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There has been no lack of news since the President was re-inaugurated in January.  However, until very recently, little of the news seemed to be coming from the SEC.  Perhaps that is because the new SEC Chair, Paul Atkins, was not sworn in until April 21 (happy birthday to me) or for some other reason, but in any case things now seem to be moving a bit.

One area of movement is cryptocurrency.  In contrast to Gary Gensler, who seems to have believed that crypto was evil incarnate, Chair Atkins is reputed to think that it’s not so bad, or maybe even that it’s fine.  Although I can’t write about SEC initiatives without mentioning crypto, I don’t understand it, and I suspect that many other people don’t either (including many who claim to get it), so I’ll leave it to Chair Atkins and others to figure it out.

But I do understand two areas where the SEC has started to move, and those are the areas I’d like to comment on.

Executive Compensation

First and foremost is executive compensation disclosure.   The SEC held an executive compensation roundtable on June 26, and the buzz is that Chair Atkins and his Republican colleagues aren’t very happy with the existing disclosure regime, likening it to a Frankenstein monster (an apt analogy, IMO).  I have mixed feelings on the subject; on the one hand, executive compensation is where the governance rubber meets the road, and consequently should be the subject of good disclosure.  On the other hand, I’ve drafted and/or read many proxy statements over the years, and it’s a gross understatement to say that most compensation disclosure is impenetrable and unhelpful.  The situation has not been helped by SEC interpretations and comments that have caused the Compensation Discussion and Analysis to become bloated and uninformative, sometimes focusing on trivial matters at the expense of more important ones.  (And yet…. One of my pet peeves is that many companies continue to get away with reporting that time-vested equity grants are “performance-based,” when the only “performance” is that the recipient is still breathing; however, the SEC doesn’t seem to think this is a problem.)

It’s way too early to make predictions, but the areas of focus at the roundtable included both the “Pay versus Performance” and CEO Pay Ratio disclosures.  The SEC more or less ignored the congressional mandate for PVP disclosures for a while, but when the Gensler regime took it up, it did so with a vengeance, and the rules it conjured up went far beyond what anyone thought they should be.  CEO pay ratio disclosures appeared to be little more than a very complicated shame game.  And, with some exceptions, actual investors (as opposed to the SEC’s imaginary ones) don’t seem to have paid much attention to either set of disclosures.

I haven’t digested all of the reports of the roundtable discussions, but so far I haven’t seen anything suggesting that CD&A reform was discussed. Hopefully it will be, because I just don’t understand why a 30-page (or longer) CD&A is necessary or tolerated. 

The road ahead may be bumpy.  Some of the disclosures that we love to hate were mandated by legislation, and it may be difficult for the new, reform-minded SEC to cut back on the excesses perpetrated by previous commissions.  Also, there will always be some investors who will claim that they need to have such-and-such information to properly evaluate the appropriateness of executive pay at a given company. That said, let’s hope that the SEC effects some improvements.

Scaled Disclosure

While it hasn’t gotten as much publicity as executive compensation, the SEC has also been thinking about fixing its questionable approach to scaled disclosure.  For one thing, the dollar thresholds for determining whether a company is a “Smaller Reporting Company” are woefully out of date.  And many of us have long questioned why the sole metric that determines SRC status is public float.

I went back to the 2007 proposing release and was disappointed to see that the SEC’s rationale was pretty lame, for lack of a better word.  Specifically, public float was selected as the basis for determining SRC status

“… because we… have several rules using the $75 million public float metric to distinguish smaller companies. In addition to the use of this public float metric in the definition of accelerated filer, the $75 million public float requirement is used to determine expanded eligibility in Form S–3 and Form F–3.  Further, issuers are required to provide their public float on the cover page of their Exchange Act annual reports.”

If this sounds similar to the parental “because I said so,” it gets worse when the release “explains” (using the term very loosely) why a revenue test was not considered:

“Our proposed definition of ‘‘smaller reporting company’’ does not include a revenue test for most companies. While our current definition of ‘small business issuer’ includes a revenue standard, the classification of an issuer as a large accelerated filer, an accelerated filer, or… a non-accelerated filer does not involve a revenue standard. We chose not to propose a revenue standard to qualify for ‘smaller reporting company’ status for most companies to provide greater simplicity, consistency, and certainty.”

