SEC streamlines financial disclosure requirements applicable to registered debt offerings
On Monday, without an open meeting, the SEC voted, with a dissent from Commissioner Allison Lee, to adopt final amendments to Rules 3-10 and 3-16 of Reg S-X. Part of the SEC’s Disclosure Effectiveness Initiative, the amendments are designed to streamline and modernize the financial disclosure requirements applicable to registered debt offerings that involve guaranteed or collateralized securities, such as subsidiary guarantees. According to the press release, the “changes are intended to both improve the quality of disclosure and increase the likelihood that issuers will conduct debt offerings on a registered basis. The amended rules focus on the provision of material, relevant, and decision-useful information regarding guarantees and other credit enhancements, and eliminate prescriptive requirements that have imposed unnecessary burdens and incentivized issuers of securities with guarantees and other credit enhancements to offer and sell those securities on an unregistered basis.” According to the SEC, by improving disclosure and reducing the compliance burden, the final amendments may encourage issuers “to offer guaranteed or collateralized securities on a registered basis, thereby affording investors protection they may not be provided in offerings conducted on an unregistered basis.” The rules will apply to several categories of issuers, including foreign private issuers, smaller reporting companies and issuers offering securities pursuant to Reg A. The changes were originally proposed in July 2018. (See this PubCo post.) The amendments will become effective on January, 4, 2021, but voluntary compliance will be permitted in advance of the effective date.
How do the largest fund families vote on shareholder proposals related to ESG?
In 2019, investor support for shareholder proposals related to environmental, social and governance matters reached a record average high of 29%, according to Morningstar. And that doesn’t take into account the number of climate-related proposals that were withdrawn after successful negotiation—a number that exceeded the number of climate proposals that actually went to a vote. In this report, Morningstar analyzes the level of proxy voting support by 52 of the largest fund families for ESG-related shareholder proposals in 2019 and over the five years from 2015 to 2019. Although Morningstar finds substantial increases in average support over the last five years, five of the largest fund families, including BlackRock, voted against over 88% of ESG-related proposals, enough to prevent many of these proposals from achieving majority support. But, in 2020, with BlackRock having joined Climate Action 100+— reportedly “the world’s largest group of investors by assets pressuring companies to act on climate change”—and having announced that it was putting “sustainability at the center of [BlackRock’s] investment approach,” the question is whether that voting strategy is about to change?
Coronavirus gives companies sourcing headaches
The spread of the devastating coronavirus has created alarm around the world, with the health and safety of the world’s populations obviously being the most important concern. There has also been significant anxiety about the disruptive impact of the virus on the global economy—and the market has reacted to that anxiety. This special report from Dun & Bradstreet, “Business Impact of the Coronavirus,” may help companies preparing disclosures get a better handle on the effects. In addition to closure of factories, retail stores and hospitality venues, as well as cancellation of travel plans and quarantines (and resulting unavailability) of employees, the report indicates that companies may need to consider the disruptive effects of the coronavirus on both product demand and supply— the potential hit to consumer demand, especially in locked-down parts of China, and the interruption to supply chains for raw materials and components.
Cooley Alert: SEC Proposes to Modernize MD&A and Other Financial Disclosures
Check out our new Cooley Alert: SEC Proposes to Modernize MD&A and Other Financial Disclosures. It’s a thrill from beginning to end and much more fun than watching the market these days.
Law professors submit rulemaking petition to deter “short and distort”
A committee of law professors, led by John Coffee and Joshua Mitts, both of Columbia Law School, have submitted a petition for rulemaking with the rhythmic title, “Short and Distort,” concerning the practice of “negative activism”: as they describe it, a negative activist “opens a large short position; disseminates sometimes aggressive negative opinion about a public company (often stopping just short of factual falsehoods)…, which induces a panic and run on the stock price; and rapidly closes that position for a profit, prior to the stock price partially or fully rebounding.” In these scenarios, the short sellers do well, but the investing public—not so much.
SEC charges company for failure to disclose material trends
The SEC has just settled an action against Diageo PLC, a producer of liquor, wine and beer, for failure to disclose known trends and uncertainties. Diageo’s omission resulted in materially misleading disclosures regarding its financial results and material inflation of key performance indicators—organic net sales growth and organic operating profit growth. It’s worth noting that the SEC has not been reluctant to take enforcement action against companies that have misled investors by inflating KPIs, such as subscriber counts, revenue-per-subscriber, number of vehicles sold monthly, net new customers added, backlog and now organic net sales growth and organic operating profit growth. These types of metrics—typically outside of the financial statements—are metrics on which investors and analysts often rely to assess performance, and companies have been held to account if their presentations are materially inaccurate or misleading or the related controls are inadequate.
Commissioner Roisman defends proxy proposals
The SEC’s recent proxy proposals—both the proposal related to proxy advisory firms (see this PubCo post) and the proposal related to Rule 14a-8 shareholder proposals (see this PubCo post)—have been hit hard by the critics. Even the SEC’s own Investor Advisory Committee piled on, ultimately recommending that the SEC consider a do-over. (See this PubCo post.) To the defense comes SEC Commissioner Elad Roisman, who has been honchoing these proposals at the SEC.
SEC issues public statement on impact of coronavirus on financial reporting and audit quality
In a public statement issued today, SEC Chair Jay Clayton, Corp Fin Director Bill Hinman, SEC Chief Accountant Sagar Teotia and PCAOB Chairman William D. Duhnke III provided guidance regarding the impact of the coronavirus on financial reporting and audit quality, as well as the potential availability of regulatory relief. The statement arose out of the recent continuing dialogue between these officials and the senior leaders of the largest U.S. audit firms regarding difficulties in connection with conducting audits in emerging markets.
SSGA offers roadmap for board oversight of ESG; may vote against directors of ESG “laggards”
It’s not just BlackRock’s CEO that has words for companies. Cyrus Taraporevala, the CEO of State Street Global Advisers, another large asset manager, has recently sent his own letter to company boards cautioning that SSGA’s engagement on sustainability this year will also include the possibility of a proxy vote against directors “to press companies that are falling behind and failing to engage.” While directors can play a vital role in catalyzing action on ESG matters, SSGA recognizes that, in many ways, our understanding of ESG is still in its early stages, making board oversight of ESG something of a challenge. To help demystify sustainability for directors, SSGA has developed a framework intended to provide a roadmap for boards—where to begin—in conducting oversight of sustainability as a strategic and operational issue.
SEC approves Nasdaq changes to definition of “family member”
The SEC has granted accelerated approval of Nasdaq’s amended proposal, originally filed in May 2019, to modify the definition of a “family member” for purposes of determining director independence under Listing Rule 5605(a)(2). As part of the new definition, Nasdaq excludes stepchildren from the definition of “family member,” but will ultimately leave to the board the determination of whether stepchildren who do not live at home with the director nevertheless have a relationship with the director that could interfere with the director’s exercise of independent judgment. Calling Dr. Phil….
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