BCLP – US Securities and Corporate Governance – Bryan Cave Leighton Paisner

US Securities and Corporate Governance

Other Posts

Main Content

Latest Twists in Long and Winding Road to Board Diversity Disclosure

The House Committee on Financial Services met virtually on April 20, 2021 to consider legislation that, among other things, would require public companies to annually disclose the voluntarily, self-identified gender, race, ethnicity and veteran status of their board directors. The Committee cited a 2017 board diversity survey finding that increased board diversity improves companies’ ability to innovate and enhances overall business performance.

In the meantime, the wait continues for an SEC decision on Nasdaq’s proposed “comply or explain why not” mandate that would require public disclosure of board diversity statistics for most Nasdaq-listed companies, initially proposed in December 2020.   The SEC most recently acted on these rules on March 10, 2021, when it issued an “Order Instituting Proceedings to Determine Whether to Approve or Disapprove Proposed Rule Changes, as Modified by Amendment No. 1” (the “Order”).  The Order postponed the date, which had already been extended, by which the SEC is required to make its decision regarding the proposed rules, as amended, until possibly as late as August 2021. 

Some speculated that the delay was, at least in part, to allow time for Gary Gensler to be named SEC Chair.  The Senate confirmed Gensler’s nomination on April 14, 2021, and he was sworn in as a member of the SEC on April 17, 2021, so many expect movement on the Order this summer.  Comments continue to trickle in to the SEC website, and the SEC Office of the Investor Advocate continues to meet by telephone

Be Aware – SEC Implements Holding Foreign Companies Accountable Act (HFCA) Requirements

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

Don’t Delay: SEC Wants Your Two Cents on Climate Change Disclosure

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.

  • How can the Commission best regulate, monitor, review, and guide climate change disclosures in order to provide more consistent, comparable, and reliable information for investors while also providing greater clarity to companies as to what is expected of them? Where and how should such disclosures be provided?
  • What information related to climate risks can be quantified and measured?  Are there specific metrics on which all companies should report? How have companies or investors analyzed risks and costs associated with climate change? What are companies doing internally to evaluate or project climate scenarios,
  • Wait Continues for Any SEC Public Response to Senators’ Urgent Call for Rule 10b5-1 Plan Reform

    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:

  • What actions does the SEC currently take to ensure that 10b5-1 plans are compliant with the Commission’s current rules and requirements?
  • How many enforcement actions has the agency taken with regard to 10b5-1 plans in the past five years? Please provide a list and summary of all such actions.
  • Has the SEC taken action to require a “cooling off period” between the adoption or amendment of any 10b5-1 plan and any stock sales under that plan?
  • Does the agency intend to require that 10b5-1 plans are disclosed publicly and posted online in advance of any trades made under that plan?
  • Has the SEC considered or evaluated modifications of regulations to ensure that 10b5-1 adequately covers “short-swing” purchases?
  • What other actions has the SEC taken or are under consideration to prevent the abuse of 10b5-1 plans?
  • 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

    Climate-Related Disclosure in the Hot Seat

    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,

    New ISS 2021 Factors for Governance QualityScore Address Investor Hot Topics

    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)

    Don’t Forget! Refresher on Glass Lewis COVID-19-Related Guidance and ISS Compensation-Related FAQs

    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

    Nasdaq Board Diversity Proposal Faces Backlash

    Nasdaq’s recent proposal mandating board diversity faces backlash, as 12 Republican senators on the U.S. Senate Banking Committee last week urged the SEC not to approve the proposed rules, which would require all U.S. Nasdaq-listed companies to disclose board diversity statistics and to have, or explain why they do not have, at least two diverse directors: one woman and one who self-identifies as either an underrepresented minority or LGBTQ.

