In Case You Missed It - Interesting Items for Corporate Counsel - May 2018

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  1. Pay equity advocates were undoubtedly disappointed that inaugural disclosure of the ratio of CEO pay to median employee pay fizzled. See, for example, here. CEO pay has, of course, been publicly disclosed forever; only the median employee’s pay was new information for investors. And despite all the hand-wringing about the requirement in the several-year run-up to disclosure, nobody seems to know what to do with the new information, or to care much about it, except to marvel that people at Facebook get paid a lot (as here) or to scratch their heads when they realize that even comparing median pay between competing companies may not be useful, as here.
  2. The SEC proposed an honest-to-goodness rule, here, which has been a relatively rare occurrence under the Trump Administration. The rule intends to “refocus” the analysis to determine whether a lending relationship foils auditor independence, generally backing away from bright-line rules that may not actually impair an auditor’s independence. A summary of the proposed rule is here.
  3. The SEC also proposed “Regulation Best Interest,” here, which seeks to establish a standard that broker-dealers act in the best interest of customers, mandate that broker-dealers and investment advisers disclose information about their relationships with their clients on a new Form CRS (customer relationship summary), and clarify standards of conduct for investment advisers.
  4. Kind of, sort of related to Regulation Best Interest is the Department of Labor’s Field Assistance Bulletin No. 2018-01, here, in which it fires shots across the bow of retirement fund managers that invest based on environmental, social or governance (ESG) issues and cautions that (a) “[f]iduciaries must not too readily treat ESG factors as economically relevant” and must “always put first the economic interests of the plan in providing retirement benefits” and (b) “[i]f a plan fiduciary is considering a routine or substantial expenditure of plan assets to actively engage with management on environmental or social factors, either directly or through the plan’s investment manager, that may well constitute the type of ‘special circumstances’ that the IB 2016-01 preamble described as warranting a documented analysis of the cost of the shareholder activity compared to the expected economic benefit (gain) over an appropriate investment horizon.” Perhaps stated differently: Lay off basing your investments on climate change criteria, California! (See here).
  5. It seems unlikely that the DOL’s bulletin will significantly curb the focus on ESG issues, however, and more likely that ESG proponents will keep the pressure on. For example, the Financial Stability Board and the Climate Disclosure Standards Board recently announced the release of tools, here, to help companies make recommended climate-related disclosures. Yahoo Finance recently rolled out its free online “sustainability score” for public companies on its site, see here. In the meantime, the GAO released its report to Congress on the SEC’s steps to clarify the disclosure of climate-related risks, here.
  6. The hot topic of cybersecurity continues to simmer, as it has for years. The SEC released interpretive guidance on the topic at the end of February, here, admonishing companies to do a better job identifying and reporting breaches, and followed that with its first-ever settlement of an action based on the failure to disclose a cybersecurity breach, here. The $35 million settlement, against Yahoo, followed allegations that it sat on a known and massive data breach for two years, disclosing only that such a breach was a risk and not that one had occurred.
  7. Despite the action on cybersecurity, and in addition to the relatively slow pace of SEC rulemaking, 2017 SEC enforcement actions are down from the prior year (see here). But not to fret – accounting class action lawsuits were apparently way up (see here), so there’s that.
  8. On the topic of enforcement action, the SEC reminds us that “there is no exemption from the anti-fraud provisions of the federal securities laws simply because a company is non-public, development-stage, or is the subject of exuberant media attention.” The SEC’s press release about its settlement of claims against blood “testing” company Theranos and its founder, Chairman and CEO Elizabeth Holmes is here, and analysis about the settlement from the D&O Diary is here. As the D&O Diary suggests, some might view a $500,000 fine for a $700 million swindle as lenient. Yep. On the upside, in addition to the fine, Holmes also must give up voting control of Theranos, which we can all assume will at least hamper Theranos’s efforts to collect all six infinity stones.
  9. As another reminder that the SEC can take action against private companies, and its focus on the fast and loose ways of some Silicon Valley-based companies (see here), read about the SEC’s enforcement action against Credit Karma for failing to make required disclosures required by Rule 701 here.
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