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SEC Staff Announces Temporary Procedures for Supplemental Materials and Rule 83 Confidential Treatment Requests

In light of health and safety concerns related to the pandemic, the SEC staff recently announced the availability of a temporary secure file transfer process for the submission of supplemental materials pursuant to Rule 418 under the Securities Act of 1933 or Rule 12b-4 under the Securities Exchange Act of 1934 and information subject to Rule 83 confidential treatment requests (“CTRs”).

From time to time companies provide supplemental materials to the SEC staff, typically when responding to SEC comments.  Rule 418 provides broad authority to the SEC and its staff to request information concerning a company, its registration statement, the distribution of its securities and market or underwriter activities. Rule 12b-4 provides similar authority with respect to registration statements and periodic or other reports. Both rules require the SEC to return supplemental materials upon request, provided the request is made at the time they are furnished to the staff and return of the materials is consistent with the protection of investors and FOIA.  Rule 418 also requires that the materials not have been filed in electronic format.

SEC Rule 83 provides a procedure by which persons submitting information may include a CTR for portions of that information where no other confidential treatment process applies. Typically, this is utilized when companies provide responses to SEC staff comments.  Rule 83 generally requires the submission of the information covered by the CTR separately from that for which confidential treatment is not requested, appropriately marked as confidential, and accompanied by

Consider Updates to D&O Questionnaire as Pressure Mounts for Voluntary Racial, Ethnic and Gender Diversity Disclosures

As the pandemic and racial unrest continue in 2020, companies should consider whether to update their D&O questionnaires to gather information in response to the growing pressure for voluntary diversity disclosures from investors, proxy advisors, activists and others, as noted in our recent posts on August 3 and August 10.

Boards grappling with the possibility of voluntary diversity disclosures must consider how to accurately collect data.  In February 2019, the SEC issued Compliance and Disclosure Interpretation 133.13 requiring certain disclosures if a board or nominating committee considers self-identified diversity characteristics of an individual who has consented to the company’s disclosure of those characteristics.  Companies understandably were slow to address self-identification of diversity traits in D&O questionnaires, given the sensitivity of the topic.

But now, as pressures mount and some companies publicly pledge to add diverse directors to their boards within one year, the annual D&O questionnaire can be a useful way to document the issue and provide a basis for any voluntary disclosures a company may decide to make.  Given the sensitivity of the issue, companies could consider discussing the topic in advance of circulating the questionnaire in order to evaluate whether or how directors wish to proceed. To maintain collegiality, companies should make clear responses are optional, and take care to avoid any implication that particular directors were appointed because of their race, gender or other characteristics.  In lieu of a questionnaire, the board could consider addressing self-identification disclosures during a board meeting or in

SEC stays approval of NYSE rule changes allowing primary capital raises by issuers in direct listings

On August 26, 2020, pursuant to delegated authority by the Commission, the SEC’s Division of Trading and Markets approved changes to NYSE listing rules to allow companies to raise capital in connection with a direct listing on the NYSE without a firm commitment offering.   Currently, the NYSE has discretion to approve direct listings at the time of effectiveness of a company’s initial registration statement under the Securities Act of 1933 filed solely for the purpose of allowing existing shareholders to sell their shares without a firm commitment offering (a “selling shareholder direct listing”).  Under the new rules, the NYSE would be permitted to approve a direct listing by a company that sells shares itself in the opening auction on the first day of trading on the NYSE (a “primary direct listing”) in addition to, or instead of, a selling shareholder direct listing.

On August 31, 2020, the SEC notified the NYSE that the rule changes have been stayed following receipt of notice, reportedly by the Council of Institutional Investors (CII), that CII plans to submit a petition for review by the full Commission of the delegated approval by the Division of Trading and Markets.

The CII had commented on the rule proposal expressing concern about, among other things, the potential for reduced liability under technical principles under Section 11 of the Securities Act of 1933 due to challenges in tracing shares back to the registration statement.  The SEC staff had considered those concerns, but had noted

SEC, in Split Vote, Expands Accredited Investor Definition, Paving Way for More Investors to Access Private Capital Markets

The SEC adopted amendments on August 26, 2020 by a 3-2 vote, to expand the definition of “accredited investor,” paving the way for certain financially sophisticated institutional and individual investors to participate in private capital market offerings. The SEC release notably invited members of the public to propose to the Commission additional specific certifications, designations, degrees, or programs of study that should qualify someone to be an accredited investor.

Click here to read the Alert in full.

Divided SEC amends Regulation S-K rules to modernize descriptions of business, legal proceedings and risk factors

On August 26, 2020, by a 3-2 party-line vote, the SEC adopted amendments to Regulation S-K that aim to modernize the descriptions of business and legal proceedings, and risk factor disclosure requirements. The amendments reflect a principles-based approach in which disclosure objectives are set and management is permitted to exercise judgment on how to satisfy those objectives — tailored to the particular registrant — to the extent such information is material to an understanding of the topic.

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

Description of Business (Items 101(a) and (c)). The amendments provide a nonexclusive list of the types of information that a company may need to disclose, based on a principles-based approach. For example, a company would describe its dependence on key products and services that are material instead of focusing on products and services that meet the quantitative thresholds based on revenue currently prescribed in Item 101(c)(1)(i).

Among other things, the revised list of disclosure topics relating to the general development of a company’s business and accompanying business description:

  • Eliminates the look-back in Item 101(a) – generally five years, or three years for smaller reporting companies — to focus on material developments of a company’s business, regardless of a specific time frame.
  • Revises and expands the list of disclosure topics in Item 101(c) with a principles-based, non-exclusive list of topics.
  • Require, to the extent material, new disclosures regarding “human capital resources,” which includes any

Troubles Mount for Embattled Eastman Kodak

A proposed class action has been filed against Eastman Kodak alleging securities fraud in connection with certain events surrounding the government’s possible $765 million pharmaceutical development loan to Kodak.  The plaintiff seeks to represent a class of shareholders who may have purchased Kodak stock between July 27 – when early word of a possible government-Kodak initiative was released – and August 7 – when the company announced the formation of an independent committee of the board of directors to conduct an internal investigation of the events surrounding the possible government loan.

Between those dates, the company released a flurry of information, Senator Elizabeth Warren sent a letter to the SEC seeking an SEC investigation, the U.S. government tweeted that the loan would be halted pending resolution of wrongdoing allegations and there was extraordinary stock activity.  During that time, Kodak stock rose as high as $60 per share, up from about $2 per share the prior week.

The troubles seem to stem from an advisory sent by Kodak to media outlets in Rochester, New York, Kodak’s hometown, on Monday, July 27.  According to media reports, local reporters tweeted information on July 27 about an initiative between Kodak and the U.S. government in response to the coronavirus pandemic.  Those were followed by posted news stories on the websites of the local ABC and CBS affiliates.  Some of those tweets and stories were deleted when Kodak reached out to advise them that the advisory information was only for “background” and not publication. 

Q2 Reporting Trends: Few Jump on EBITDAC Bandwagon

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

Analysis of PPP Borrowers: Who Returned Funds?

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.

Lawsuits challenge alleged false proxy statements about commitment to diversity

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

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

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