Results for: conflict minerals
NAM seeks to challenge Rule 14a-8 regulatory process for shareholder proposals
You might recall that this past proxy season witnessed a significant number of shareholder proposals related to ESG—from both sides of the aisle. (See this PubCo post.) One of those proposals was submitted by the National Center for Public Policy Research to The Kroger Co., which operates supermarkets, regarding the omission of consideration of “viewpoint” and “ideology” from its equal employment opportunity policy. Kroger sought to exclude the proposal as “ordinary business” under Rule 14a-8(i)(7), and Corp Fin concurred. After Corp Fin and the SEC refused reconsideration of the decision, the NCPPR petitioned the Fifth Circuit for review. Now, the National Association of Manufacturers has requested, and been granted, leave to intervene in the case, claiming that neither the federal securities laws nor the First Amendment allows the SEC to use Rule 14a-8 to compel companies to speak about contentious political or social issues, such as abortion, climate change, diversity or gun control, that are “unrelated to its core business or the creation of shareholder value.” That is, NAM isn’t just arguing about Corp Fin’s greenlighting of the exclusion of NCPPR’s proposal—in fact, NAM agrees that “Kroger should not be forced to include petitioners’ policy proposal in Kroger’s proxy statement.” Rather, NAM is upping the ante considerably by challenging whether the SEC has any business “dictat[ing] the content of public company proxy ballots and the topics on which shareholders are required to cast votes.” According to NAM’s Chief Legal Officer, “[m]anufacturers are facing an onslaught of activists seeking to hijack the proxy ballot to advance narrow political agendas, and the SEC has become a willing partner in the effort. The corporate proxy ballot is not the appropriate venue for policy decisions better made by America’s elected representatives, and manufacturers are regularly caught in the middle as activists on the left and the right bring fights from the political arena into the boardroom.”
Will Chevron deference survive? Why you might really care about a case about fishing
On May 1, SCOTUS granted cert in the case of Loper Bright Enterprises v. Raimondo, a case about whether the National Marine Fisheries Service has the authority to require fishing vessels to pay some of the costs for onboard federal observers who are required to monitor regulatory compliance. So why is this relevant to public companies? Because one of the questions presented to SCOTUS was whether the Court should continue the decades-long deference of courts, under Chevron U.S.A., Inc. v. Nat. Res. Def. Council, to the reasonable interpretations of statutes by agencies (such as the SEC). The doctrine of Chevron deference, articulated in that case, mandated that, if there is ambiguity in how to interpret a statute, courts must accept an agency’s interpretation of a law unless it is arbitrary or manifestly contrary to the statute. The decision, expected next term, could narrow, or even completely undo, that deference. Of course, the conservative members of the Court have long signaled their desire to rein in the dreaded “administrative state.” (See, for example, the dissent of Chief Justice John Roberts in City of Arlington v. FCC back in 2013, where he worried that “the danger posed by the growing power of the administrative state cannot be dismissed.”) But, in recent past cases, the Court has resolved issues and avoided addressing Chevron. This case, however, may well present that long-sought opportunity. Depending on the outcome, its impact could be felt far beyond the Marine Fisheries Service at many other agencies, including the SEC.
SEC adopts “better-than-it-might-have-been” final rules for stock buyback disclosure [UPDATED]
[This post revises and updates my earlier post primarily to reflect the contents of the adopting release.]
At an open meeting last week, the SEC voted three to two to adopt a proposal intended to modernize and improve disclosure regarding company stock repurchases. Issuers have something to be relieved about and something to be mildly anxious about. The good news is what the SEC didn’t do: the new rule does away with the proposed Form SR for domestic companies and backs off the proposed requirement for almost real-time (daily) reporting of share repurchases. Instead, the final rule moves to quarterly reporting of detailed quantitative information on daily repurchase activity, filed as exhibits to issuers’ periodic reports. The more vexing aspect is that domestic issuers will be required to begin this reporting, along with the new narrative disclosure, starting with the first Form 10-Q or 10-K covering the first full fiscal quarter (i.e., for the 10-K, the 4th quarter) that begins on or after October 1, 2023. That means that companies will need to get on the stick to begin to develop processes and procedures for collection of that data. In addition, the information will be deemed “filed” and not “furnished,” as originally proposed, which means that it could be subject to Section 18 and Section 11 liability. The amendments will also revise and expand the narrative requirements and add a new requirement for disclosure regarding a company’s adoption and termination of Rule 10b5-1 trading arrangements. In the press release, Chair Gary Gensler observed that “[i]n 2021, buybacks amounted to nearly $950 billion and reportedly reached more than $1.25 trillion in 2022….Today’s amendments will increase the transparency and integrity of this significant means by which issuers transact in their own securities. Through these disclosures, investors will be able to better assess issuer buyback programs. The disclosures will also help lessen some of the information asymmetries inherent between issuers and investors in buybacks. That’s good for investors, issuers, and the markets.” Commissioners Hester Peirce and Mark Uyeda dissented, with Peirce remarking that “better-than-it-might-have-been is not my standard for supporting a final rule.”
