SEC Final Rules Layout Companies’ Reporting Duty for Cybersecurity Incidents, Risk Management, Strategy and Governance

On July 26, 2023, the U.S. Securities and Exchange Commission (SEC) adopted final rules requiring U.S. public companies to disclose material cybersecurity incidents on Form 8-K and, on an annual basis, disclose material information regarding their cybersecurity risk management, strategy and governance on Form 10-K. The final rules also require foreign private issuers to make comparable disclosures on Forms 6-K and 20-F.

Read the full Alert on the Duane Morris LLP website.

SEC Proposes Climate Disclosure Rules for Public Companies

On March 21, 2022, the Securities and Exchange Commission proposed, in a 510-page release, rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in audited financial statements. The required information about climate-related risks also would include disclosure of a registrant’s greenhouse gas emissions. The commissioners voted on party lines to approve the proposal on a three to one vote.

SEC Chair Gary Gensler commented that “if adopted, [the rule changes] would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers.” Mr. Gensler believes that the proposal would help issuers more efficiently and effectively disclose climate risks and meet investor demand and that “companies and investors alike would benefit from the clear rules of the road proposed in the release.”

Republican SEC Commissioner Hester Peirce voted against the proposal and issued a dissenting statement.  “We are here laying the cornerstone of a new disclosure framework that will eventually rival our existing securities-disclosure framework in magnitude and cost, and probably outpace it in complexity,” Ms. Peirce said. She also warned that the proposed rules will enrich “the climate-industrial complex” while hurting investors, the economy and the SEC.

The proposed rule changes would require a registrant to disclose information about:

  1. the registrant’s governance of climate-related risks and relevant risk management processes;
  2. how any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term;
  3. how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook; and
  4. the impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.

For registrants that already conduct scenario analysis, have developed transition plans, or publicly set climate-related targets or goals, the proposed amendments would require certain disclosures to enable investors to understand those aspects of the registrants’ climate risk management.

In what is likely to be a more burdensome and costly disclosure requirement, the proposed rules also would require a registrant to disclose information about its direct greenhouse gas (GHG) emissions (Scope 1), indirect emissions from purchased electricity or other forms of energy (Scope 2), and GHG emissions from upstream and downstream activities in its value chain (Scope 3). Disclosure of Scope 3 emissions would be mandatory only if output of GHG is material, or significant to investors, or if companies outline specific targets for them. According to the SEC, these proposals for GHG emissions disclosures would provide investors with decision-useful information to assess a registrant’s exposure to, and management of, climate-related risks, and in particular transition risks.  Adding to the cost of these requirements, accelerated filers and large accelerated filers would be required to include an attestation report from an independent attestation service provider covering Scopes 1 and 2 emissions disclosures.

The proposing release will be open for public comment for a relatively short  period of 30 days after publication in the Federal Register, or 60 days after the date of issuance and publication on sec.gov, whichever period is longer.

Shareholder Proposal Rule Amended by SEC

On September 23, 2020, the Securities and Exchange Commission adopted the amendments to its shareholder proposal rule, which governs the process for a shareholder to have a proposal included in the company’s proxy statement for consideration by all shareholders. Typical shareholder proposals include recommendations that a company or its board of directors take specified actions. The amendments are designed to promote engagement between the company and the proponent, raise eligibility thresholds for shorter-term investors and further restrict repeat proposals garnering minimal support.

To read the full text of this Duane Morris Alert, please visit the firm’s website.

“Accredited Investor” and “Qualified Institutional Buyer” Get Updated Definitions in SEC Final Rule

On August 26, 2020, the U.S. Securities and Exchange Commission (SEC) adopted final rules amending the definitions of “accredited investor” and “qualified institutional buyer” (QIB). The purpose of the amendments is to identify more effectively institutional and individual investors that have sufficient knowledge and expertise to participate in investment opportunities without investor protections provided by registration under the Securities Act of 1933.

The final amendments will be published in the Federal Register soon and become effective 60 days after publication.

To read the full text of this Duane Morris Alert, please visit the firm website.

SEC Adopts Final Amendments to Proxy Rules on Proxy Voting Advice

On July 22, 2020, the U.S. Securities and Exchange Commission adopted amendments to its rules under the Securities Exchange Act of 1934 that exempt persons furnishing proxy voting advice from the information and filing requirements of the federal proxy rules. The most prominent proxy advisory firms that provide such proxy voting advice in the United States today are Institutional Shareholder Services and Glass Lewis & Co. Pursuant to the amendments, the SEC codified its view that proxy voting advice generally constitutes a “solicitation,” imposed new conditions to exemptions under Exchange Act Rule 14a-2(b) and added examples of what may be “misleading” within the meaning of Exchange Act Rule 14a-9. The SEC also published supplemental guidance to assist investment advisers on assessing how to consider registrant responses to proxy voting advice in light of the new amendments to the proxy rules.

