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ISS opens 2021 Annual Policy Survey, following call to voluntarily disclose ethnicity of directors, officers

Institutional Shareholder Services Inc. (ISS) opened its 2021 Annual Policy Survey on July 29, 2020, to seek input from institutional investors, public companies, directors and others to begin development of ISS’ annual benchmark policies and assess potential policy changes for 2021 and beyond.  The survey will close on August 21, 2020, at 5 p.m. ET.

This year’s survey includes questions related to recently released ISS policy guidance on issues related to the COVID-19 pandemic, including annual general meeting formats and stakeholder expectations regarding compensation and adjustments to incentives.  The survey also requests feedback on a global level related to climate change risk, sustainable development goals, auditors and audit committees, and racial and ethnic diversity on corporate boards. As in prior years, after analysis and consideration of the survey responses, among other inputs, ISS will open a public comment period in October for all interested market participants on the proposed changes to 2021 benchmark voting policies.

Earlier this month, ISS sent letters to multiple public companies asking them to voluntarily disclose “information on the self-identified race/ethnicity of each of the company’s directors and named executive officers (NEOs), to the extent that the company and the individual directors or NEOs are willing to provide this.”  The letter allows each director or officer to disclose up to three classifications from multiple categories, largely drawn from the OMB Standards for the Classification of Race and Ethnicity. Individuals may also provide supplemental information in free-text fields.

The letter states the request is driven by the

Repeating COVID-19 Risk Factor Updates in Your Second (and Third) Quarter 10-Qs

As previously noted, the SEC issued supplemental disclosure guidance near the end of the second quarter which, among other things, set forth dozens of questions for companies to consider as they assess and disclose the evolving impact of COVID-19 on their operations, liquidity and capital resources.

Many public companies with a December 31 fiscal year end included updated risk factors in their first quarter 10-Q filings, reflecting the uncertainties and adjusted risk profile in light of COVID-19.  Disclosure practices varied, with some companies including a small number of risk factors (or even a single risk factor) that updated previously disclosed risks in a global manner.  Other companies updated a small subset or suite of risk factors affected by COVID-19, and some may have updated all of their risk factor disclosure from the previous Form 10-K.

As companies assess their risk factor disclosure for the second (and third) quarters, it is important to consider that Item 1A of Part II of Form 10-Q requires disclosure of “any material changes from risk factors as previously disclosed in the registrant’s Form 10-K in response to Item 1A to Part 1 of Form 10-K.”  In other words, as a technical matter, companies don’t get the benefit in later quarters of relying on updates in previous 10-Q filings in the same fiscal year.  (Compare this requirement with, for example, the instruction to Part II, Item 1 as to Legal Proceedings, where disclosure in subsequent Form 10-Q filings in the same fiscal year are

Dodd-Frank’s 10th Anniversary: Mandatory Rulemaking Provisions Still Pending

This week marked the 10th anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law on July 21, 2020.  At various virtual events celebrating the milestone, including a webinar co-sponsored by advocacy group Better Markets and George Washington University Law School’s Business and Finance Law Program, creators Chris Dodd and Barney Frank, as well as former President Barack Obama, Elizabeth Warren and Maxine Waters, among others, shared their insights and memories, as well as views on the Dodd-Frank Act’s role in strengthening banks, which arguably helped them withstand the COVID-19 storm.

The SEC website page on implementing the Dodd-Frank Act shows that to date, the SEC has adopted final rules for 67 mandatory rulemaking provisions of the Dodd-Frank Act.  Here is what remains outstanding:

  • Executive Compensation: 4 proposed
    • Section 953(a): Pay vs. performance disclosure (proposed rules issued April 29, 2015 that continue to be characterized as a Long-Term Action on SEC’s recently released Spring 2020 Reg-Flex Agenda)
    • Section 954: Recovery of executive compensation (proposed rules issued July 1, 2015 and listed in the short term “proposed rule stage” of the Spring 2020 Reg-Flex Agenda)
    • Section 956(a):  Compensation structure reporting at certain financial institutions (jointly proposed rules issued May 6, 2016 that continue to be characterized as a Long-Term Action on SEC’s recently released Spring 2020 Reg-Flex Agenda)
    • Section 956(b): Prohibition on certain compensation arrangements at certain financial institutions (jointly proposed rules

SEC alerts public companies of increase in sophisticated ransomware attacks

The SEC’s Office of Compliance and Examinations (OCIE) issued a risk alert on July 10 about its observation of an apparent increase in sophistication of ransomware attacks on SEC registrants, including broker-dealers, investment advisers,  investment companies, and impacting service providers to public financial institutions.

