House passes Insider Trading Prohibition Act—will it pass the Senate?
On Tuesday, the Insider Trading Prohibition Act passed the house by a pretty big bipartisan majority—350 to 75. Currently, there is no explicit statutory prohibition on insider trading and prosecutors have relied on general fraud statutes to pursue charges. The bill would add to the Exchange Act a new Section 16A that would define insider trading and make it illegal. In an interview with Reuters, the bill’s sponsor, Jim Himes, said that “the legislation does not expand insider trading law but simpli?es and codi?es the law as articulated by courts through decades of opinions.” A version of the bill passed the House in 2019 by an even stronger vote, but never made it through the Republican-led Senate. No,w with Democrats in charge, will the bill be passed and signed into law?
Leadership survey: How prepared are leaders to face key business issues? Do executives think boards give good advice?
While it’s certainly not yet in the rear-view mirror, as we start to see COVID-19 begin to fade as an all-consuming crisis for business—thank you science and scientists!—what are the next issues that corporate leaders must face and how ready are they to face them? Consultant Russell Reynolds Associates has just released its 2021 Global Leadership Monitor?, designed to track top business issues and monitor leadership preparedness. Some of the more interesting findings: In terms of “stakeholder capitalism,” while customers are top of the heap, employees come in second as key stakeholders—ahead of stockholders. Most fascinating perhaps is this revelation: 40% of CEOs and other C-Suite executives “don’t believe the executive team receives good advice and input from the board.”
Is there a resurgence in the use of non-GAAP financial measures?
In 2016 and early 2017, the SEC made a big push—through a series of staff oral admonitions and written guidance, as well as an enforcement action—to require issuers to be more transparent and more consistent in the use of non-GAAP financial measures and to avoid altogether non-GAAP measures that were misleading. In May 2016, the Corp Fin chief accountant, as reported in CFO.com, cautioned companies in neon lights that, with regard to non-GAAP financial measures, “[f]or lack of a better way to say it, we are going to crack down.” (See, e.g., this PubCo post and this PubCo post.) By early 2017, the SEC staff were apparently sufficiently satisfied (see this PubCo post) with the responses to their campaign that the pendulum swung back, and the relentless finger-wagging by the staff about non-GAAP financial measures appeared to have tailed off. (See this PubCo post.) And, according to this analysis from Audit Analytics, in 2018, SEC staff comments regarding non-GAAP financial measures actually began to decline. But, MarketWatch has reported, with the onset of COVID-19, there seems to have been something of a resurgence in the use of non-GAAP measures. Will we see another crackdown?
Acting Corp Fin Director Coates says ESG disclosure requirements “overdue”
As reported by Bloomberg, Acting Corp Fin Director John Coates told a webinar audience that mandatory ESG disclosures were “overdue,” and that the SEC was moving quickly on related rulemaking. In the webinar, sponsored by NYU’s Institute of Accounting Research and the Institute for Corporate Governance & Finance, Coates said that he expects the SEC to soon be in a position to review and consider staff proposals for mandatory prescriptive rules on ESG addressing both general and industry-specific requirements. These actions are expected to be the SEC’s most significant action on climate since the 2010 guidance. (See this PubCo post.)
BlackRock uses its voting power to support environmental and social issues
The outside pressure has been on. As reported by Bloomberg, “[e]nvironmental advocates in cities including New York, Miami, San Francisco, London and Zurich targeted BlackRock for a wave of protests in mid-April, holding up images of giant eyeballs to signal that ‘all eyes’ were on BlackRock’s voting decisions.” Of course, protests outside of the company’s offices by climate activists are nothing new. But why this pressure on BlackRock? BlackRock and its CEO, Laurence Fink, have played an outsized role in promoting corporate sustainability and social responsibility, announcing, in 2020, a number of initiatives designed to put “sustainability at the center of [BlackRock’s] investment approach.” (See this PubCo post.) Yet, BlackRock has historically conducted extensive engagement with companies and, in the end, voted with management much more often than activists preferred; for example, in the first quarter of 2020, the company supported less than 10% of environmental and social shareholder proposals and opposed three environmental proposals. As a result, as reflected in press reports like this one in the NYT, activists have reacted to the appearance of stark inconsistencies between the company’s advocacy positions and its proxy voting record. Even a group of Democratic Senators highlighted that inconsistency in this October 2020 letter, characterizing the company’s voting record on climate issues as “troubling and inconsistent.” But that impression may be about to change. In an interview with Reuters, BlackRock’s global head of investment stewardship since 2020 revealed that the company is “‘accelerating the pace of our stewardship activities; resulting in more engagement and more voting, reflecting heightened expectations, which … are just a function of the urgency of some of the issues.’” Indeed, in the first quarter of 2021, BlackRock supported 12 of 16 environmental and social shareholder proposals.
