Last week the Staff of the Division of Corporation Finance issued a statement addressing a variety of accounting, financial reporting and governance issues that a private operating company should consider before undertaking a business combination with a special purpose acquisition company (a “SPAC”), shortly followed by one by the Acting Chief Accountant addressing financial reporting and auditing considerations for companies considering merging with SPACs.

The Corporation Finance statement addressed:

• Ineligibility for
  • The 71-day extension for target company financials, which must be filed on Form 8-K within four business days of closing the de-SPAC transaction
  • Incorporation of 1934 Act filings on Form S-1 until three years after closing 
  • Use of Form S-8 to register equity plans until 60 days after filing the “Super 8-K” containing required “Form 10 information” 
  • WKSI status, use of free writing prospectuses and certain other less strict requirements for public offerings 
• Public company reporting requirements applicable to the SPAC before, and the combined company after, closing including
  • Books and records requirements
  • SEC reporting and disclosure requirements 
  • The Staff noted that in the limited circumstances described in S-K CDI 215.02, it would not object if the combined company were to exclude management’s assessment of internal control over financial reporting in the Form 10-K covering the fiscal year in which the transaction was consummated 
  • New accounting requirements
• Stock exchange listing standards, including quantitative as well as corporate governance
  

The SEC recently announced its adoption of interim final amendments to certain forms, including Form 10-K and Form 20-F, to implement the congressionally mandated document submission and disclosure requirements of the Holding Foreign Companies Accountable Act (the “HFCA Act”) that became effective in December 2020.  The amendments will become effective 30 days after publication in the Federal Register.  They apply to public companies (each, a “Commission-Identified Issuer”) that are identified by the SEC as having filed an annual report that includes an audit report issued by a registered public accounting firm that (1) has a branch or office located in a foreign jurisdiction and (2) the PCAOB has determined it is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction.  The SEC will be responsible for identifying such companies, and the PCAOB will be required to identify audit firms that have a location in such a foreign jurisdiction.

Annual Report Amendments.  The new requirements will be implemented (1) with respect to Form 10-K, by the addition of Part II, Item 9C, and (2) with respect to Form 20-F, by the addition of Part II, Item 161.  Each new item will be captioned “Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.”

New Submission Requirement – Commission-Identified Issuers.  The new rules refer to any year in which the SEC identifies a company as a Commission-Identified Issuer as a “non-inspection year.”  The interim final amendments will require that each Commission-Identified Issuer submit, on or

The SEC recently issued a public statement asking investors, companies and other market participants to share their views on climate change disclosure.  Comments are due by June 13, 2021 and can be submitted via the SEC webform or email.  In addition to, or in lieu of, written submissions, the SEC staff is also willing to meet with members of the public to discuss their feedback.

The SEC generally will post submissions on www.sec.gov, so personal identifying information should not be included in written feedback. The SEC encouraged commenters to include empirical data and other information in support of their comments. Original data may assist the SEC in assessing the materiality of climate-related disclosures, and the costs and benefits of different regulatory approaches to climate disclosure.

The public statement contains 15 multipart questions for consideration, including the key excerpts set out below.  Please refer to the public statement for the full text of the questions.

In a speech on March 15, 2021, Allison Herren Lee, Acting Chair of the SEC, reported on the steps the SEC is taking to meet investors’ growing demand for climate and ESG information, stating that “no single issue has been more pressing for me” and that “climate and ESG are front and center for the SEC.”  She observed that there has been a shift in capital towards ESG and sustainable investment strategies, and that ESG risks and metrics increasingly affect investment decision-making.

Lee indicated that the SEC will devote substantial resources to investor protection initiatives that extend beyond, but are mutually reinforcing of, the SEC’s climate and ESG initiatives.  She noted that these other initiatives include, among others, ensuring strong and clear standards for broker-dealers, taking a “hard look” at the effects of the continuing flow of capital away from the public markets and proceeding with equity market structure reforms.  Reflecting the change in administration and SEC leadership, she noted that this may result in undoing some recently adopted rules and/or guidance.