Recognizing the SEC’s alert and other recent cyber incidents, we encourage all public companies, financial institutions and their service providers to consider their cybersecurity preparedness and operational resiliency to address hacking and, in particular ransomware attacks, consistent with the advice of the OCIE and the Department of Homeland Security.  This is particularly important given that OCIE once again advised financial institutions, in its 2020 Examination Priorities release, that Information Security was one of its top priorities.

In its risk alert, OCIE cited recent reports of one or more threat actors orchestrating phishing and other campaigns designed to penetrate financial institution networks, primarily to access internal resources and deploy ransomware, a type of malware designed to provide unauthorized access to institutions’ systems and deny the institution use of its system until a ransom is paid.  OCIE also noted ransomware attacks impacting service providers to public companies.

OCIE encouraged public companies and their service providers to monitor cybersecurity alerts published by the Department of Homeland Security Cybersecurity and Infrastructure Security Agency (CISA), including the alert published on June 30, 2020, relating to a particular malware focused on financial institutions and their customers.

The OCIE alert noted that information security is a key risk area on

SEC proposes $3.4 billion increase to current $100 million reporting threshold for Form 13F

On Friday, July 10, the SEC proposed amendments to Form 13F to substantially increase the reporting threshold to $3.5 billion from the current level of $100 million and make certain other changes.  This would be the first change to the threshold since the form was adopted in 1978.

SEC rules require institutional investment managers to file a Form 13F for each quarter if the accounts over which they exercise investment discretion hold more than $100 million of “13(f) securities”, which primarily consist of U.S. exchange-traded stocks, shares of closed-end investment companies and shares of ETFs.  The form was adopted to promote greater visibility into the investment activities and holdings of larger investment managers.

According to the SEC, the new threshold would reflect proportionally the same market value of U.S. equities that $100 million represented in 1975, when Congress directed the SEC to develop a reporting regime.  The SEC believes the change would result in disclosure of over 90% of the dollar value of the holdings data currently reported while eliminating the Form 13F filing requirement and its attendant costs for the nearly 90% of filers that are smaller managers. Further, the aggregate value of section 13(f) securities reported by managers would represent approximately 75% of the U.S. equities market as a whole, as compared with 40% in 1981, the earliest year for which Form 13F data is available.

At the same time, the SEC acknowledges that some of the holdings data that would no longer be reported relates

80% of U.S. S&P 500 Companies Fail to Provide Guidance in Last Three Months

As U.S. public companies prepare to kick off the Q2 2020 financial reporting season, a clear trend is emerging, with 80% of S&P 500 companies refusing to provide earnings guidance during the last three months, according to a recent Bloomberg article.  That translates to more than 400 companies who failed to provide guidance to investors, with nearly all stating that they lack visibility because of COVID-19, based on a recent Seeking Alpha report.

For those companies that have issued guidance, Factset.com recently reported that during Q2 2020, 27 S&P 500 companies issued negative EPS guidance and 22 S&P 500 companies issued positive EPS guidance. Only 49 S&P 500 companies issued EPS guidance for Q2, which was well below the 5-year average of 106 for a quarter.

While the numbers and percentages reported above differ slightly, the trend toward withholding guidance is clear and understandable in the current environment.  The health and economic effects of COVID-19 remain uncertain and depend on the duration of the crisis.  Absent a vaccine for the virus, companies – particularly those in the consumer discretionary sector – grapple with how to profitably run a business where social distancing and avoidance of large crowds are the new norms.

On the other hand, the conservative position of failing to provide guidance seems at odds with investors’ desire for greater transparency and more insight into the range of potential outcomes and the ability of companies to manage through different scenarios during this period of pandemic and

Key themes emerge from SEC Investor Roundtable

On June 30, 2020, Jay Clayton, SEC chair, and Bill Hinman, Director of Corporation Finance, hosted an investor roundtable seeking input from investors on how to improve disclosures during this period of COVID-19.  The participants included Gary Cohn, Former Director of the National Economic Council; Glenn Hutchins, Chairman of North Island; Tracy Maitland, President and CIO of Advent Capital; and Barbara Novick, Vice Chairman and Co-Founder of BlackRock.

