In Case You Missed It - Interesting Items for Corporate Counsel - February 2020

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  1. The SEC proposed updates to Regulation S-K to modernize, simplify and enhance financial disclosures, here. The SEC’s press release, here, summarizes the changes as well as any law firm memo (but see here and here if you don’t believe us). Per the SEC’s summary, the changes would:
    • Eliminate Item 301 (selected financial data) and Item 302 (supplemental financial data), which certainly are redundant.
    • Add a new Item 303(a), Objective, to state the principal objectives of MD&A.
    • Replace Item 303(a)(4), Off-balance sheet arrangements, with a principles-based instruction to prompt registrants to discuss off-balance sheet arrangements in the broader context of MD&A.
    • Eliminate Item 303(a)(5), Tabular disclosure of contractual obligations, given the overlap with information required in the financial statements and to promote the principles-based nature of MD&A.
    • Add a new disclosure requirement to Item 303, Critical accounting estimates, to clarify and codify existing SEC guidance in this area.
    • Revise the interim MD&A requirement in Item 303(b) to provide flexibility by allowing companies to compare their most recently completed quarter to either the corresponding quarter of the prior year (as is currently required) or to the immediately preceding quarter.
  2. The SEC published three Compliance and Disclosure Interpretations on excluding the earliest fiscal year from MD&A, here. The CDIs say:
    • A reference to the location of the omitted disclosure does not incorporate the prior disclosure into your filing.
    • If a discussion of the earliest year is necessary to an understanding of financial condition, change in financial condition and results of operation, don’t omit it.
    • After you file a 10-K that omits the earliest fiscal year, that fiscal year is not incorporated by reference into a later filed ’33 Act report. Slightly longer versions of the above are here and here.
  3. The SEC also published guidance, here, on key performance indicators and metrics in MD&A, admonishing companies that disclose KPIs to clearly define the KPI and how it is calculated, indicate why the KPI is useful to investors, and explain how management uses the KPI to manage or monitor its business. And, the SEC continues, your internal controls better be up to snuff on your KPIs. Summaries are here and here.
  4. The SEC Office of Compliance Inspections and Examinations released, here, its observations related to cybersecurity and operational resiliency practices. A review of the results, as a check on your own policies and practices, seems like a very good idea.
  5. Climate change warriors that moonlight as securities lawyers, and vice versa, get a charge every year out of BlackRock’s annual shareholder letter. This year’s letter, here, does not disappoint. In it, CEO Fink states that climate change has become a defining factor in companies’ long-term prospects and suggests we are on the edge of a fundamental reshaping of finance (read: BlackRock isn’t going to invest any of the $7 trillion it manages in your company if you don’t address climate change). Among other things, BlackRock mentions with approval standards issued by the Sustainability Accounting Standards Board for reporting “sustainability information across a wide range of issues, from labor practices to data privacy to business ethics” and standards issued by the Task Force on Climate-related Financial Disclosures for evaluating and reporting “climate-related risks, as well as the related governance issues that are essential to managing them.” A slew of CEOs at Davos approvingly referenced a sustainability reporting and measurement system proposed by the big four accounting firms, here. In another sign of the times, CalPERS and CalSTRS filed their first climate change reports in response to California Senate Bill 964, see here, here and here. And a survey of small- and mid-cap companies that make sustainability disclosures is here.

    SEC Commissioner Lee brought up climate change disclosure in her public statement about modernizing Regulation S-K, noting, here, that the investors are clamoring for reliable disclosure about sustainability measures, and that the SEC has failed to address this need in its MD&A proposals. (See analysis of the “heated” debate (… ah, securities lawyers) here).

    Heck, even D&O insurers are getting into the sustainability game, with Allianz Global reporting, here, that ESG (and climate change) will be one of five megatrends that drive D&O litigation and insurance costs.

  6. The BlackRock letter concludes with an admonition that “[c]ompanies must be deliberate and committed to embracing purpose and serving all stakeholders—your shareholders, customers, employees, and the communities where you operate. In doing so, your company will enjoy greater long-term prosperity, as will investors, workers, and society as a whole.” Recall our post back on November 13, 2019, where we went on and on (and on) about challenges to the shareholder supremacy model (see here) including from The Business Roundtable (BRT). An analysis of what BRT members actually do, and whether they were just blowing smoke, is here. According to the report, “nope.” We’ve certainly come a long way from the ’80s (see, e.g., here.
  7. Goldman Sachs, an unlikely source, jumped into the social justice fray with its announcement, here, that as part of its commitment to diversity, starting July 1, 2020 it will only underwrite IPOs in the U.S. and Europe of private companies that have at least one diverse board member and, starting in 2021, at least two.
  8. Last year around this time, we perused a comprehensive review of “The Latest on Proxy Access,” here. A five-year review of proxy access is here. The upshot? For all the hullabaloo, a single shareholder so far has made use of the provision to try to get a director elected. (And the nominee was elected, with the unanimous support of the Board.)
  9. We generally avoided larding up last month’s ICYMI with 2019 retrospectives, but at least a few about securities litigation in 2019 are here, here and here.
  10. There has been “interesting” action on insider trading early in 2020. Insider trading law, developed through federal courts applying fraud theories to specific fact patterns, generally is a bit of a mess. A task force headed by Preet Bharara, the former NY federal prosecutor most widely known for being purged by Trump, published its report on insider trading here. The report advocates for, among other things, the codification and rationalization of insider trading law. There are signs that Congress might, indeed, take some action: a summary of a proposed law to close the “8-K gap”—to require that companies adopt policies to prevent insider trading during the days between a material event and public disclosure about the event—is here, and the House-passed Insider Trading Prohibition Act is summarized here. Calls for insider trading legislation may be boosted by last year’s 2nd Circuit decision in United States v. Blaszczak, in which the U.S. relied on a criminal statute—18 USC § 1348—to bring claims. The court determined that under the statute a showing that a tipper received a “personal benefit” is not required, and, ironically, the ruling makes a criminal prosecution of insider trading easier than a civil prosecution under Section 10(b) of the Securities Exchange Act.
  11. Final Committee on Foreign Investment in the United States (CFIUS) rules adopted in January, see here, go into effect on February 13, 2020. The rules (here) shift the playbook from voluntary pre-approval of foreign investments in U.S. companies, and now mandate filings if an acquired business is involved in critical Technology or Infrastructure or sensitive Data of U.S. citizens (TID Businesses). The rules (here) also expand CFIUS jurisdiction to specified real estate transactions but doesn’t mandate a pre-transaction filing. Summaries of the new rules are here, here and here.
  12. Finally, Valentine’s Day approaches and, as always, young security lawyers’ thoughts turn to the timely filing of annual Schedule 13Gs, due February 14. Remember: nothing says “I own more than 5% of a public company’s stock” like a Schedule 13G.
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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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