Corporate Governance: 2022 Midyear Review

Kramer Levin Naftalis & Frankel LLP

The first half of 2022 illuminated important trends in the corporate governance space. In recent months, there were notable developments in the enforcement of economic sanctions and export control measures, and the oversight of crypto-related activities. 

  • At a New York City Bar Association event on April 27, Deputy Attorney General Lisa Monaco described economic sanctions as “the new FCPA.” Monaco’s statement suggests that the Department of Justice (DOJ) will be paying even closer attention to enforcing sanctions and export control measures in the coming years, and her characterization should put corporate compliance departments on heightened notice concerning their potential exposure to sanctioned parties and sanctioned activities. The DOJ’s continued emphasis on corporate compliance sends a strong signal that companies should invest in compliance now in order to avoid bad outcomes later.
  • On April 7, the Federal Deposit Insurance Corporation (FDIC) issued a Financial Institution Letter (FIL) articulating its expectations of FDIC-supervised institutions with respect to their crypto-related activities.[1] Noting the FDIC’s concern regarding safety and soundness, financial stability, and consumer protection risks, the FIL requires FDIC-supervised institutions to notify the FDIC prior to engaging in crypto-related activities. If an FDIC-supervised institution is currently engaged in a crypto-related activity, it must “promptly” notify the FDIC. The FDIC will review the notification, request additional information as needed, consider the risks associated with the activity and, as appropriate, provide supervisory feedback “in a timely manner.” Any FDIC-supervised institution should update its compliance procedures to account for these notification requirements.

Additionally, Kramer Levin lawyers issued numerous alerts throughout the first half of 2022 on other important developments in corporate governance, including the increasing prioritization of environmental, social and governance (ESG) matters for private entities and regulators; the Security and Exchange Commission’s (SEC) continuing focus on cybersecurity issues; and the DOJ’s emphasis on individual accountability in corporate criminal investigations. 

SEC Proposes To Enhance Disclosures by Certain Funds and Advisers Regarding ESG Investment Practices

On May 25, the SEC proposed amendments to rules and reporting forms seeking to promote consistent, comparable and reliable information for investors concerning funds’ and advisers’ incorporation of ESG factors. The proposed amendments seek to categorize certain types of ESG investments broadly, and require funds and advisers to provide more specific disclosures in fund prospectuses, annual reports and adviser brochures based on the particular ESG strategies they utilize. Our alert detailed how the proposed amendments would require funds that consider ESG factors in their investment process to disclose additional information regarding their strategy. The amount of required disclosure depends on how central ESG factors are to a fund’s strategy.

The SEC’s Climate and ESG Task Force Charges Vale S.A. With Securities Fraud

On April 28, the SEC’s Climate and ESG Task Force commenced an action against the Brazilian mining company Vale S.A., alleging that the company made false and misleading statements to investors about the company’s “commitment to sustainability” and other material matters. The Vale complaint was the first enforcement action falling squarely within the purview of the Climate and ESG Task Force, offering new insight into the Task Force’s approach to ESG-related misstatements.

Specifically, the SEC’s complaint against Vale concerned allegedly false and misleading statements made prior to and immediately after the collapse of a dam used to collect toxic sludge produced in the mining process, which released 12 million tons of toxic sludge and killed 270 people. According to the SEC’s complaint, these events followed several years of company statements designed to convince investors that Vale’s dams were thoroughly inspected for stability risks. This enforcement action, our alert explained, highlights the SEC’s increasing scrutiny of alleged misstatements about issuers’ ESG credentials. The enforcement action also underscores the importance of maintaining appropriate disclosure-related compliance procedures to avoid regulatory scrutiny.

Following the settlement of the Vale S.A. action, the Enforcement Division’s ESG Task Force settled a second major proceeding — against BNY Mellon Investment Adviser Inc. (BNYMIA).[2] The action concerned a series of allegedly false or misleading statements about the role of BNYMIA’s “ESG quality review” in the management of six investment companies, collectively, “the Overlay Funds.” According to an administrative order released by the SEC, statements made in Overlay Fund prospectuses, board minutes and RFP responses suggested that an “ESG quality review” was completed for all assets held by each of the Overlay Funds. For example, one RFP response stated that “ahead of investing, each security being considered for investment by our global industry analysis must have an ESG quality review … .” But the inclusion of investment assets in ESG quality review was not, in fact, so comprehensive. One fund discussed by the order applied ESG quality review to only 118 of its 185 investments during the period under investigation. This left 67 investments — amounting to nearly 25% of the fund’s net assets — untouched by the review. Due to these misstatements, the order concluded that BNYMIA violated Sections 206(2) and 206(4) of the Advisers Act and Section 34(b) of the Investment Company Act. It ordered BNYMIA to cease and desist from these violations, and BNYMIA agreed to pay a $1.5 million civil penalty.

