Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The PCAOB announced it has conducted a limited review of audit reports of large accelerated filers reporting critical audit matters or CAMs.

As a starting matter, the PCAOB’s report seems to implicitly and perhaps explicitly assume that its audit standard requiring the reporting of CAMs provides “more useful and timely information.” That assumption is not backed up with any empirical data or observations.

The PCAOB apparently reviewed 12 of 189 audit reports through November 30, 2019 containing CAMs and there is no information about whether this observation set is statistically significant. The report promises that fuller analysis will follow.

The observations reported by the PCAOB are general in nature and far from startling or, perhaps to many, useful. Observations include:

  • Framework for implementing CAMs. Firms appear to have made significant investments in developing methodologies, tools, and training as well as providing targeted support for audit teams implementing the new requirements for the first time.
  • Preliminary CAM determination and drafting. Some audit teams reported beginning the process of determining and describing CAMs as early as the second or third quarter of the company’s fiscal year.
  • Ongoing CAM evaluation. Where CAM determination and drafting began early in the audit process, audit teams continued to evaluate the draft CAMs so that the final CAM determinations and CAM descriptions reflected the facts and circumstances of the current year’s audit, including changes that happened during the year.
  • Subject matter expertise. Audit teams reported that it was helpful to involve a firm’s national office as well as experts in tax, information technology, and other areas early and throughout the CAM determination and drafting process.
  • Management and audit committee involvement. Timely and robust engagement with management and the audit committee were important factors in the CAM implementation process

Nasdaq has proposed new Rule 5120 permitting Nasdaq to halt trading in a security and request information from the company regarding the number of unrestricted publicly held shares when Nasdaq observes unusual trading characteristics in a security or a company announces an event that may cause a contraction in the number of unrestricted publicly held shares.

Nasdaq notes illiquid securities may trade infrequently and in a more volatile manner and change hands at a price that may not reflect their true market value. Less liquid securities may also be more susceptible to price manipulation as a relatively small amount of trading activity can have an inordinate effect on market prices.

Under proposed Rule 5120, in considering whether there are unusual trading characteristics, Nasdaq may review volume, price movements, spread and the presence or absence of any news. Events that may cause a contraction in the number of unrestricted publicly held shares include reverse stock splits, tender offers, stock buybacks, or entering into contractual agreements such as standstills or lockups.

Calumet Specialty Products Partners, L.P. disclosed in its third-quarter 2017 Form 10-Q that, beginning in September 2017, Calumet’s implementation of its new enterprise resource planning (“ERP”) system had resulted in various “operating and reporting disruptions, including limitations on [Calumet’s] ability to ship product and bill customers, project [its] inventory requirements, manage [its] supply chain, maintain current and complete books and records, maintain an effective internal control environment and meet external reporting deadlines.”  According to the SEC order on settled enforcement proceedings:

Three senior finance and accounting managers, including the company’s interim controller, then left the company.

Calumet was seven weeks late filing its financial results for the third quarter of 2017 and, in that filing, announced two material weaknesses in internal control over financial reporting (“ICFR”).

Calumet’s ERP implementation issues and material weaknesses in ICFR continued into March 2018. On March 1, Calumet’s independent auditor identified a potential additional material weakness in the company’s ICFR with respect to the financial statement closing process.

Calumet investors, concerned that Calumet would not be able to disclose its 2017 Financial Results on time, began pressuring the company to issue an earnings release consistent with Calumet’s practice in prior years.

Despite the departure of senior finance and accounting managers, the pervasive ERP implementation and internal control issues, and the seven-week delay in the filing of its third quarter 2017 Form 10-Q, Calumet issued an earnings release on March 8, 2018, announcing the company’s 2017 Financial Results. The earnings release was furnished as an exhibit to a Form 8-K, which was filed with the Commission.

According to the SEC, the earnings release materially misstated, among other things, the company’s earnings for 2017.

On March 19, Calumet filed a Form 8-K with the Commission disclosing that it expected its 2017 Financial Results to differ from what had been reported in the March 8 earnings release. Calumet’s shares declined over eight percent that day.

Calmut agreed to pay a $250,000 civil monetary penalty to the SEC for violating securities laws.  Calmut did not admit of deny the SEC’s findings.

ISS has announced its 2020 policy updates.  The summary below is largely extracted from ISS’ executive summary or the commentary in the updated policies.

