrine been stretched too thin?
In this paper, Ann Lipton, an Associate Professor at Tulane Law School, contends that the “internal affairs” doctrine has gradually expanded its reach and, perhaps as a result, is now facing new challenges. As applied in Delaware—where it is applied most often—the doctrine, she argues, is “on a collision course with the legitimate regulatory interests of other states (and indeed the federal government).” Of course, many will strongly disagree with her argument, especially given the practical implications. Still, it may be worthwhile to gain some insight into her perspective. Is it time to rethink the internal affairs doctrine? The author suggests that a more balanced, targeted approach would be more appropriate and more effective.
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