In other words, “we chose not to use a revenue standard because we chose not to use a revenue standard.”  (Please excuse the sarcasm, but it seems appropriate in the circumstances.)

The good news is that the SEC has reached out to my favorite professional organization, the Society for Corporate Governance (and possibly others), for thoughts and observations, and the Society has submitted a very well written and thoughtful letter and a related appendix in response.

So far so good.  However, even if the SEC accepts the Society’s recommendations (as I hope it does), the companies that would qualify as SRCs range in size from nano- or micro-caps to companies of a substantial size.  As a result, compliance with requirements applicable to SRCs generally may be relatively easy for companies at the larger end of the range but very challenging for those at the smaller end of the range.  We have seen this time and again in the past, perhaps most clearly in the climate disclosure rules that have, thankfully, ridden off into the sunset, but the problem will unquestionably arise again and again in the future. 

The current and proposed standards raise another concern that I believe to be greater, at least in the long run, than compliance by companies that are already publicly held.   Specifically, they will continue to deter companies seeking to raise capital from going to the public markets.  The number of companies that have gone public has diminished significantly over time, and the SEC and others have expressed concern with this development.  However, treating all SRCs alike from the regulatory perspective will, in my view, perpetuate this problem.  Personally, while I’m a staunch supporter of accessing the public markets, I tend to tell clients and prospective clients who want to go public that they should think long and hard before they do so.  And several have gone ahead, only to tell me years later that they wish they’d paid more attention to my warnings.

I have reason to believe that the SEC’s reforms in this area will not be limited to those suggested in the Society’s letter, but it’s still early days.

Fingers crossed!

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It’s early days, but I’m pleased to report that the optimism I expressed about the SEC in the aftermath of the 2024 election may have been warranted.  At a minimum, the actions taken by the SEC since January 20 demonstrate support for the issuer community, an interest in pursuing the traditional goals of the SEC, and a willingness to help those of us who advise clients with respect to SEC rules and the many interpretations of those rules.

What the Commissioners Are Saying

First, on January 27, Commissioner Hester Peirce spoke before the Northwestern Securities Regulation Institute.  Her remarks were witty (as always) and, for the most part, spot on, to the point that I considered copying them here.  (I haven’t, though I have copied some of her choice remarks below.)  I do take issue with a few of her remarks (also as always), including her view that a corporation’s singular focus should be on building value for shareholders; it seems to me that it is not possible to build value without focusing on other constituencies such as customers, suppliers, and – yes – even the community at large.  Those matters aside, Ms. Peirce made the following good points, among others:

Continue Reading So Far, So Good
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For the benefit of new subscribers, every January I depart from my usual screeds about the SEC and corporate governance and indulge in the slightly less nerdy exercise of telling you about my favorite books of the year gone by.  As regular readers know, unlike the New York Times and other publications, my favorite books are those I read in 2024, regardless of their publication dates.

Having mentioned the Times, I have to say that the more I read its book reviews and “10 Best” lists, the less I relate to them.  I have a theory as to the reasons for that, but I’ll spare you. That said, if you’ve read the 2024 10 Best list in the “Gray Lady,” you’ll see that it has little in common with mine. 

Finally, I decided this year that I won’t be bound by the number 10, largely because I usually find myself agonizing over which books to cut, and it’s just not worth it.  So this year’s list contains more than 10 books, and my favorites are not evenly divided between fiction and non-fiction.

Here goes. 

Continue Reading Bob’s Best Books of 2024
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For those of us who are unhappy or worse about the outcome of the 2024 presidential election, fearing (among other things) that we are about to enter a modern incarnation of the dark ages, I respectfully suggest that the time has come to light a candle rather than curse the darkness.