US – Problematic Governance Structure – Newly Public Companies

ISS seeks to provide clarity on policy application at newly-public companies by creating two distinct policies that address (1) problematic governance provisions and (2) multi-class capital structures with unequal voting rights. Specifically, the changes create a policy to address problematic capital structures at newly-public companies and provide a framework for addressing acceptable sunset requirements. In assessing the reasonableness of a time-based sunset requirement, consideration will be given to the company’s lifespan, its post-IPO ownership structure and the board’s disclosed rationale for the specific duration selected. No sunset period of more than seven years from the date of the IPO will be considered to be reasonable.

In line with the current implementation of the policy, the update also clarifies and narrows the focus of the policy to certain highly problematic governance structures.

US – Independent Board Chair Shareholder Proposals

The policy update largely codifies the existing ISS policy application with respect to independent chair proposals. While ISS will maintain a holistic approach to evaluating these proposals, the policy now explicitly identifies the factors that will generally result in recommending support for these proposals. In line with the feedback received from investors in the policy survey and roundtables, support for a well crafted proposal will be likely at companies where boards rely on a weak lead independent director role or there is evidence that directors failed to oversee material risks facing the company or did not adequately respond to shareholders’ concerns. The language in the existing policy that provided an overview of how ISS will analyze the scope and rationale of the proposal, the company’s current board leadership structure, the company’s governance structure and practices, company performance, and the overriding factors will be updated and subsequently relocated to the relevant ISS Policy FAQ document.

US – Share Repurchase Program Proposals

While most US companies can (and often do) implement share buyback programs through board resolutions without shareholder votes, there are exceptions to this general rule. Certain financial institutions, for example, are required by their regulators to receive shareholder approval for buyback programs. In addition, certain US-listed cross-market companies are required by the law of their country of incorporation to receive shareholder approval to grant the board the authority to repurchase shares.

The policy update codifies the existing ISS approach, particularly with respect to the rare cases in which an “against” recommendation may be warranted. It is intended that this policy will apply to US Domestic Issuers (DEF 14 filers) listed solely in the US, regardless of their country of incorporation.

The updated policy provides safeguards against (1) the use of targeted share buybacks as greenmail or to reward company insiders by purchasing their shares at a price higher than they could receive in an open market sale, (2) the use of buybacks to boost EPS or other compensation metrics to increase payouts to executives or other insiders, and (3) repurchases that threaten a company’s long-term viability (or a bank’s capitalization level). In the absence of these abusive practices, support will generally be warranted for a grant of authority to the board to engage in a buyback.

Other modestly revised ISS policies include the following:

  • Board of Directors – Voting on Director Nominees in Uncontested Elections: When making recommendations on nominees, ISS takes into consideration if a director has limited tenure; whether he/she should be held responsible for an action taken by the board before he/she joined. But this case-by-case consideration only occurs if the director has been on the board for less than one year. While this is the current policy application, the current footnote under Board Accountability on new nominees is being clarified such that only the subset of new nominees who have served on board for less than one year will be considered on a case-by-case basis.
  • Board Composition – Attendance: The term “new nominee” is being removed from the attendance policy, because the issue for recently-added directors under this policy is whether they served the entire fiscal year under review, not whether they have been previously elected by shareholders.
  • Board Composition – Diversity: The one-year transition period for the U.S. gender diversity policy has now passed, and absent a firm commitment from the company to achieve gender diversity within a year, ISS will recommend against the chair of the nominating committee (or other directors as appropriate), if the board lacks a female director. In addition, ISS is clarifying that such a commitment from a board with no women on it previously will only be a mitigating factor for 2020, not beyond.
  • Board Accountability – Restrictions on Shareholders’ Rights: ISS has seen a general increase in the number of companies submitting proposals to shareholders seeking ratification or approval of requirements in excess of SEC Rule 14a-8 regarding submission of binding bylaw amendments. The update provides guidance on how ISS will apply the policy and will ensure consistency in recommendations. Specifically, ISS will generally recommend that shareholders vote against or withhold from members of the governance committee until shareholders are provided with an unfettered ability to amend the bylaws or a proposal providing for such unfettered right is submitted for shareholder approval.
  • Equity-Based and Other Incentive Plans – Evergreen Provision: Prior to the Tax Cuts and Jobs Act in late 2017, Internal Revenue Code Section 162(m) required companies to seek approval of their incentive plan metrics at least every five years for qualification of the performance-based pay exemption. However, the tax reform repealed the performance-based pay exemption, thereby eliminating the need for companies to obtain shareholder regular reapproval of plans. As a result of the tax reform, there has been a significant drop in the number of equity plans brought to shareholder vote (a 27 percent year-over-year drop from 2017 to 2018), and the number of such proposals in 2018 and 2019 has remained significantly below levels seen before the tax reform. The new environment post-tax reform renews concerns around evergreen provisions that automatically replenish plan reserves and circumvent regular shareholder reapproval of such plans within reasonable time intervals. Further, the presence of an evergreen provision may perpetuate plans with shareholder-unfriendly features. Therefore, ISS will include a plan’s containing an evergreen feature as an overriding factor in the U.S. Equity Plan Scorecard analysis.
  • Diversity – Gender Pay Gap: This is an update of current policy to better align it with the requests of all the types of shareholder proposals filed. The updated language will better capture and be more inclusive of the types of requests on this issue, which include reporting on race or ethnicity-based pay inequities.