SEC crams much into packed Fall 2022 agenda
The SEC’s Fall 2022 Reg-Flex Agenda—according to the preamble, compiled as of October 6, 2022, reflecting “only the priorities of the Chair”—has just been posted, and it looks like the SEC will have another frenetic year ahead dealing with new and pending proposals—and so will we. Describing the new agenda, SEC Chair Gary Gensler said that it “reflects the need to modernize our ruleset, moving deliberately to update our rules in light of ever-changing technologies and business models in the securities markets. Our ability to meet our mission depends on having an up-to-date rulebook—consistent with our mandate from Congress, guided by economic analysis, and shaped by public input.” Here are the short-term and long-term lists, which show all Corp Fin agenda items scheduled for action by either April or October 2023, with the first four months looking especially jam-packed. There’s no dispute that the agenda is laden with major proposals, and many of these proposals—climate disclosure, cybersecurity, SPACs, share buybacks—are apparently at the final rule stage. Implementing all of these proposals, if adopted, would likely represent a challenge for many companies; whether overwhelmingly so remains to be seen.
SEC v. AT&T headed to trial—is Reg FD constitutional?
Reg FD cases rarely get to court, but here’s one that, barring a settlement, appears to be headed to trial. In a 129-page opinion in SEC v. AT&T, 9/08/22, the federal district court for the SDNY denied summary judgment for both sides in a case the SEC brought in March of 2021 against AT&T and three members of its Investor Relations Department for violations of Reg FD. (See this PubCo post.) The SEC alleged that, in March 2016, AT&T learned that, as a result of a “steeper-than-expected decline in smartphone sales,” AT&T’s first quarter revenues would fall short of analysts’ estimates by over a $1 billion. Given that AT&T had missed consensus revenue estimates in two of the three preceding quarters, AT&T, it was alleged, embarked on a “campaign” to beat consensus revenue estimates for Q1: the three defendant IR employees were asked by the CFO and IR Director to contact the analysts whose estimates were too high to “walk” them down. As part of that campaign, the SEC alleged, they selectively disclosed the company’s “projected or actual total revenue, and internal metrics bearing on total revenue, including wireless equipment revenue and wireless equipment upgrade rates.” The campaign worked. But—and it’s a big but—it also led the SEC to bring claims against AT&T for violating Reg FD, and against the three IR employees for aiding and abetting that violation. As to AT&T and the other defendants, the Court was not persuaded by their arguments that there was insufficient evidence to support the SEC’s claims of a Reg FD violation, nor did the Court agree that Reg FD was “invalid” under the First Amendment. And, as to the SEC, while the Court viewed as “formidable” the evidence showing that the information at issue was material, nonpublic and selectively disclosed, the question of scienter was a closer one, and a reasonable jury could find for the defendants on that point.
