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Background

On October 26, 2022, the SEC adopted final clawback rules consistent with the requirements of the Dodd-Frank Act. The new rules direct the national securities exchanges to establish listing standards requiring companies to adopt, disclose, and enforce policies to recoup, or “clawback,” incentive-based compensation erroneously awarded to executive officers.  Based upon recent SEC action, listed companies will have until December 1, 2023 to adopt compliant clawback policies. The following summarizes some key provisions of the final rules and the decisions that companies will have to make as they finalize their policies by the deadline.

Adopting Compliant Policies 

Companies that do not have existing clawback provisions in place must adopt policies that comply with the standards established by the exchanges. Companies that have clawback provisions in place must determine if and how those policies differ from what is required and either modify their existing policies or adopt a new compliant policy on a stand-alone basis. Questions to help integrate or create compliant policies include: Continue Reading The SEC’s New Clawback Rules: The Devil’s in the Details (and There Are Lots of Details)

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I recently read an article suggesting that companies need to consider appointing a chief resilience officer. That got me thinking about all the other “chief” positions that pundits may be encouraging companies to create.  Here’s a partial list:

Chief Analytics OfficerChief Happiness Officer
Chief Automation OfficerChief Inclusion Officer
Chief Behavioral OfficerChief Information Officer
Chief
…

I have long thought that the SEC is among the best, if not the best, government agency.  Over the years, I’ve worked with and gotten to know many folks on the SEC’s staff, who have consistently impressed me as bright, hard-working, serious about the SEC’s mission, and very nice people.  I am sure that most people on the staff continue to possess these and other great attributes.

However.

As with most organizations, the tone at the top is critical.  And, at least from outward appearances, the tone at the top of the SEC is at best dismissive, if not hostile, towards business, and disingenuous.  I’m not saying that the SEC should bow to corporate America’s wishes and do its bidding.  But it’s in the interest of our capital markets and the participants in those markets that the SEC consider a wide range of views and engage in thorough and thoughtful deliberation (part of what is known in the corporate world as the fiduciary duty of due care) before making decisions.

That does not seem to be the case.  In the last year or so, the SEC has repeatedly demonstrated fealty to the institutional investor community by such things as announcing, early in Chair Gensler’s tenure, that the SEC would not enforce rules providing for a more level playing field between companies and proxy advisory firms, adopted by the SEC barely two years earlier, and then formally rescinding those rules (see here).  I’m not saying those rules were perfect – far from it; in fact, they met the classic definition of compromise, in that all sides were dissatisfied with the outcome.  However, they were a start, and instead of getting rid of them the SEC could and, IMHO, should have worked to improve them.
Continue Reading Rooting for the other guys?

Image by WikiImages from Pixabay

Hating lawyers may not have started with Shakespeare, but he didn’t help things when he wrote “The first thing we do, let’s kill all the lawyers” in Henry VI.  Any lawyer who’s been practicing law for more than a couple of weeks knows that part of the price of bar admission is having to endure lawyer jokes (most of which aren’t very good) and experiences like having a client say to you at the outset of your first meeting, “just so you know, I don’t like lawyers” or words to that effect.

It’s particularly painful, however, when an attack on our profession comes from one of our own, who also happens to be a member of the Securities and Exchange Commission.  I refer to a March 4 speech by Commissioner Allison Herren Lee in which she notes her “deep regard for the ideals of public service that our profession represents” and that her “belief in the ideals of the profession – ideals I know you all share – has only grown stronger with time” but then goes on to castigate corporate lawyers for failing to fulfill our “role…as gatekeepers in the capital markets.”  She distinguishes corporate lawyers from litigators – a dubious distinction that suggests we should be less zealous in representing our clients than our litigation colleagues – and says that in passing Section 307 of the Sarbanes-Oxley Act (more on that below) “Congress was concerned…that counsel often acted in the interests of the executives who hired them rather than the company and its shareholders to whom their duty and responsibility is [sic] owed.”
Continue Reading Who needs Shakespeare when you’ve got the SEC?

Remember those three monkeys – see no evil, hear no evil, speak no evil?  Well, that’s kind of how the SEC views the internet and social media.  Time after time after time, the SEC has cautioned that social media are fraught, to the point that I sometimes wonder if there is a watermark, visible only to securities lawyers, in every SEC pronouncement about the web and social media that says “PROCEED AT YOUR PERIL!”  And, unfortunately, many (too many, IMHO) SEC attorneys follow the SEC’s lead and either don’t encourage or actively discourage clients from taking advantage of the opportunities afforded by technology.

An example may be helpful.  Several years ago, when I was in-house, we decided to include in our proxy statement a live link to something on our website.  When we sent our draft proxy statement to outside counsel for the customary rules check, one of the comments we received was a strong admonition to remove the link or at least not make it “live.”  The rationale was that there might be something on our website that we wouldn’t put in an Exchange Act filing and that the link would somehow suck all that bad stuff into the proxy statement and lead to liability.
Continue Reading Note to SEC: The internet and social media are here – deal with it!

