SEC proposes shortening the settlement cycle to T+1—and asks: what about T+0?
At an open meeting yesterday morning, the SEC voted unanimously to propose shortening of the standard settlement cycle for most securities transactions from T+2 to T+1. The press release can be found here, the fact sheet here and the proposing release here. According to SEC Chair Gary Gensler, “[t]hese proposed amendments to the securities clearing and settling process, if adopted, could lower risk to the financial system and drive greater efficiencies in the markets….First, these amendments would shorten the standard settlement cycle. As the old saying goes, time is money. Shortening the settlement cycle should reduce the amount of margin that counterparties would need to post with clearinghouses. Second, these changes would require affirmations, confirmations, and allocations to take place as soon as technologically practicable on trade date (‘T+0’). Finally, the release would require clearing agencies that provide central matching services to have policies and procedures to facilitate straight-through processing—i.e., fully automated transactions processing.” The public comment period—using a new format following complaints that the comment period was too short—will be open for 60 days following publication of the proposing release on the SEC’s website or 30 days following publication in the Federal Register, whichever period is longer.
ISSB global sustainability reporting standards—will the SEC’s expected climate disclosure rules be in sync?
As part of the Deloitte Global Boardroom Program, in Q4 2021, Deloitte surveyed over 350 audit committee members in 40 countries about climate issues. In the survey, 60% of respondents said “the lack of global reporting standards makes it hard to compare their organization’s progress against meaningful external benchmarks.” The International Sustainability Standards Board established by the IFRS Foundations is developing a set of global sustainability reporting standards. Will climate disclosure rules expected from the SEC be in sync with ISSB global standards? Could some companies be subject to both climate disclosure regimes?
Delaware expected to allow captive insurance for D&O coverage
Recent legislation expected to be signed into law by Delaware’s governor amends the state’s General Corporation Law to expressly allow the use of captive insurance companies to fund a Delaware corporation’s directors and officers insurance coverage. What are the implications?
For the 2022 proxy season, SSGA continues its emphasis on climate and diversity transformation
In his last letter to boards as CEO of State Street Global Advisors, Cyrus Taraporevala (who has announced his planned retirement this year) writes that we are at a “moment of significant transition,” facing many challenges, including a pandemic, climate change and gender, racial and ethnic inequities, that have led to economic disruption and even political instability. How should companies address these challenges? SSGA expects its portfolio companies to manage “these threats and opportunities by transitioning their strategies and operations—enhancing efforts to decarbonize and embracing new ways of recruiting and retaining talent—as the world moves toward a low-carbon and more diverse and inclusive future.” Accordingly, SSGA’s “main focus in 2022 will be to support the acceleration of the systemic transformations underway in climate change and the diversity of boards and workforces.”
Is the Rooney Rule just window dressing?
At the beginning of Black history month, in a class action complaint against the NFL and others replete with heart-breaking allegations of racism, former Head Coach of the Miami Dolphins, Brian Flores, charged that, among many other things, he and other members of the proposed class have been denied positions as head coaches and general managers as a result of racial discrimination. Defendants that have responded publicly have reportedly denied the allegations and said that the claims are without merit. Particularly notable from a governance and DEI perspective are allegations regarding the disingenuous application of the vaunted “Rooney Rule”—which originated in the NFL back in 2002 in an effort to address the dearth of Black head coaches—but has since become almost de rigueur in governance circles as one effective approach to increasing diversity in a wide variety of contexts, including boards of directors. However well-intentioned originally, the complaint alleges, “the Rooney Rule is not working.” Flores claims that, to fulfill the admonitions of the Rooney Rule, NFL teams “discriminatorily subjected” him and other Black candidates “to sham and illegitimate interviews due in whole or part to their race and/or color.” While this claim is far from the most incendiary in the complaint, if shown to be accurate, it would certainly seriously damage the reputation of the defendants involved. Can an approach that has allegedly failed to work in its original setting still be made to work effectively in other contexts?
Being a “good corporate citizen”: how can ESG be integrated with corporate compliance and board oversight functions?
In light of accelerating concerns about climate change and sustainability, economic inequality, worker safety and racial inequity, companies have faced increasing calls to answer to a variety of stakeholders—stakeholders other than shareholders. These concerns are often collected under the heading of environmental, social and governance issues, sometimes adding in “employees” as a separate “E” category. How should companies that aim to be good corporate citizens identify relevant components of EESG? How does EESG align with existing Caremark compliance efforts? How should we think about incorporating EESG oversight into the board’s organizational structure? Is this another job for the already burdened audit committee? This article, Caremark and ESG, Perfect Together: A Practical Approach to Implementing an Integrated, Efficient, and Effective Caremark and EESG Strategy, co-authored by former Delaware Chief Justice Leo Strine, observes that “boards and management teams are struggling to situate EESG within their existing reporting and committee framework and figure out how to meet the demand for greater accountability to society while not falling short in other areas.” Strine and his co-authors offer a framework for doing just that.