At an open meeting on November 5th, SEC Commissioners voted 3-2 to propose potentially significant changes to the shareholder proposals process under Rule 14a-8 with respect to the bases upon which issuers can seek to omit shareholder proposal from their proxy materials.

The proposed amendments to the shareholder proposal process under Rule 14a-8 would:

  • Institute a “tiered approach” for demonstrating sufficient ownership of securities to submit a proposal;
  • Require specified documentation for proposals submitted by a shareholder representative;
  • Obligate shareholder proponents to engage with the company with respect to the shareholder’s proposal;
  • Restrict a person to the submission of only one proposal for the same shareholders’ meeting;
  • Raise the shareholder support thresholds for resubmitting a proposal; and
  • Allow companies to exclude proposals under certain conditions where shareholder support for the issue has declined.

In addition, the SEC separately adopted proposed rules directed towards proxy advisors such as ISS and Glass Lewis, which the SEC refers to as proxy voting advice businesses. The proposed rules:

  • Provide for enhanced disclosure of conflicts of interests by proxy voting advice businesses;
  • Require that registrants be given the opportunity to review and comment on proxy voting recommendations in certain circumstances;
  • Permit registrants to include a hyperlink in the proxy voting recommendation setting forth the registrant’s position on the proxy voting advice;
  • Clarify the application of the SEC’s antifraud rules to proxy voting recommendations and provide examples of what may be misleading information; and
  • Codify previous SEC interpretations to make clear that the terms “solicit” and “solicitation” include any proxy voting advice that makes a recommendation to a shareholder as to its vote.

Significant Updates to Shareholder Proposals Process

The proposed amendments to the shareholder proposal process would reflect the first substantial modifications to the process in decades.

Ownership Requirements

The first proposed amendment is to Rule 14a-8(b), which provides the eligibility requirements a shareholder-proponent must satisfy to have a proposal included in a company’s proxy statement. Under the current rule, to be eligible to submit a proposal, a shareholder proponent must have continuously held at least $2,000 in market value or one percent of the company’s securities entitled to be voted on the proposal at the meeting for at least one year by the date the proposal is submitted.

The ownership threshold and holding period in Rule 14a-8(b) are intended to ensure that a shareholder has some meaningful “economic stake or investment interest” in a company before engaging company resources via the proposal submission process. Based on concerns that the prior thresholds no longer present a meaningful investment, the SEC has proposed a tiered approach that would provide three options for demonstrating an ownership stake through a combination of amount of securities owned and length of time held.

As proposed, the amended thresholds would allow a shareholder to submit a Rule 14a-8 proposal for inclusion in a company’s proxy materials if the shareholder satisfies one of three continuous ownership requirements: as follows:

  • $2,000 of a company’s securities entitled to vote on the proposal for at least 3 years;
  • $15,000 of a company’s securities entitled to vote on the proposal for at least 2 years; or
  • $25,000 of a company’s securities entitled to vote on the proposal for at least 1 year.

The proposed rule would not allow shareholders to aggregate their securities with other shareholders to meet the applicable minimum ownership thresholds.

