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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

SEC amends proxy rules to address proxy voting advisors and issues guidance for investment advisers on use of automated voting platforms

On Wednesday, the SEC adopted amendments to the proxy solicitation rules  relating to proxy voting advisors and issued new supplemental guidance relating to the proxy voting responsibilities of investment advisers when using automated voting.

We have prepared a client alert describing the amendments and guidance in more detail.  The following is a brief summary.

The proxy rule amendments effected three principal changes:

  • They codify the SEC’s previous interpretation that proxy voting advice produced by “proxy voting advice businesses” (PVABs or proxy advisory firms), such as ISS and Glass Lewis, generally constitutes a “solicitation” for purposes of Rule 14a-1(l) of the Securities Exchange Act of 1934.
  • In order for PVABs to avoid the information and filing requirements of the proxy rules, PVABs must:
    • Disclose material conflicts of interest to their clients as well as any policies and procedures used to identify, and steps taken to address, any material conflicts.
    • Establish and publicly disclose policies and procedures reasonably designed to allow registrants that are the subject of the PVABs’ voting advice to be able to access that advice prior to or at the same time as the advice is disseminated to the advisory firms’ clients.
    • Adopt and publicly disclose policies and procedures reasonably designed to ensure the PVABs provide their clients with a mechanism by which they can reasonably be expected to become aware of any written responses by registrants to such voting advice, in a timely manner before the shareholder meeting or other action.
  • Third, the amended

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

Is There Life for SAFTs After the Telegram Case?

The final act in the saga between Telegram Group Inc. (“Telegram”) and the SEC was the June 26, 2020 court approval of the SEC’s settlement with Telegram, in which Telegram agreed to pay a civil penalty of $18.5 million and disgorge $1.224 billion to investors related to what the SEC claimed was an illegal unregistered public offering of securities.  This followed the court granting the SEC’s requested temporary restraining order in October 2019 (on an emergency basis) to prevent Telegram’s issuance of $1.7 billion in blockchain-based instruments (“digital assets”) known as “Grams.”

The abrupt termination of Telegram’s offering is particularly notable for the SEC’s treatment of the Simple Agreement for Future Tokens (“SAFT”) offering framework, which its designers thought was  a creative solution to conduct “initial coin offerings” (“ICOs”) without triggering U.S. securities registration requirements. The two-step transaction contemplated by SAFTs was envisioned as enabling startups to secure an initial infusion of cash by selling in a private placement to accredited investors the right to receive digital assets when they were issued in the future. The digital asset community has been watching the Telegram case, hoping SAFTs would be spared the enforcement scrutiny that the SEC gave to ICOs.  However, recent SEC enforcement activity, including the order in SEC v. Telegram, suggests the SEC is viewing SAFTs as another breed of ICO, and successfully persuading federal courts to join that viewpoint.

Designers of the SAFT framework touted it as a potential avenue to issue digital assets without requiring registration

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

SEC extends temporary COVID-19 relief for some submissions

June 30, 2020

Categories

In light of health, transportation and logistical issues raised by COVID-19, the SEC staff recently extended previously announced relief for several types of submissions.

  • Form 144 paper filings and certain forms (other than 144s) that are permitted to be filed in paper (such as annual or other reports by foreign private issuers on Form 6-K, Form 11-K and certain other specified forms) may be submitted via email in lieu of mailing or physical delivery if the complete Form 144 or other document is attached as a PDF sent to PaperForms144@sec.gov or CorporationFinancePaperForms@SEC.gov, respectively.
    • If a manual signature cannot be provided with the email, the SEC staff has announced that it will not recommend enforcement action if a typed signature is included instead and: (i) a manually signed page or other document acknowledging or otherwise adopting his or her signature in the filing is retained by the signatory and is provided upon request by the SEC staff; (ii) the signature page indicates the date and time when signed; and (iii) appropriate policies and procedures are established relating to this process.
    • Filers may continue to submit these documents to the SEC mailroom but there may be delays in processing.
  • The signature requirement for Edgar filings may create challenges for public companies and other filers to have such filings executed before the time of the electronic filing due to circumstances arising from COVID-19. While the SEC staff expects filers to comply with requirements to

COVID-19 Business Risk Management: Addressing Supply Chain Risks

As public companies continue to manage vulnerabilities attendant to the global pandemic and its widespread economic consequences, counter-party risk assessments and careful management of those risks can be critical.  We previously blogged about a series of ongoing posts from our restructuring and special situations team relating to general and customer counter-party risk management during this time.  Most recently, the team provided its assessment of managing supply chain risks.

Our special situations team explores the need for vigilance with respect to the health and resilience of a company’s supply chain, especially for critical suppliers and those for which replacements are limited or nonexistent.  The team discusses some of the insolvency law issues attendant to suppliers and supply agreements; it also provides several risk mitigation strategies to help ensure continuity of supply and reasonableness of ongoing counter-party terms and conditions.  The team recommends companies engage in a fulsome assessment of all suppliers; consider supply chain diversification; and establish contingency plans for any suppliers who seem at risk.   The importance of knowing a company’s leverage and using it appropriately is discussed, as are practical issues pertaining to supplier possession of a company’s inventory or equipment.

While a company cannot control all of what is happening to its customers and suppliers, it can be fully cognizant of its counter-party risk assessments and implement strategies where appropriate to mitigate those risks.  When it comes time to report results for the quarter and the year, companies who have taken the time to take

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