Court Concludes That California Board Diversity Statute Is Unconstitutional

On April 1, a California state court granted a summary judgment motion that effectively struck down AB 979, a California statute requiring the boards of public corporations based in the state to include a minimum number of directors from underrepresented communities. The court determined that the statute violated the equal protection clause of the California Constitution by “treat[ing] similarly situated individuals — qualified potential corporate board members — differently based on their membership (or lack thereof) in certain listed racial, sexual orientation and gender identity groups.” 

With similar legal challenges still pending in state and federal courts, the fate of board diversity statutes like AB 979 is unsettled. But regardless of the outcomes of these cases, we expect that board diversity will remain a high priority for many companies and stakeholders.

SEC Proposes Rules to Require New Climate-Related Disclosures

On March 21, the SEC proposed rules requiring companies to include climate-related disclosures in their registration statements and periodic reports. Our alert covered the disclosure requirements related to greenhouse gas emissions, including a description of all climate-related risks likely to have a material impact on the registrant, an analysis of the material impact, the company’s process for identifying and managing climate-related risks, and the registrant’s climate-related targets or goals. The phase-in period for the proposed disclosures differs depending on a registrant’s filing status and the particular disclosure.

In May, the SEC extended the public comment period on the proposed rule from May 20 to June 17. More than 10,000 comments were received during the comment period.

SEC Proposes Comprehensive Cybersecurity Reporting Rules for Public Companies

On March 9, the SEC, by a 3-1 vote, proposed new rules as part of its most far-reaching effort to enhance and standardize cybersecurity-related disclosures and incident reporting by public companies. The proposed rules include mandatory cyber incident reporting and periodic disclosure regarding risk management, strategy and governance.

These proposed rules, coupled with recent comprehensive guidance and enforcement actions, demonstrate the SEC’s heightened focus on cybersecurity issues. As set out in our alert, we expect this trend to continue — underscoring the importance for companies to maintain adequate cybersecurity disclosure and risk management policies and procedures.

At White Collar Crime Institute, DOJ Reiterates Focus on Individual Accountability in Corporate Crime Investigations

In their March 3 speeches to the 37th American Bar Association National Institute on White Collar Crime, Attorney General Merrick Garland and Assistant Attorney General Kenneth Polite Jr. each emphasized the DOJ’s commitment to hold individuals — and not just corporations — responsible for white collar crimes.

The speeches followed a previous address from Deputy Attorney General Lisa Monaco, in which she stated that “[a]ccountability starts with the individuals responsible for criminal conduct” and announced DOJ policy shifts in the prosecution of corporate crime, including the requirement that cooperating corporations identify all individuals involved in wrongdoing, the guidance to prosecutors to consider a corporation’s historical misconduct when considering corporate resolutions, and an expansion in the use of corporate monitors to ensure continuing compliance with criminal resolutions.

Our alert noted that the pendulum swing toward demanding individual accountability for corporate wrongdoing will increase the costs, both monetary and personal, of cooperation with the DOJ. This, in turn, may create a risk that corporations will be more reluctant to report misconduct.

Diversity in the Boardroom: A Litigation and Governance Update

Diversity in the boardroom continued to be a focus for various stakeholders, ranging from legislators to institutional investors to retail stockholders. Our alert covered the legal challenges directed against state and regulatory corporate diversity requirements, the status of certain stockholder litigations claiming that large corporations and their directors committed fiduciary duty breaches and securities law violations in connection with alleged diversity shortcomings, and the updated board diversity policies of proxy advisory firms and large institutional investors.

ESG Voting Policy Updates for the 2022 Proxy Season

At the start of 2022, the two largest proxy advisory firms in the United States — Institutional Shareholder Services and Glass Lewis — released their U.S. voting policies for the 2022 proxy season, which include specific guidelines on ESG matters. Our alert covered the environmental, diversity and governance components of these policies.

On the environmental front, the policies include frameworks for evaluating management and shareholder climate proposals, including plans to reduce greenhouse gas emissions and lobbying activities. With respect to diversity, the policies include recommendations to vote against the chair of the nominating committee of companies based on insufficient racial, ethnic and gender diversity on boards. And on governance issues, both proxy advisory firms announced that they will recommend against certain directors at all companies (not just those that have recently gone public) with multi-class capital structures with unequal voting rights.

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We will continue to monitor these and other corporate governance developments in the months ahead.


[1] “Crypto-related activities” is defined to include (i) acting as a crypto-asset custodian; (ii) maintaining stablecoin reserves; (iii) issuing crypto and other digital assets; (iv) acting as market makers or exchange or redemption agents; (v) participating in blockchain- and distributed ledger-based settlement or payment systems, including performing node functions; and (vi) related activities such as finder activities and lending. See Federal Deposit Insurance Corporation, Notification of Engaging in Crypto-Related Activities (April 7, 2022), available at https://www.fdic.gov/news/financial-institution-letters/2022/fil22016.html? source=govdelivery&utm_medium=email&utm_source=govdelivery#letter.

[2] See In re BNY Mellon Investment Adviser, Inc., Advisers Act Release No. 6032 (May 23, 2022), https://www.sec.gov/litigation/admin/2022/ia-6032.pdf.

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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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