Additional Documentation Required for Shareholder Representatives

Proposals are often submitted by individuals or entities that may not qualify to submit proposals at a particular company in their own name, but serve as a representative for an individual that maintains the requisite share ownership requirements. The representative typically submits the proposal to the company on the shareholder’s behalf along with necessary documentation and acts as the shareholder’s representative following the initial submission.

To address concerns over whether a proponent actually fully supports the proposal being submitted on their behalf, the Commission proposed to amend the eligibility requirements of Rule 14a-8 to require shareholders that use a representative to submit a proposal for inclusion in a company’s proxy statement to provide documentation attesting that the shareholder supports the proposal and authorizes the representative to submit the proposal on the shareholder’s behalf.

Under the proposed amendment, the required documentation would be required to specifically including the following information:

  • The company to which the proposal is directed;
  • The annual or special meeting for which the proposal is submitted;
  • The shareholder-proponent and the designated representative;
  • The shareholder’s statement authorizing the designated representative to submit the proposal and/or otherwise act on the shareholder’s behalf;
  • The specific proposal to be submitted;
  • The shareholder’s statement supporting the proposal; and
  • The dated signature of the shareholder.

Mandatory Shareholder Engagement

In an effort to facilitate discussion and possible resolutions between shareholder proponents and the companies at which they have submitted proposals, the SEC has proposed to require shareholder proponents to state when they would be able to meet with the company in person or via teleconference to engage with the company with respect to the proposal.

Specifically, the proposed amendment would revise Rule 14a-8(b) to require a statement from each shareholder proponent that he or she is able to meet with the company in person or via teleconference no less than 10 calendar days, nor more than 30 calendar days, after submission of the shareholder proposal. Shareholders would also be required to include contact information and provide available business days and specific times for discussing the proposal with the company.

One Proposal Per Company, Per Person

The Commission proposed amendments to Rule 14a-8(c), which provides that each shareholder may submit no more than one proposal to a company for a particular shareholders’ meeting.

The SEC has proposed to extend the one proposal limitation to each person, rather than each shareholder, directly or indirectly, for the same shareholders’ meeting. The expansion of the limitation to each person on a direct or indirect basis has the effect of curtailing multiple submissions by shareholder representatives. For example, under the proposed rule, a shareholder proponent may not submit one proposal in its own name and simultaneously serve as a representative to submit a different proposal on another shareholder’s behalf for consideration at the same meeting. Similarly, a representative would not be permitted to submit more than one proposal to be considered at the same meeting, even if the representative would be submitting each proposal on behalf of different shareholders.

Increased Resubmission Thresholds

The Commission proposed specific changes to Rule 14a-8(i)(12), which allows companies to exclude a shareholder proposal that “deals with substantially the same subject matter as another proposal or proposals that has or have been previously included in the company’s proxy materials within the preceding 5 calendar years” if the matter was voted on at least once in the last three years and did not receive at least: (i) 3 percent of the vote if previously voted on once; (ii) 6 percent of the vote if previously voted on twice; or (iii) 10 percent of the vote if previously voted on three or more times.

The proposing release highlights that the initial amendments to the resubmission basis for exclusion in 1983 were intended to address commenter’s desire for “an appropriate response to counter the abuse of the security holder proposal process by certain proponents who make minor changes in proposals each year so that they can keep raising the same issue despite the fact that other shareholders have indicated by their votes that they are not interested in that issue.”

The proposed amendments reflect the SEC’s concern “the current resubmission thresholds may allow proposals that have not received widespread support from a company’s shareholders to be resubmitted—in some cases, year after year—with little or no indication that support for the proposal will meaningfully increase or that the proposal ultimately will obtain majority support” and address this concern by raising the current resubmission thresholds of 3, 6, and 10 percent to 5, 15, and 25 percent, respectively.

Exclusion of Proposals with Declining Support

In connection with the proposed modification to the resubmission thresholds, the SEC also proposed to add a new provision to Rule 14a-8(i)(12) that would allow companies to exclude proposals where shareholder support for the matter has declined. In particular, companies would be permitted to exclude proposals that have been submitted three or more times in the preceding five years if:

  • the proposals received more than 25 percent, but less than 50 percent, of the vote, and
  • support for the proposal declined by more than 10% the last time substantially the same subject matter was voted on compared to the immediately preceding vote.