Tackling the underrepresentation of women of color on boards
With the passage of SB 826 in 2018, California became the first state to mandate board gender diversity (see this PubCo post). In 2020, the California Partners Project, which was founded by California’s current First Lady, released a progress report on women’s representation on boards of California public companies, tracking the changes in gender diversity on California boards since enactment of the law. That same year, AB 979 was signed into law in California. That bill was designed to do for “underrepresented communities” on boards of directors what SB 826 did for board gender diversity. (See this PubCo post.) The CPP has just released a new report that not only updates its 2020 progress report on board gender diversity, but also provides data on women of color on California’s public company boards. The takeaway is that, while there has been tremendous progress in increasing the number of women on boards, nevertheless, much work remains “to tap all of our talent and achieve racial and cultural equity. Most women on California’s corporate boards are white, while women of color—especially Latinas—remain severely underrepresented.” In addition to new data, the report offers some strategies for overcoming these deficits in diversity.
SEC to scrutinize company accounting for impact of climate
In February, then-Acting SEC Chair Allison Lee directed the staff of Corp Fin, in connection with the disclosure review process, to “enhance its focus on climate-related disclosure in public company filings,” starting with the extent to which public companies address the topics identified in the interpretive guidance the staff issued regarding climate change in 2010. (See this PubCo post.) In March, the SEC announced the creation of a new Climate and ESG Task Force in the Division of Enforcement. (See this PubCo post.) How else does this new ESG focus play out? On Wednesday, Bloomberg reported, Lindsay McCord, Corp Fin Chief Accountant, in remarks to the Baruch College spring financial reporting conference, said that the SEC staff are also “scrutinizing how public companies account for climate-related risks and impacts to their business based on existing accounting rules.” So, in addition to refreshing their understandings of the 2010 guidance, companies will also need to take a hard look at the how environmental issues could affect their financials.
Under Armour’s failure to disclose order “pull forwards” comes under fire at the SEC
On Monday, the SEC announced settled charges against Under Armour, Inc., a manufacturer of sports apparel, for misleading investors by failing to disclose material information about its “revenue management practices.” According to the Order, Under Armour had established a reputation for consistent revenue growth that exceeded analysts’ consensus estimates. But when internal forecasts began to indicate that it would miss those estimates, the company sought to close the gap by accelerating—“pulling forward”—existing orders that had been scheduled by customers for future quarters. Although this practice continued for six quarters, the SEC charged, the company failed to disclose this pull-forward practice as a driver of its revenue growth nor did it disclose the “known uncertainty” that this practice created with regard to revenues in future quarters. It’s worth noting that the SEC’s charges related solely to disclosure failures; the Order expressly indicated that the SEC did “not make any findings that revenue from these sales was not recorded in accordance with [GAAP].” Under Armour agreed to pay $9 million to settle the action.
Not much data disclosed on human capital, according to new survey
When, in August 2020, the SEC considered adopting a new requirement to discuss human capital as part of an overhaul of Regulation S-K, the debate centered largely on principles-based versus prescriptive regulation—a debate that continues to this day. In that instance, notwithstanding a rulemaking petition and clamor from numerous institutional and other investors for transparency regarding workforce composition, health and safety, living wages and other specifics, the “principles-based” team carried the day; the SEC limited the requirement to a “description of the registrant’s human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).” What was the result? In this new Human Capital Disclosure Report: Learning on the Job, Intelligize took a look at how companies responded to the new disclosure mandate. Its conclusion: most companies made a “sincere effort to fulfill the scantly defined disclosure obligation”; nevertheless, the report contends, companies “capitalized on the fact that the new rule does not call for specific metrics,” as “[r]elatively few issuers provided meaningful numbers about their human capital, even when they had those numbers at hand.”
SEC charges eight companies for deficient Forms 12b-25
At the end of last week, the SEC announced that it had filed settled charges against eight companies for failing to disclose in their Form 12b-25 filings (Form NT Notification of Late Filing) that their late filings of periodic reports were caused by an anticipated restatement or correction of prior financial reporting. The staff detected the violations through the use of data analytics in an initiative aimed at Form 12b-25 filings that were soon followed by announcements of financial restatements or corrections. According to Melissa Hodgman, the new (again) Acting Director of Enforcement (following the abrupt resignation of the prior Director), “[a]s today’s actions show, we will continue to use data analytics to uncover difficult to detect disclosure violations….Targeted initiatives like this allow us to efficiently address disclosure abuses that have the potential to undermine investor confidence in our markets if left unaddressed.” Is it just more “broken windows”? Maybe, maybe not. The Associate Director of Enforcement hit on a central problem from the SEC’s perspective with deficiencies of this type: “In these cases, due to the companies’ failure to include required disclosure in their Form 12b-25, investors relying on the deficient Forms NT were kept in the dark regarding the unreliability of the company’s financial reporting or anticipated material changes in operating results.” These charges should serve as a reminder that completing the late notification is not, to borrow a phrase, a trivial pursuit and could necessitate substantial time and attention to provide the narrative and quantitative data that, depending on the circumstances, could be required.
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