    While many anticipated that the SEC’s approval of the proposed rules would be a “slam dunk” given the current social climate, certain recent events suggest that approval may not necessarily be guaranteed.  These events include the senators’ disapproval and the SEC’s extension of the end of the comment period from January 25, 2021 to March 11, 2021.  Nasdaq and others, however, continue to fervently support the proposed rules.  In a letter dated February 5, 2021 to the SEC, counsel for Nasdaq reported that, by its count, 86% of the comment letters then submitted had supported adoption of the rules.  As reported in our December 2, 2020 post, Nasdaq believes its proposal would benefit investors and the public interest and cites in its SEC filing numerous empirical studies as support for its finding that diverse boards “are positively associated with improved corporate governance and financial performance.”  Nasdaq also noted calls for diversity from institutional investors, corporate stakeholders and legislators.

    In the letter urging the SEC not to approve the proposed rules, the senators noted that Nasdaq appears to them

    Nuts and Bolts of Electronic Signatures

    As discussed in our November 24, 2020 post, amended Rule 302 under Regulation S-T permits the use of electronic signatures on documents “authenticating” typewritten signatures that are included in a company’s filings with the SEC, provided certain requirements are met.  The signatory first has to manually (i.e., with “wet ink”) sign a company’s form of “attestation” in which the signer agrees that the use of his or her electronic signature on authentication documents constitutes the legal equivalent of his or her manual signature for purposes of authenticating his or her signature on any filing for which it is provided.  The company’s electronic signature process must, at a minimum, also meet the following requirements as set out in updated Volume II of the SEC’s EDGAR Filer Manual:

    • require presentation of a physical, logical or digital credential that authenticates the signer’s identity;
    • reasonably provide for non-repudiation of the signature;
    • provide that the signature be attached, affixed or otherwise logically associated with the signature page or document being signed; and
    • include a timestamp to record the date and time of the signature.

    As companies have begun to rely on amended Rule 302 to obtain electronic signatures on documents such as Form 10-Ks, Form 10-Qs and Section 302 and 906 certifications, here are a few of the questions and logistical issues that have arisen:

    1. Are the authentication requirements met if a company emails a document for signature and asks that the recipient reply by email affirmatively indicating approval of

    Lessons from GameStop: Small Investors “100% Don’t Care” About Risk

    Like KC Chiefs quarterback Patrick Mahomes eating green beans in a recent commercial, even though he “100% [doesn’t] like them,” it appeared the Reddit r/WallStreetBets group that banded together to buy GameStop shares “100% don’t care” about market risk and potential investment losses.  

    Inspired by social media cheerleaders, thousands of small investors acted with irrational exuberance, driving the share price from less than $20 on January 15, 2021 to $483 on January 28, 2021 before it closed that day below $200, and plummeted more than 40% to $53 on February 4.  

    Average investors watched in disbelief as trading markets were turned upside down by investors who appeared to ignore financial and other disclosures, disregarding the risks of possible complete loss of their investments.

    Understandably, the executives of GameStop and some players on the social media investor radar screen have so far declined to comment.  The social media blitz was completely outside control of the issuer’s management and they likely don’t have sufficient information to attempt to explain it.  To wit, one of GameStop’s reactions to the inexplicable volatility was to restrict trading in its shares.

    Regardless of how this saga ultimately ends for GameStop, it has raised important questions like whether a company should keep its trading window closed even after earnings are announced and the company has disclosed all material nonpublic information.  Normally, there “ought not” be any liability concerns for an issuer in such a situation, but that could be risky when judged in hindsight.  Large

    The attorneys of Bryan Cave Leighton Paisner make this site available to you only for the educational purposes of imparting general information and a general understanding of the law. This site does not offer specific legal advice. Your use of this site does not create an attorney-client relationship between you and Bryan Cave LLP or any of its attorneys. Do not use this site as a substitute for specific legal advice from a licensed attorney. Much of the information on this site is based upon preliminary discussions in the absence of definitive advice or policy statements and therefore may change as soon as more definitive advice is available. Please review our full disclaimer.