The candle is rather limited and simple: whatever else may happen during the next Trump administration, there’s a fair chance that those of us who practice securities law will find the SEC a lot more pleasant (or less unpleasant) to deal with.

Continue Reading Lighting a Candle
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You may have noticed that the SEC has been very quiet on the rulemaking front in recent weeks.  It comes as no surprise, as action on a number of items on the SEC’s Regulatory Flexibility Agenda had been moved from late 2024 to early 2025.  (The cynic in me wonders whether the scheduling changes resulted from concerns that accusations of over-regulation would impact the 2024 election cycle, but – for now, at least – I’ll leave that to others.)

However, the SEC has definitely not been idle.  Quite the contrary.  In fact, recent weeks have seen what strikes me as an inordinate number of announcements of enforcement actions.  Some of these actions are relatively “standard” – insider trading, recordkeeping violations, securities fraud, whistleblower protection violations (discussed in our recent e-alert), and so on. But others are somewhat unusual. For example:

Continue Reading Law and Order: SEC
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For many years, I have urged companies to consider going beyond the bare minimum disclosures required by SEC rules – in appropriate circumstances, of course.  In my experience, providing more disclosure than what is specified in the rules can generate positive feedback or even praise from investors and other stakeholders.  And, in fact, many companies do go beyond the rules.  For example:

  • Does your proxy statement include photos of your board members?  The rules don’t require that, but it can certainly help to create the impression – hopefully valid – that your directors are actual human beings and can also demonstrate your board’s diversity.
  • How about including a proxy statement summary that points out your company’s strong governance practices or demonstrates that it really does pay for performance?  Again, the rules don’t require a summary. However, given the incredibly limited amount of time that most investors spend reading your proxy statement, a summary can prove very helpful – and can generate support for your nominees and the board’s position on shareholder proposals and other voting matters.
  • Do you explain the roles of your board and its committees in overseeing areas such as sustainability or diversity?  Again, not required, but in my experience those disclosures can convey that your board is on top of its responsibilities.

However, at the risk of stating the obvious, any voluntary disclosures have to meet the same standards as required disclosures.  In other words, they must be accurate and complete and must not omit information that would make the disclosure incorrect or misleading. This was most recently brought home in a case involving Keurig Dr Pepper Inc.

The facts of the case, as recited in the SEC Order in the case, include that:

  • The company had conducted consumer research in 2016 indicating that, for some consumers, environmental concerns were a significant factor in deciding whether to purchase a Keurig brewing system.
  • Following a change in the composition of its “pods,” the company conducted testing to determine whether the newly formulated pods could, in fact, be recycled.  Two major recycling companies participating in the test “conveyed significant negative feedback to Keurig regarding the commercial feasibility of…recycling of pods at that time.”
  • Despite that feedback, the company’s 10-Ks for 2019 and 2020 stated that “we have conducted extensive testing with municipal recycling facilities to validate that [pods] can be effectively recycled.”  However, the negative feedback was not also disclosed.
  • The 10-K for 2021 did not contain the disclosures cited above.

In finding the above statements in violation of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder, the SEC imposed a fine of $1,500,000, and the company entered into a cease and desist order.

The statements in Keurig’s 10-Ks were not required; the SEC Order suggests that they were included in order to appeal to the company’s environmentally conscious customers and, possibly investors.  However, the company seems to have overlooked that the rules applicable to required disclosure apply equally to voluntary disclosure.

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One of the things I learned as young securities lawyer was that securities offerings can be made only by prospectus.  Accordingly, one of the first things we did whenever we embarked on an IPO was to send a memo to our clients reminding them of the limitations imposed on communications under the securities laws and alerting them to the risks associated with gun-jumping.  (For the record, the term “gun-jumping” is sometimes referred to as “conditioning the market” for an offering, but in plain English it means hyping the offering.)