The new rules have the potential to alter the dynamics between public companies and proxy advisory firms, with public companies gaining some leverage. The new rules have been criticized by some industry participants with an interest in maintaining the prior system.

Duane Morris’ client alert on these new rules was issued on July 30, 2020 and is available here.

SEC Adopts Amendments to Financial Reporting Requirements in Acquisitions and Dispositions of Businesses

Yesterday, May 21, 2020, the Securities and Exchange Commission announced that it approved amendments to its rules and forms “to improve for investors the financial information about acquired or disposed businesses, facilitate more timely access to capital, and reduce the complexity and costs to prepare the disclosure.”  The 267-page final rule release is available by clicking here.

The amendments update SEC rules which have not been comprehensively addressed since their adoption, some over 30 years ago.  Jay Clayton, the SEC’s Chairman, said that amendments are “designed to enhance the quality of information that investors receive while eliminating unnecessary costs and burdens [and] will benefit investors, registrants and the market more generally.”

Among other things, the amendments:

  • update the significance tests (i.e., to determine when financial statements regarding an acquisition or disposition must be included) in Rule 1-02(w) and elsewhere by revising the investment test to compare the registrant’s investments in and advances to the acquired or disposed business to the registrant’s aggregate worldwide market value if available; revising the income test by adding a revenue component; expanding the use of pro forma financial information in measuring significance; and conforming, to the extent applicable, the significance threshold and tests for disposed businesses to those used for acquired businesses;
  • modify and enhance the required disclosure for the aggregate effect of acquisitions for which financial statements are not required or are not yet required by eliminating historical financial statements for insignificant businesses and expanding the pro forma financial information to depict the aggregate effect in all material respects;
  • require the financial statements of the acquired business to cover no more than the two most recent fiscal years;
  • permit disclosure of financial statements that omit certain expenses for certain acquisitions of a component of an entity;
  • permit the use of, or reconciliation to, International Financial Reporting Standards as issued by the International Accounting Standards Board in certain circumstances;
  • no longer require separate acquired business financial statements once the business has been included in the registrant’s post-acquisition financial statements for nine months or a complete fiscal year, depending on significance; and
  • make corresponding changes to the smaller reporting company requirements in Article 8 of Regulation S-X, which will also apply to issuers relying on Regulation A.

The amendments will be effective on Jan. 1, 2021, but voluntary compliance will be permitted in advance of the effective date.

 

 

SEC Amendments to Accelerated and Large Accelerated Filer Definitions Become Effective

Today, final amendments to the definitions of “accelerated filer” and “large accelerated filer” under Rule 12b-2 of the Securities Exchange Act of 1934 became effective. The SEC adopted the final rule implementing the amendments on March 12, 2020.

The amendments are designed to reduce the number of issuers that qualify as accelerated and large accelerated filers, thereby promoting capital formation for certain smaller reporting companies by reducing compliance costs while still maintaining investor protections.

For additional information regarding the amendments, please visit the firm website.

California Mandates Gender Diversity on Public Company Boards

California has become the first state in the nation to require public companies to put female directors on their boards. On September 30, 2018, Governor Jerry Brown signed a bill mandating that by the end of 2019 certain publicly traded companies with headquarters in the state appoint at least one woman to their boards. Further, by 2021, companies subject to the law with at least five directors will need to appoint at least two female directors to their boards, and those with at least six directors will need to appoint at least three female directors to their boards. Companies subject to the law that do not comply with the mandates will face financial penalties.

Whether the law is constitutional is questionable. Governor Brown acknowledged as much after he signed the bill, stating, “I don’t minimize the potential flaws that may indeed prove fatal to its ultimate implementation,” but he justified the law, stating that “recent events in Washington, D.C.—and beyond—make it crystal clear that many aren’t getting the message.” Opponents argue that the mandate violates both the California and U.S. Constitutions because it imposes impermissible gender quotas and requires companies to reject or replace men seeking to serve on boards. In addition, opponents claim that the law violates constitutional principles because it applies to companies headquartered in California even if they are incorporated in another state, creating an inherent conflict between California law and the corporate law of every other state.

Regardless of whether the California law is ultimately enforceable, there is no question that proxy advisory firms and some institutional investors like BlackRock remain focused on board diversity, including gender diversity, and there will continue to be pressure on public company boards to increase their diversity. Action by shareholders seeking to increase board diversity, rather than state governments mandating quotas, is likely to be more enduring and ultimately more successful.

