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).”
Yesterday, ISS released its new benchmark policies, effective for shareholder meetings on or after February 1, 2021. In addition to anticipated policy changes (see this PubCo post) regarding board racial and ethnic diversity, shareholder litigation rights (such as exclusive federal forum provisions) and director accountability for governance failures related to environmental or social issues, ISS also made a number of other policy changes and clarifications, not previewed during the comment period, that generally relate to changing market practices, certain shareholder proposals and policies that were announced previously but subject to a transition period.
If Matt Levine has a mantra in his “Money Stuff” column on Bloomberg, it’s this: everything is securities fraud. “You know the basic idea,” he often says in his most acerbic voice,
“A company does something bad, or something bad happens to it. Its stock price goes down, because of the bad thing. Shareholders sue: Doing the bad thing and not immediately telling shareholders about it, the shareholders say, is securities fraud. Even if the company does immediately tell shareholders about the bad thing, which is not particularly common, the shareholders might sue, claiming that the company failed to disclose the conditions and vulnerabilities that allowed the bad thing to happen. And so contributing to global warming is securities fraud, and sexual harassment by executives is securities fraud, and customer data breaches are securities fraud, and mistreating killer whales is securities fraud, and whatever else you’ve got. Securities fraud is a universal regulatory regime; anything bad that is done by or happens to a public company is also securities fraud, and it is often easier to punish the bad thing as securities fraud than it is to regulate it directly.” (Money Stuff, 6/26/19)
In this rulemaking petition filed by the U.S. Chamber Institute for Legal Reform and the Center for Capital Markets Competitiveness of the U.S. Chamber of Commerce, petitioners ask the SEC to take on one aspect of this type of securities litigation—event-driven securities litigation arising out of the COVID-19 pandemic. Will the SEC take action?
At last week’s PLI annual securities regulation institute, SEC Commissioner Allison Lee gave the keynote address, Playing the Long Game: The Intersection of Climate Change Risk and Financial Regulation. She began her remarks with the pandemic as metaphor: a global crisis that, before it struck, was “understood intellectually to be a serious risk,” but not fully appreciated as something we really needed to worry about. Now, we have experience of a crisis, no longer viewed “antiseptically through our TVs or phones, but firsthand as it unfolds in our homes, families, schools, and workplaces—not to mention in our economy. Seemingly theoretical risks have become very real.” Another dramatic risk that looms even larger with potential for more dire consequences is the topic of Lee’s remarks: climate change. According to a 2018 study by scientists in the U.K. and the Netherlands, the “point of no return” for achieving the goal of two degrees Celsius by 2100 set by the Paris Accord may arrive as soon as 2035. To be sure, the lesson from the pandemic is “not to wait in the face of a known threat. We should not wait for climate change to make its way from scientific journals, economic models, and news coverage of climate events directly into our daily lives, and those of our children and theirs. We can come together now to focus on solutions.” And while this is hardly Lee’s first rodeo when it comes to advocating that the SEC mandate climate risk disclosure, it seems much more likely now, with the imminent change in the administration in D.C., that the SEC may actually take steps toward implementing a regulatory solution.
Today, Corp Fin posted a few new FAQs regarding the transition to the new amendments to Reg S-K Items 101, 103 and 105, which are designed to modernize the disclosure requirements related to the descriptions of business, legal proceedings and risk factors (see this PubCo post). Those new rule amendments will become effective November 9.
Legislation—such as California’s board racial/ethnic diversity mandate (see this PubCo post) and board gender diversity mandate (see this PubCo post)—is not the only route that diversity advocates are employing to diversify the ranks of corporate directors. Moral suasion—together with implicit or explicit voting pressure—is another avenue that some groups are pursuing. One group following this path is the Russell 3000 Board Diversity Disclosure Initiative, a new initiative recently organized by the Illinois State Treasurer. At the end of October, the Initiative sent a letter to companies on the Russell 3000, urging that they all disclose board racial/ethnic/gender data. Signed by over 20 investor organizations representing more than $3 trillion in assets under management and advisement, the letter waited until the end to note that many of the signatories “either have or are examining policies to vote against nominating committees with no reported racial/ethnic diversity in their proxy statements and expanding more direct shareholder engagement.”
Yesterday, the SEC adopted, by a vote of three to two, amendments designed to harmonize and simplify the patchwork universe of private offering exemptions. The final amendments were informed by feedback received from the March 2020 proposal, the SEC’s advisory committees and the SEC’s Government-Business Forum on Small Business Capital Formation, as well as engagement with investors and companies. According to Chair Jay Clayton, the amendments “reflect a comprehensive, retrospective review of a framework that has, over time, unfortunately become difficult to navigate, for both investors and businesses, particularly smaller and medium-sized businesses…. Today’s amendments would rationalize that framework, increase efficiency and facilitate capital formation, while preserving or enhancing important investor protections.” Here is the almost 400-page adopting release. The final amendments will become effective 60 days after publication in the Federal Register.
Today’s the day—if you haven’t already—Vote! Vote! Vote!