Unfortunately, some of our clients didn’t follow our advice, in some cases unintentionally and in other cases willfully or even due to arrogance.  (One client told me that the SEC couldn’t limit his First Amendment right to free speech, even though he’d been advised that commercial speech doesn’t necessarily get First Amendment protection.)  And while the principal remedy for gun-jumping – the imposition of a cooling-off period before the offering can be completed – may not seem severe, it can be a deal-killer.  In one case, the SEC imposed a cooling-off period because an interview with the issuer’s CEO generated a story in several major newspapers shortly before the offering was to be priced.  (Notably, the SEC did not cut the issuer any slack because the interview had been given several months earlier, before work on the offering had even begun.)  Of course, even in those good old days, timing was everything when it came to pricing, and the delay imposed by the SEC had to be extended by the issuer because the market had turned and the offering was no longer viable.  Given the volatility of today’s market, the consequences might be worse.

Over the years, people may have forgotten about gun-jumping, or assumed that it is no longer an issue.  Liberalization of some SEC rules associated with communications and terms such as “free writing prospectus” may have given the impression that there is no such thing as gun-jumping.  But it never went away, and as recently as 2020 an offering with which I was familiar nearly went awry due to gun-jumping concerns.

Then came this week’s news about a delay in the much-ballyhooed IPO of Pershing Square.  To my knowledge, the issuer has not explained the reason for the delay, but media reports have stated that it resulted from the facts that the issuer’s CEO sent an “internal communication” about the offering to investors in the issuer’s investment manager, and that the information contained in the communication was not included in the preliminary prospectus and may have been inconsistent with the preliminary prospectus.

Given the market interest in the deal well before the delay was implemented, it seems unlikely that the delay will seriously impact the timing or success of the offering.  However, the episode may serve as a reminder that old rules never die and may not even fade away.

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The week of June 24, 2024 may be remembered as one of the worst in recent memory for the SEC, which – along with the “administrative state” generally – was beaten up by some very significant decisions handed down by the U.S. federal courts.

Securities Fraud Claims Seeking Civil Penalties Must Be Brought in Federal Court

On June 27, the U.S. Supreme Court announced its decision in Securities and Exchange Commission v. Jarkesy, holding that the SEC must bring securities fraud actions seeking civil penalties before a federal court, rather than before the Commission or an administrative law judge. 

The Dodd-Frank Act, enacted in the wake of the financial crisis in the early years of the 21st century, authorized the SEC to impose civil penalties without having to resort to the federal courts.  Pursuant to this authority, the SEC brought an enforcement action against the defendants in Jarkesy in 2013, alleging violations of the antifraud provisions of federal securities laws, opting for proceedings before an administrative law judge.  The proceedings resulted in a civil penalty of $300,000 and other remedies.  Upon review, the US Court of Appeals for the Fifth Circuit vacated the SEC’s order on three grounds, and the SEC appealed to the Supreme Court.

In its decision, SCOTUS addressed only one of the Fifth Circuit’s bases for vacating the SEC order – namely, that the pursuit of civil remedies for antifraud violations violated the Seventh Amendment right to a jury trial.  According to the majority opinion, actions resembling a common law cause of action for which remedies are traditionally available at common law must be brought in federal court.  Because the violations alleged in Jarkesy are similar to common law fraud (claims that were “legal rather than equitable”), the Court found that the action should have been brought in federal court.

The impact of Jarkesy remains to be seen. For example, it does not appear to apply to matters not involving common law causes of action, even when those matters result in a civil penalty, such as the SEC’s recent enforcement action against R. R. Donnelley & Sons Co., or where other remedies, such as disgorgement, are sought.  However, the admonition to “watch this space” seems applicable here.

The SEC’s Rescission of Proxy Advisory Firm Rules Is Vacated

The Jarkesy decision came just one day after a Fifth Circuit decision vacating the SEC’s 2022 rescission of rules affecting proxy advisory firms that had been adopted a mere two years earlier. 

The rules adopted in 2020 imposed a number of requirements on proxy advisory firms, such as Institutional Shareholder Services and Glass Lewis.  Among other things, the rules required proxy advisory firms (1) to promptly notify companies of their voting recommendations and (2) to notify their investor clients of companies’ written responses to those recommendations.  The following year, the SEC proposed to “amend” these requirements – i.e., to rescind them – and adopted those amendments the following year.  This flip-flop surprised and frustrated many constituencies, including corporate America, resulting in the litigation in question.