SEC reopens comment period for 2015 pay-versus-performance proposal
It’s been almost 12 years since Dodd-Frank mandated, in Section 953(a), so-called pay-versus-performance disclosure, but amazingly, no rules have yet been adopted to implement that mandate. Even more amazing, the SEC is still working on it. As expected, on Thursday last week, the SEC announced that it had reopened the comment period on rules, originally proposed in 2015, that would require disclosure of information reflecting the relationship between executive compensation actually paid by a company and the company’s financial performance. The reopening of the proposal is due in part “to certain developments since 2015 when the proposing release was issued,” particularly, “developments in executive compensation practices.” Here is the SEC’s original proposing release, fact sheet and the proposal reopening the comment period. According to SEC Chair Gary Gensler in his statement on the reopening of the proposal, “this proposed rule would strengthen the transparency and quality of executive compensation disclosure….The Commission has long recognized the value of information on executive compensation to investors.” The questions posed by the SEC in the notice (discussed below) give us some insight into where the SEC may be headed with the proposal. In particular, as noted by Gensler, the 2015 proposal “relied upon total shareholder return as the sole measure of financial performance. Some commenters expressed concerns that total shareholder return would provide an incomplete picture of performance. In this reopening release, we are considering whether additional performance metrics would better reflect Congress’s intention in the Dodd-Frank Act and would provide shareholders with information they need to evaluate a company’s executive compensation policies.” The public comment period will be open for 30 days following publication of the release in the Federal Register.
Proxy plumbing is still a challenge—will we see improvement in 2022?
Shareholder voting is viewed as fundamental to keeping boards and managements accountable, and, every year, billions of shares are voted at thousands of shareholder meetings of public companies. However, it is widely recognized that the current system of share ownership and intermediaries is a byzantine one that accreted over time and certainly would not be the system anyone would create if starting from scratch. There is also broad agreement that the current system of “proxy plumbing” is inefficient, opaque and, all too often, inaccurate. As the SEC’s Investor Advisory Committee has observed, under the current system, shareholders “cannot determine if their votes were cast as they intended; issuers cannot rapidly determine the outcome of close votes; and the legitimacy of corporate elections, which depend on accurate, reliable, and transparent vote counts, has been called into doubt.” Nevertheless, while the IAC and others have made recommendations for action to the SEC, nothing has yet been done or proposed, and the topic of proxy plumbing has been relegated to the SEC’s long-term agenda. (See this PubCo post.) Now, however, some aspects of the problem may be addressed through private ordering. Broadridge Financial Solutions, which provides services related to the proxy voting process, including vote tabulation, has announced that “it will provide end-to-end proxy vote confirmation this year to all shareholders in the annual meetings of the 2,000+ U.S. public companies whose votes it tabulates.”
Corp Fin Chief Accountant addresses restatements
In November 2021, Audit Analytics posted its 20-year review of restatements, showing that the number of “Big R” reissuance restatements in 2020, the last year of the review, was at a record low. According to the report, there were “81% fewer restatements in 2020 than the high in 2006 and 26% fewer than 2019.” Notably, however, while in 2005 reissuance restatements represented the majority of restatements, in 2020, reissuance restatements represented only 24.3% of restatements; revision restatements represented 75.7% of all restatements. At yesterday’s Northwestern Pritzker School of Law’s Annual Securities Regulation Institute, Lindsay McCord, Corp Fin Chief Accountant, raised a question: were companies being properly “objective” in assessing whether a restatement should be a “Big R” or “little r” restatement?
Gensler discusses cybersecurity under the securities laws
In remarks yesterday before the Northwestern Pritzker School of Law’s Annual Securities Regulation Institute, SEC Chair Gary Gensler addressed cybersecurity under the securities laws. Gensler suggests that the economic cost of cyberattacks could possibly be in the trillions of dollars, taking many forms, including denials-of-service, malware and ransomware. It’s also a national security issue. He reminds us that “cybersecurity is a team sport,” and that the private sector is often on the front lines. Given the frequency of cybersecurity incidents, the SEC is “working to improve the overall cybersecurity posture and resiliency of the financial sector.” To Gensler, the SEC’s cybersecurity policy has three components: “cyber hygiene and preparedness; cyber incident reporting to the government; and in certain circumstances, disclosure to the public.” In his remarks, Gensler considered cybersecurity in a variety of contexts, including SEC registrants in the financial sector, such as broker-dealers, investment companies, registered investment advisers and other market intermediaries; service providers and the SEC itself, but his discussion of cybersecurity in the context of public companies is of most interest here.
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