Highlights of Acting Chair Lee’s speech follow:

Improving Climate and ESG Disclosures.  Lee noted that the SEC’s fundamental role with respect to climate and ESG is helping ensure that material information gets into the market in a timely manner.  She believes the SEC’s current voluntary framework for climate and ESG disclosures neither ensures that result nor meets investor demands; as a result, the SEC has begun taking steps to create a mandatory and comprehensive ESG disclosure framework

Yesterday, John Coates, the acting director of the SEC’s Division of Corporation Finance, announced a proposed framework for considering new ESG disclosure requirements, recognizing that while the scope of ESG issues is very broad, specific ESG issues affect particular companies differently based on industry, geography and other factors.

Need for “adaptive and innovative” policy

Coates compared ESG issues to asbestos-related risks, which evolved from invisible “non-financial” risks that were not addressed in SEC filings to visible and eventually clear financial risks that were increasingly disclosed in companies’ filings.  He believes that SEC policy needs to be adaptive and innovative and, for example, respond to climate risks that were formerly peripheral and now have greater significance.

Effective ESG disclosure system

Coates believes some of the questions the SEC should consider include:

• What disclosures are most useful?
• What is the right balance between principles and metrics?
• How much standardization can be achieved across industries?
• How and when should standards evolve?
• What is the best way to verify or provide assurance about disclosures?
• Where and how should disclosures be globally comparable?
• Where and how can disclosures be aligned with information companies already use to make decisions?

Costs from having no ESG requirements

Although recognizing that disclosure requirements impose costs on companies, Coates believes that failing to establish ESG requirements is itself costly – that the lack of consistent, comparable and reliable ESG data discourages investment and voting decisions.  Companies incur higher costs in responding to multiple, conflicting or redundant investor

The wait continues for any public response from the SEC to a recent letter from three Democratic members of the Senate Committee on Banking, Housing, and Urban Affairs, including Senator Elizabeth Warren, urging the SEC to (1) consider reforms to prevent what the senators identified as abusive 10b5-1 plan practices and (2) improve disclosure of and enforcement relating to such plans.

Senators’ SEC Requests for Information.  The senators asked the SEC to respond to the following questions by Monday, February 22, 2021:

In the letter, the senators said they believe reforms are necessary in large part because “new evidence indicates that executives – especially those in the health care industry – are abusing these

SEC Commissioners: Are Recent Announcements Changes from Status Quo or New PR Twist?

SEC Commissioners Hester M. Peirce and Elad L. Roisman today issued a statement providing their perspectives on the recent wave of climate-related announcements by the Divisions of Enforcement, Examinations and Corporation Finance.  Emphasizing that in their view the recent announcements raise more questions than they answer, the commissioners note their impact is not yet clear and query whether the announcements “represent a change from current Commission practices or a continuation of the status quo with a new public relations twist.”  Recent SEC ESG developments include:

• On March 4, 2021, the SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement to, among other things, develop initiatives to proactively identify ESG-related misconduct.
• On March 3, 2021, the SEC’s Division of Examinations announced its 2021 examination priorities, which include a greater focus on climate-related risks.
• On March 2, 2021, Gary Gensler, President Biden’s nominee to serve as SEC Chair, noted in a Senate confirmation hearing that investors increasingly want to see climate risk disclosures. He indicated that, if confirmed, he would support the SEC’s focus on more climate-related disclosures.
• On March 2, 2021, the House Committee on Energy & Commerce announced the Climate Leadership and Environmental Action for our Nation’s (CLEAN) Future Act which, if adopted as proposed, would direct the SEC to adopt climate risk disclosure rules within two years.
• On February 24, 2021, Allison Herren Lee,
  

On Friday, Nasdaq submitted a revised proposal that addresses board diversity membership for listed companies.  As discussed in our prior alert, Nasdaq had originally called for public companies – over a two-to-four year phase-in period — to include two diverse directors on their boards and to disclose in a “diversity matrix” certain anonymous aggregate data regarding gender identity, race, ethnicity and sexual orientation.