In its opinion, the Fifth Circuit found the SEC’s actions in reversing the rule to be arbitrary and capricious.  Among other things, the Court noted that “[t]he 2020 rule[s] never went into effect” and also commented on the questionable timing of the proposal to rescind the rules:

“The agency’s proposal… was published in November 2021, following a closed-door meeting between Chairman Gensler and opponents of the 2020 [rules]… .  The comment period for the proposal was thirty-one days and encompassed portions of the Thanksgiving, Hanukkah, and Christmas holidays…. Unsurprisingly, far fewer comments were filed during this highly truncated period than had addressed the 2019 Proposed Rule. After the comment period closed, the SEC adopted the proposed rescission over the dissent of two commissioners.”

It seems likely if not certain that the SEC will appeal the Fifth Circuit’s decision, but the Jarkesy decision and a third decision handed down this week, discussed below, suggest that the appeal’s success is far from assured.

Chevron “Deference” Falls by the Wayside

To end the week, on June 28 SCOTUS handed down its decision in Loper Bright Enterprises v. Raimondo.  While this case does not involve the SEC, it will likely be the most significant of them all.  Specifically, the decision overturned a 1984 precedent, in Chevron v. Natural Resources Defense Council, that permitted judges to defer to federal agencies’ interpretations of law in rulemaking.  In striking down the so-called “Chevron deference” doctrine, the Court stated that it improperly prioritized the legal interpretations of the executive branch over those of the judicial branch. 

While this decision impacts many agencies other than the SEC, it seems likely if not certain that the SEC’s rulemaking decisions will come under greater scrutiny and be subject to more second-guessing by the federal courts than is currently the case.  

The Moral of the Story?

The moral of this story, at least for now, seems to be that if you don’t like an SEC rule or practice, just wait around.  It will likely be challenged.  And, based on these and other cases, the federal courts – and, in particular, the Fifth Circuit – appear willing to oblige.

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Once upon a time, few if any investors seriously challenged executive pay.  Executive compensation was, as always, a hot topic, but in the days before say-on-pay votes, it wasn’t easy to effectively object to excessive pay packages.  Moreover, as one of the more outspoken members of the investor community once told me, as long as a company was performing well for its stockholders, investors weren’t going to second-guess the board on the subject. 

That changed in the early 2000s, when Ray Irani, the man who succeeded Armand Hammer as CEO of Occidental Petroleum, was voted out as a board member after pulling down $1.2 billion in compensation over 20-year period, an average of $54 million a year.  (For you young folk, Armand Hammer is not to be confused with his great-grandson, the actor Armie Hammer.  Perhaps more about the elder Hammer in another post.)   While $54 million per year doesn’t sound like much by today’s standards, it was a big deal at the time.  And when I asked the same investor what prompted the rebellion, the response was, in effect, “sometimes too much is just too much.”

Perhaps.  And objections to outlandish or outrageous executive pay did increase, leading, among other things, to the provisions of the Dodd-Frank Act requiring most public companies to hold periodic “say-on-pay” votes.  However, these votes have rarely failed (unless you agree with Institutional Shareholder Services that anything less than 70% support for a say on pay vote is a failing grade), and it’s no secret that executive compensation has soared.

At this point, a digression seems appropriate.  Many years ago, I attended a conference at which one of the speakers was a highly regarded compensation consultant.  During her remarks, she pointed out that every single initiative to control executive compensation, whether from the government, investors, or others, had been followed by an increase in executive pay.  History continues to prove her correct.

Moreover, it seems to me that there has always been one glaring exception to the increased levels of investor concern about executive pay – namely, the founder/CEO.  Think about it – the founder/CEOs of companies such as Apple, Amazon, Google, and so on have become among the world’s wealthiest people, without anything close to the degree of squawking that occurs when a “regular” CEO rakes it in.  It’s an understandable exception – someone who creates something out of nothing, particularly when that “something” is an enormous, successful enterprise that employs thousands of people, arguably deserves a break – and big bucks.

