Based on Q2 reporting to date, few companies opted to present non-GAAP financial measures using the new metric term “EBITDAC” (earnings before interest, tax, depreciation, amortization – and COVID-19).  That is not surprising, given the concerns raised by credit rating agencies, the CFA Institute and U.S. creditors, among others, about the potential for EBITDAC to distort and misrepresent companies’ earnings.

Instead, many companies appeared to heed SEC advice, including CF Disclosure Guidance: Topic No. 9A, as described in our June 24, 2020 post, and CF Disclosure Guidance: Topic No. 9 as described in our April 2, 2020 post .  In addition to including discussions of COVID-19 business impacts in earnings releases, many included such discussions in MD&A in the Q2 Form 10-Q filed with the SEC.  Rather than disclosing the impact of COVID-19 as a non-GAAP financial measure, many presented traditional operating or statistical metrics while separately quantifying the effect of the pandemic, such as “Operating expenses increased 25% compared to the second quarter of 2019, 15% of which was due to COVID-19 supplies, cleaning and other incremental costs.”

While few companies used the EBITDAC label as noted above, some appeared to be using the concept without the label.  For example, some adjusted their adjusted EBITDA for COVID-19 expenses or presented gross margin without COVID-19 impacts.  Such COVID-19 adjustments may be more likely to draw SEC scrutiny during ordinary periodic filing reviews, especially when viewed in hindsight.  The staff has taken the position that “presenting a

Under the CARES Act, the U.S. Treasury and Small Business Administration established the Paycheck Protection Program, a forgivable loan program for small businesses.  While public companies were eligible to participate, on April 23, 2020, the U.S. Treasury published new guidance suggesting public company participants who could not demonstrate sufficient need could be subject to scrutiny unless they return the funds. We previously wrote about a framework for borrowers to analyze their certification risks.

Most public company recipients of Paycheck Protection Program loans have elected not to return the funds.  Based on a review of SEC filings and published SBA data, this post on Bryan Cave Leighton Paisner’s banking blog, BankBCLP.com, analyzes the statistics to see who returned Paycheck Protection Program loans.  Among the findings, 88% of public borrowers that received PPP loans elected to retain their PPP proceeds and 75% of borrowers approved for PPP loans of between $5 and $10 million did the same.

Read more here.

A well-known plaintiffs’ law firm recently filed derivative lawsuits against four prominent companies, alleging false proxy disclosures and breaches of fiduciary duties.  The allegations focus on the absence of Black directors and executive leadership, and in some cases other persons of color, and very few Black employees, and purported false statements about the companies’ commitment to diversity.

The allegations of proxy statement misstatements, which include breaches of the duty of candor, vary somewhat among the complaints, but generally focus on:

• Statements touting the board’s consideration of diversity in the nominating process;
• Statements regarding the importance of diversity and inclusion in the company’s employment practices;
• The absence of terms limits and the failure to discuss their effect on the nomination of Blacks and minorities; and
• The failure to consider diversity and inclusion goals in executive compensation decisions and the lack of disclosure of the company’s unlawful discriminatory hiring and pay practices.

The complaints typically cite disclosures in the corporate governance and CD&A sections of the proxy statement, but in some cases also focus on company responses to shareholder proposals that relate to diversity and employment practices.

The allegations of breaches of fiduciary duties focus on directors’ failure to oversee compliance with anti-discrimination laws, citing class action settlements and/or government investigations regarding gender or other discrimination, and failing to ensure the inclusion of diverse candidates as directors, citing board committee charters and proxy disclosures.  Some of the complaints also challenged director and/or executive compensation as excessive or unjust in light

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

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

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
  

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
    

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

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

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