I suppose I should be getting tired of writing about enforcement actions involving nondisclosure of perquisites (for example, see here), and that you’re getting tired of reading about them.  However, the topic is hard to resist, whether due to schadenfreude (look it up) or other factors.

The most recent such enforcement action, announced in late November, told a story similar to those told before – a CEO who used corporate aircraft for personal travel, used corporate credit cards for personal expenses, and so on, resulting in a failure to disclose more than $425,000 in “perks” over a two-year period.  The CEO also pledged all of his company stock in violation of a shareholders agreement that required the prior written consent of the company, but that’s another story.  Suffice it to say that the company and the CEO were hit with a variety of charges, including a failure to maintain accurate books and records.

If this elicits yawns or eye-rolling that we’ve seen this movie before, so be it.  However, there is a twist.  Specifically, the SEC’s report noted that the CEO did not disclose the relevant information in his questionnaires – and in some cases had not completed a questionnaire at all.  I don’t recall the SEC focusing on the lowly D&O questionnaire in the past.  Anyone who has pulled his or her hair out trying to get a director or officer to complete a questionnaire is now smiling and saying “Ha!  It serves him right!”  (The same goes for all those directors and officers who complete every questionnaire by saying “please fill it out for me” or “no change from last year” regardless of whether there are changes.)
Continue Reading Another perquisites enforcement action…with a twist or three

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Lest you think that the summer is a quiet time for those of us in the wacky world of securities and corporate governance, think again.  Here’s some of what’s going on:

Legislation

On July 30, the House Financial Services Committee passed 11 bills and sent them to the full House. One of the bills would authorize the SEC to revise the reporting period for 13F disclosures from quarterly to monthly, change the time period to submit such reports, and expand the list of items to be disclosed to include certain derivatives.  The issuer and investment communities support these moves, and House passage seems likely, but the Senate is another matter altogether.

Another bill would impact family offices in a number of ways, including limiting the use of the family office exemption from registration as an investment adviser with the SEC to offices with $750 million or less in assets under management; requiring family offices with more than $750 million of assets under management to register with the SEC as “exempt reporting advisers”; and preventing persons who are barred or subject to final orders for conduct constituting fraud, manipulation, or deceit from being associated with a family office.
Continue Reading Summer Doldrums? Not So Much!

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In the last several days, the SEC has engaged in a skirmish, and possibly an opening battle, against SPACs.  A recap follows.

The first shot was fired on March 31, when the Staff of the SEC’s Division of Corporation Finance and the Office of Chief Accountant issued separate public statements about a number of risks and challenges associated with taking private companies public via “deSPAC” transactions.

The CorpFin statement covered a lot of territory, pointing out the following pitfalls, among others, facing companies that go public via a deSPAC.  These pitfalls reflect that such companies are subject to rules governing shell companies that do not apply to companies going public through conventional IPOs.

  • Financial statements for the target must be filed with an 8-K report within four business days of the completion of the business combination.  The usual 71-day extension for such financial statements is not available.
  • The combined company will not be eligible to incorporate Exchange Act reports or proxy or information statements until three years after the completion of the business combination.
  • The combined company will not be eligible to use Form S-8 for the registration of securities issuable under compensation and benefit plans until at least 60 calendar days after the combined company has filed current Form 10 information. (This information is customarily included in a “Super 8-K” filed within four business days after closing of the deSPAC transaction.)
  • For three years following the completion of the deSPAC transaction, the company will be unable to use some streamlined procedures for offerings and other filings, such as using a free-writing prospectus.

The statement also reminds companies that public issuers are required to maintain accurate books and records as well as internal control on financial reporting – both areas that have been the basis for enforcement actions by the SEC.
Continue Reading Caveat Everybody — The SEC Takes Aim at SPACs

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My apologies to those of you who thought I would expound on the corporate governance implications of Madonna’s early oeuvre; but I want to write about materiality, and I’m a sucker for a catchy title.

Those of us who spend our waking (and many sleeping) hours thinking about disclosure know that materiality is the linchpin of disclosure; if something is material, you at least have to consider disclosing it – though of course, probability and other factors can impact that decision.  We also know that there are any number of judicial interpretations of what is and is not material.  However, it seems to me that we are approaching a tipping point in how materiality may impact disclosures.

Take, for example, the position of SEC Commissioner Elad Roisman, who has stated, in effect, that there is no need for SEC rules explicitly requiring disclosures concerning climate change and other ESG matters, because existing rules already require disclosure of anything that is material to a company.  (For example, see his keynote address to the 2020 National Conference of the Society for Corporate Governance.)  I have been a member of the Society for many years, and I have heard many of my fellow members express similar views.  However, if that is the case, taking that view to its logical extreme, why have any specific disclosure requirements at all?  Why not just say “tell us what’s material”?
Continue Reading Living in a material world