Now comes Elon Musk, a once-admired founder/CEO who has become something of an enfant terrible.  His ginormous special bonus – which has been valued at more than $50 billion (eat your heart out, Mr. Irani) – was overturned by the Delaware courts after having been approved by stockholders, and is now being resubmitted for shareholder approval.  I won’t be shocked if the stockholders approve it once more, but given some of Mr. Musk’s troubles – ranging from sales declines and layoffs at Tesla to the questionable distraction of his purchase of X (FKA Twitter), his sometimes odd behavior, and other problems – I also won’t be shocked if the reproposal fails.  If that happens, I wonder whether the pass that seems to have been given to other founder/CEOs will begin to evaporate, and if they will be held to the same standard as those “regular” CEOs.

I also wonder if the whole saga will cause companies to be more thoughtful about how they justify high levels of compensation.  I doubt it, but anyone who reads proxy statements knows that some of these justifications are questionable.  For example, so many proxy statements say, in effect, that high compensation is necessary to retain talented executives.  I may be wrong, but in my experience CEOs love being CEOs and in at least some instances would stay even if their pay were cut.  To say nothing of the fact that when you’re pulling down tens of millions a year, it seems questionable that you need tens of millions more to make you happy. 

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I’ll start by making a few things clear: I support a clean environment, stopping or slowing climate change, and many other good things.  I also believe that corporations should (and many do) consider constituencies other than shareholders and seek to do more than increase shareholder value.   There.  I’ve gotten that out of my system.

But that doesn’t mean that I support “ESG” – the term, not the concept.  In fact, I’ve disliked the term ever since it became the acronym du jour.  Aside from the fact that I’m not a fan of acronyms generally, I struggled with “ESG” from the get-go for more substantive reasons.

First and foremost, I didn’t and don’t like the concept of bundling all things bright and beautiful into one easy-to-remember buzz word (or acronym).  It reminded me of some classmates in college who took copious notes in class, reduced their notes to 3X5 index cards, and then kept reducing those cards to the point where I figured they should be able to walk into the final exam, write one all-encompassing word in their blue book (remember those?), and get an A+.  That bothered (and still bothers) me, because life just isn’t that simple.

Another way of looking at it is that the components of ESG, when viewed separately, constitute a large percentage of all the things that companies and their boards need to consider these days.  Take “S” for example.  Presumably, it stands for “social,” and that includes a broad range of workforce and workplace issues, ranging from pay equity to safe workplace environments to diversity, equity, and inclusion (note that I have not used the acronym for those three matters), the company’s role in the communities in which it operates, and beyond.  Then go to “G” next.  It stands for “governance” – again, a very broad topic that has been the subject of many books, articles, and so on.  “E” may be the simplest of the three, but that doesn’t mean it’s simple.  Moreover, the factors that impact E, S, and G are all over the lot, and factors that impact one of the three may or may not impact either or both of the others.   

Among other things, the foregoing suggests that a board committee assigned oversight responsibility for oversight of ESG is taking on a huge and insurmountable task.  No wonder I’ve heard board members complain that they don’t know which committees have or should have responsibility for ESG!  

As if that weren’t enough, several pundits suggested that the term “ESG” was insufficient because it might be viewed as excluding certain things.  One pundit (whom I shall refrain from identifying) suggested that the proper term was “EESG,” with the first “E” standing for “employees.”  I heard other suggestions as well.  If this had gone on much longer, we might have ended up with something like supercalifragilisticexpialidocious.  (If you’ve never seen Mary Poppins, deal with it.)

Accordingly, I think we’d all have been much better off if the term had not been invented, and if those who invented it had instead tried to address its components instead.  Hence the title of this posting (get it – “Rest in Pieces”?).

One last thing: Just because I don’t like the term ESG doesn’t mean I support the anti-ESG movement.  The folks in that movement haven’t joined it because they don’t like acronyms or for the other reasons I’ve given above.  Rather, it’s pretty clear that they oppose the things I believe in.