Based on comments, including criticism as discussed here, Nasdaq has modified the proposal in a variety of areas:

• Smaller boards. Companies with five or fewer directors would only need to include one diverse director, instead of two.
• Grace period for vacancies. A one-year grace period would be provided for companies that no longer meet the diversity objective as a result of a vacancy on the board.
• Timing of disclosure. Diversity information would need to be made publicly available before annual shareholder meetings, to align with disclosures for other proxy-related governance matters.
• Extra time for newly-listed companies. Newly-listed companies that become listed after the phase-in period for the new rules ends would have an additional two-year period after the phase-in period to fully meet the diversity objective.
• Trigger date. The operative date for disclosure would be the later of (1) one calendar year from the date of SEC approval of the revised proposal or (2) the date the proxy statement is filed for a company’s annual meeting during the calendar year of such SEC approval date.
• Location of disclosure. Companies could choose to disclose
  

ISS recently released updated methodology for its Governance QualityScore (GQS) rating system for institutional investors.  The new factors relate to areas of emerging concern to investors, with 11 of the 17 new factors addressing information security risk and oversight.  Other new factors relate to board matters, such as diversity, inclusion, practices and composition, and to compensation matters, such as whether and the extent to which special grants have been made to executive officers.  ISS also extended to the U.S. market certain factors regarding the number of boards on which directors serve and shareholder voting rights.  ISS further indicated that the updated methodology reflects the rebalancing of certain existing factors in the categories of Board Commitments and Litigation Rights.

ISS reviews its methodology annually to ensure that its approach remains closely aligned with ISS’ benchmark voting policies and reflects developments in regulatory and market practices.  Key updates to ISS’ benchmark voting policies for the 2021 proxy season are summarized in our December 11, 2020 post. The new factors and factors newly applied to the U.S. market include:

New Factors as of January 29, 2021:

Audit (Information Security Risk Oversight)

• What percentage of the committee responsible for information security risk is independent? (Q403)
• How often does senior leadership brief the board on information security matters? (Q404)
• How many directors with information security experience are on the board? (Q405)

Audit (Information Security Risk Management)

• Does the company disclose an approach on identifying and mitigating information security risks? (Q402)

For companies knee deep in proxy statement drafting and 2021 executive compensation decisions, we recommend a quick refresher on Glass Lewis’ December 2020 Approach to Executive Compensation in the Context of the COVID-19 Pandemic and ISS’ October 2020 COVID-19-related compensation FAQs, as well as ISS’ more general December 2020 compensation-related FAQs and equity plan-related FAQs.  Highlights include:

Glass Lewis Approach to Executive Compensation in the Context of the COVID-19 Pandemic

Glass Lewis released this December 2020 guidance to illustrate how it will apply its executive compensation policies in 2021 in the wake of COVID-19.  Glass Lewis noted that the pandemic has not changed its approach to executive pay, which is a “pragmatic, contextual approach that applies in good times and bad.”  Some of the key topics covered are:

Pay-for-Performance Analysis.  Glass Lewis does not expect the macroeconomic climate to have a drastic impact on its pay-for-performance model and will continue to take a holistic approach when evaluating the alignment between executive pay and company performance within the context of the pay-for-performance model and the pandemic.

Say-on-Pay Proposals.  Glass Lewis notes that how companies respond to changing macroeconomic conditions resulting from the pandemic will dominate say-on-pay votes.  Given that an executive’s base salary represents a relatively low portion of his or her total compensation, Glass Lewis will view temporary base salary reductions in the face of the pandemic to be token gestures.  Glass Lewis will instead look closely at overall pay levels, including scrutinizing mid-cycle pay