West Virginia v. EPA: SCOTUS gives its imprimatur to the “major questions” doctrine, shaking up the “administrative state”
West Virginia v EPA, the next-to-final decision handed down by SCOTUS this term, is a significant decision regarding a rule that the EPA said was never even in effect, that it had no intention of enforcing and that it planned to later replace with a new still-to-be-developed rule. As the NYT phrased it, “it’s a case about a regulation that doesn’t exist.” (Sort of like an episode of Seinfeld—the show about nothing—except that it’s not the least bit funny.) So SCOTUS could have stopped right there, but the Court forged ahead—an indicator by itself—with a decision that is nevertheless shaking up administrative law and the extent of rulemaking authority that federal agencies have—or thought they had. Its impact will likely be felt, not just at the EPA, but also at many other agencies, including the SEC. Of course, the conservative members of the Court have long signaled their desire to rein in the dreaded “administrative state.” (See, for example, the dissent of Chief Justice John Roberts in City of Arlington v. FCC back in 2013, where he worried that “the danger posed by the growing power of the administrative state cannot be dismissed.”) With this new decision by the Chief Justice (joined by five other justices), that desire has now been sated—for a while at least. In the majority opinion, SCOTUS declared that this case “is a major questions case,” referring to a judicially created doctrine holding that courts must be “skeptical” of agency efforts to assert broad authority to regulate matters of “vast economic and political significance,” requiring, in those instances, that the agency “point to ‘clear congressional authorization’ to regulate.’” In addition to the blow that the decision deals to climate regulation—“Court Decision Leaves Biden With Few Tools to Combat Climate Change,” is one of the headlines from the NYT—we can now expect the major questions doctrine to be brandished regularly against significant agency regulations across the board, and, with Congress perpetually at loggerheads and limited in its ability to authorize much of anything these days, it could well stymie much agency rulemaking. Does anyone question that, with SCOTUS’s new imprimatur, the doctrine will be raised in anticipated litigation against whatever version of the SEC’s climate disclosure regulation is adopted? As reported by Reuters, when asked by Bloomberg TV on Thursday about the impact of the decision on other agencies, Senator Patrick Toomey “singled out the SEC rule,” claiming that the SEC is “attempting to impose this whole climate change disclosure regime…with no authority from Congress to do that.” To better understand the major questions doctrine, it may be useful to take a closer look at the case.
A jam-packed Spring 2022 agenda for the SEC
The SEC has posted its Spring 2022 Reg-Flex agenda and it’s crammed with pending and new rulemakings—and they’re all going to be proposed or adopted in October! (Ok, admittedly, that’s an exaggeration, but not much of one.) Here is the short-term agenda and here is the long-term agenda. According to SEC Chair Gary Gensler, the “U.S. is blessed with the largest, most sophisticated, and most innovative capital markets in the world….But we cannot take that for granted. As SEC alum Robert Birnbaum and his team said decades ago, ‘no regulation can be static in a dynamic society.’ That core idea still rings true today.” Gensler’s public policy goals for the agenda are “continuing to drive efficiency in our capital markets and modernizing our rules for today’s economy and technologies.” As with recent prior agendas, SEC Commissioner Hester Peirce has almost no kind words for the agency’s plans—“flawed goals and a flawed method for achieving them.” In fact, she went so far as to characterize the agenda as “dangerous”: in her view, the agenda represents “the regulatory version of a rip current—fast-moving currents flowing away from shore that can be fatal to swimmers. Just as certain wave and wind conditions can create dangerous rip currents, the pace and character of the rulemakings on this agenda make for dangerous conditions in our capital markets.” There’s no dispute that the agenda is laden with major proposals—human capital, SPACs, board diversity. What’s more, many of these proposals—climate disclosure, cybersecurity, Rule 10b5-1—are apparently at the final rule stage. Whether or not we’ll see a load of public companies submerged by the rip tide of rulemakings remains to be seen, but there’s not much question that implementing them all would certainly be a challenge in any case.
Is the SEC’s new climate proposal within the traditions of the SEC disclosure regime?
Earlier this week, SEC Chair Gary Gensler gave the keynote address for an investor briefing on the SEC Climate Disclosure Rule presented by nonprofit Ceres. In his remarks, entitled “Building Upon a Long Tradition,” Gensler vigorously pressed his case that the SEC’s new climate disclosure proposal (see this PubCo post, this PubCo post and this PubCo post) was comfortably part of the conventional tapestry of SEC rulemaking. Growing out of the core bargain of the 1930s that let investors “decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures,” Gensler observed, the SEC’s disclosure regime has continually expanded—adding disclosure requirements about financial performance, MD&A, management, executive comp and risk factors. Over the generations, the SEC has “stepped in when there’s significant need for the disclosure of information relevant to investors’ decisions.” As has been the case historically, the SEC, he insisted, “has a role to play in terms of bringing some standardization to the conversation happening between issuers and investors, particularly when it comes to disclosures that are material to investors.” The proposed rules, he said, “would build on that long tradition.” But has everyone bought into that view?
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