The discussion was wide-ranging, but several themes emerged:

  • While swift government action from the Federal Reserve and the CARES Act appears to have helped stabilize the economy and markets, investors expressed concern that the macro-economic picture remains very uncertain, particularly as certain government programs expire.
  • Investors want to see greater transparency as to how the company expects to perform in the near term, including with respect to such matters as cash flow, working capital and covenant compliance as well as key assumptions. For example, is the company’s ability to restore production dependent on schools reopening so that parents can return to work?  Or does the company’s supply chain depend on European travel being restored?
  • Glenn Hutchins noted that fewer than 10% of the S&P 500 have maintained earnings guidance. As a result, investors seek greater insight into the range of potential outcomes and the ability of companies to manage through different scenarios as well as a greater understanding if companies have “tools for adaptability” and an ability to adjust to changes in an uncertain environment. He cited the joint statement

U.S. Companies Assess Ripple Impact of COVID-19 on their Business and Incentive Plan Metrics

As we near the end of second quarter 2020, companies are evaluating the ripple effect COVID-19 has had and will likely continue to have on their businesses as a result of worker layoffs, shelter-in-place orders, employee health and safety matters, supply chain and counterparty risk issues and decreased product demand, among other things.

One key area of focus for many companies and compensation committees will be assessing the impact of COVID-19 on incentive plan performance award targets, many of which were set in February before the pandemic hit the United States and may now be unattainable. Most companies will want to keep their executive and management teams striving for potentially new and adjusted goals that the new environment requires. How to go about reflecting and rewarding key employees for performance around these changes becomes challenging when awards for the performance period have already been granted.

Some companies have viewed their performance awards as long-term in nature and have maintained existing performance targets in spite of changed circumstances. Others see a need for changes. The approaches will depend on each company’s particular compensation philosophy and structure, the amounts and types of awards that have been granted, the extent and manner in which the business and existing targets have been affected, and other motivating criteria at issue.

On approach that companies have considered in connection with their annual awards is to adjust the performance targets based on currently available information so as to reflect changing expectations. This approach is relatively straightforward. A

Frustrations Emerge Over Lack of Clear ESG Disclosure Standards Among Patchwork of Providers

Fallout from the COVID-19 pandemic appears to be sharpening some investors’ focus on ESG (Environmental, Social or Governance) matters, as evidenced by the SEC Investor Advisory Committee’s recent recommendation that the SEC mandate disclosure of “material, decision-useful, ESG factors” as relevant to each company.

The desire for more clarity around ESG disclosure is understandable.  More than a dozen non-profit and for-profit ESG data providers have emerged in this complex, booming market, according to a May 28, 2020 webinar of the Sustainability Accounting Standards Board and the Society for Corporate Governance.  The data providers generally fall into four distinct groups:  (1) providers who publish guidance for voluntary ESG disclosure, often with company feedback; (2) providers who request data from companies using questionnaires and then based on the answers issue reports or ESG ratings; (3) providers who compile publicly available ESG data about companies and issue ESG ratings based only on that publicly available information; and (4) providers who create assessments of companies based on public and/or private information to sell to investors.

Under the current patchwork, a public company can be the subject of an ESG assessment without knowledge that it occurred or an opportunity to give input or correct misperceptions, particularly in situations where the company has very limited ESG disclosures because ESG issues were not deemed material and not required to be disclosed under SEC rules.  For public companies trying to navigate the maze of ESG issues and disclosures, frustration can easily emerge.  The different ESG assessment

New PPP Loan Forgiveness and Loan Review Interim Final Rules: SBA May Review Any PPP Loan, Regardless of Size, Concerning Forgiveness, Use of Proceeds and Eligibility

The SBA released a set of interim final rules to provide additional guidance and clarity to borrowers and lenders both for loan forgiveness and for SBA loan review procedures under the Paycheck Protection Program (“PPP”).  The loan forgiveness interim final rule supplements the guidance provided by the actual PPP loan forgiveness application previously published by the SBA, providing timing information and allocating responsibilities as between the lender and the borrower.  The SBA loan review procedures interim final rule sheds little additional light on what borrowers should expect, but does provide additional guidance for lenders with respect to their role in the review process.

With respect to the SBA review process, the interim final rule makes clear that the SBA may choose to review any PPP loan, regardless of size, concerning not only forgiveness amounts and use of proceeds, but also eligibility in the first instance.  The SBA previously announced a safe harbor of sorts for any borrower of less than $2 million regarding the “necessity” certification.  The SBA included in its Frequently Asked Questions FAQ #46 that “[a]ny borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”  No mention was made of this safe harbor, or the related statement in FAQ #46 that if a borrower repays a PPP loan after a determination by the SBA that

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