U.S. Supreme Court Holds Whistleblowers Must Report to SEC to be Afforded Protection Under Dodd-Frank Act

On Wednesday, February 21, 2018, the United States Supreme Court held, 9-0, in the case of Digital Realty Trust, Inc. v. Somers that the term “whistleblower” under the Dodd-Frank Wall Street Reform and Consumer Protection Act does not include individuals who report violations of securities laws internally to their companies but not to the United States Securities and Exchange Commission.

In Digital Realty Trust, Paul Somers sued his former employer, Digital Realty Trust, alleging that his employment was terminated because he reported certain suspected securities laws violations to Digital Realty Trust’s senior management and that such termination constituted an unlawful retaliation against a whistleblower under the Dodd-Frank Act. The Court held in favor of Digital Realty Trust, stating that the whistleblower anti-retaliation provision under the Dodd-Frank Act does not protect individuals who have reported alleged misconduct internally to their employer, but not to the SEC.

In reaching its conclusion, the Court focused on the actual text of the anti-retaliation provision of the Dodd-Frank Act as well as the Dodd-Frank Act’s purpose. The Court noted that the Dodd-Frank Act defines a “whistleblower” as “any individual who provides…information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” Further, the Court stated that the purpose of the Dodd-Frank Act was to aid the SEC’s enforcement efforts by motivating people who know of securities law violations to tell the SEC.

The Court’s ruling overturned the Ninth Circuit’s March 2017 ruling and resolved a split between the Ninth and Fifth Circuits.  In March 2017, the Ninth Circuit found that Mr. Somers was entitled to protection under Dodd-Frank Act.  In July 2013, the Fifth Circuit ruled in the case of Asadi v. G.E. Energy that whistleblowers must take their complaints to the SEC to be eligible for protection under the Dodd-Frank Act.

First SEC Staff Comments on Recent Non-GAAP CDIs

As many of us have noticed, the first comment letters from the staff in the SEC’s Division of Corporation Finance, following Corp Fin’s recent issuance of new CDI guidance on the presentation of non-GAAP financial measures, have become available publicly.  The comment letters shed additional useful light on Corp Fin’s views concerning non-GAAP presentations.

One of the comment letters sent to Alexandria Real Estate Equities, Inc. on June 20, 2016, provides a particularly helpful glimpse into Corp Fin’s views about the use of non-GAAP information in the executive summary of MD&A.  The staff’s letter includes the following comment in reference to MD&A in the registrant’s 2015 Form 10-K:

We note that in your executive summary you focus on key non-GAAP financial measures and not GAAP financial measures which may be inconsistent with the updated Compliance and Disclosure Interpretations issued on May 17, 2016 (specifically Question 102.10). We also note issues related to prominence within your earnings release filed on February 1, 2016. Please review this guidance when preparing your next earnings release.

Indeed, the executive summary portion of the MD&A – when initially conceptualized in the SEC’s 2003 release providing interpretive guidance in the preparation of MD&A – was supposed to include an overview to facilitate investor understanding.  The overview was intended to reflect the most important matters on which management focuses in evaluating operating performance and financial condition.  In particular, the overview was not supposed to be duplicative, but rather more of a “dashboard” providing investors insight in management’s operation and management of the business.

Looking back at the release to write this blog entry, I note references, with regard to Commission guidance on preparation of the MD&A overview, explaining that the presentation should inform investors about how the company earns revenues and income and generates cash, among other matters, but should not include boilerplate disclaimers and other generic language.  The Commission even acknowledged that the overview “cannot disclose everything and should not be considered by itself in determining whether a company has made full disclosure.”

Many companies have presented in their MD&A overview those non-GAAP measures used by management to operate the business and otherwise manage the company.  Where appropriate, references typically are made to the information appearing elsewhere in the document, presented to enable compliance with applicable rules and guidance for non-GAAP presentations.  Interestingly, the staff, in its comment, questions the “prominence” of the non-GAAP presentation in the context of the earnings release (noting that the staff provides less specificity in the portion of its comment relating to the MD&A overview).  This focus on prominence – to the extent the staff’s concerns relate to the MD&A overview – is worth further consideration in preparing MD&A disclosure.   In this connection, query whether the staff – in questioning prominence – could be expressing a view that when management analyzes for investors the measures on which it focuses in managing the business, if management relies on non-GAAP measures, it necessarily must focus on (and explain) – with no less prominence – the corresponding GAAP measures.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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