Regulation of Proxy Advice and Proxy Voting Advice Businesses

The SEC also proposed amendments to its rules governing proxy solicitations to help ensure that investors who use proxy voting advice receive more accurate, transparent, and complete information on which to make their voting decisions, in a manner that does not impose undue costs or delays that could adversely affect the timely provision of proxy voting advice.

Disclosures of Conflicts of Interest

The SEC is proposing to require that persons who provide proxy voting advice include certain disclosures, which are intended to be more illuminating than what is currently required by the existing rules and are specifically tailored to proxy voting advice businesses and the nature of their conflicts. The proposed disclosures include:

  • Any material interests, direct or indirect, of the proxy voting advice business (or its affiliates) in the matter or parties concerning which it is providing the advice;
  • Any material transaction or relationship between the proxy voting advice business (or its affiliates) and (i) the registrant (or any of the registrant’s affiliates), (ii) another soliciting person (or its affiliates), or (iii) a shareholder proponent (or its affiliates), in connection with the matter covered by the proxy voting advice;
  • Any other information regarding the interest, transaction, or relationship of the proxy voting advice business (or its affiliate) that is material to assessing the objectivity of the proxy voting advice in light of the circumstances of the particular interest, transaction, or relationship; and
  • Any policies and procedures used to identify, as well as the steps taken to address, any such material conflicts of interest arising from such interest, transaction, or relationship.

Registrants’ Review of Proxy Voting Advice and Response

Review of Proxy Voting Advice by Registrants

The proposed amendments would require one standardized opportunity for timely review and feedback by registrants of proxy voting advice before a proxy voting advice business disseminates its voting advice to clients, regardless of whether the advice on the matter is adverse to the registrant’s own recommendation.

As proposed, if the registrant files its definitive proxy statement less than 45 but at least 25 calendar days before the date of its shareholder meeting, the proxy voting advice business would be required to provide the registrant no fewer than three business days to review the proxy voting advice and provide feedback as a condition of the exemptions. However, if the registrant files its definitive proxy statement 45 calendar days or more before its shareholder meeting, the proxy voting advice business would be required to provide the registrant at least five business days to review the proxy voting advice and provide feedback. In the event a registrant files its definitive proxy statement less than 25 calendar days before the meeting, the proxy voting advice business would have no obligation under the proposed amendment to provide the proxy voting advice to the registrant as a condition of the exemption.

In addition to the review and feedback period, a proxy voting advice business would be required to provide registrants with a final notice of voting advice. This notice, which must contain a copy of the proxy voting advice that the proxy voting advice business will deliver to its clients, must be provided by the proxy voting advice business no later than two business days prior to delivery of the proxy voting advice to its clients. This final notice would allow the registrant to determine whether or not to provide a statement in response to the advice and request that a hyperlink to its response be included in the voting advice delivered to clients of the proxy voting advice business.

Response to Proxy Voting Advice by Registrants

In addition to the proposed review and feedback period and final notice requirements, registrants would also have the option under the proposed amendments to request that proxy voting advice businesses include in their proxy voting advice (and on any electronic medium used to distribute the advice) a hyperlink or other analogous electronic medium directing the recipient of the advice to a written statement prepared by the registrant that sets forth its views on the advice. To prevent undue delays in the distribution of the proxy voting advice to clients, registrants would be required to provide the hyperlink (or other analogous electronic medium) to the proxy voting advice business no later than the expiration of the two-day final notice period referred to above.

Changes to Antifraud Rules

The SEC believes subjecting proxy voting advice businesses to the same antifraud standard as registrants and other persons engaged in soliciting activities is appropriate in the public interest and for the protection of investors. The SEC is proposing to amend the list of examples in its rules regarding misleading information to highlight the types of information that a proxy voting advice business may, depending upon the particular facts and circumstances, need to disclose to avoid a potential violation of the rule. Thus, the amended rule would list failure to disclose information such as the proxy voting advice business’s methodology, sources of information and conflicts of interest as an example of what may be misleading within the meaning of the rule.

The SEC is aware of concerns that may arise when proxy voting advice businesses make negative voting recommendations based on their evaluation that a registrant’s conduct or disclosure is inadequate, notwithstanding that the conduct or disclosure meets applicable SEC requirements. Without additional context or clarification, clients may mistakenly infer that the negative voting recommendation is based on a registrant’s failure to comply with the applicable SEC requirements when, in fact, the negative recommendation is based on the determination that the registrant did not satisfy the criteria used by the proxy voting advice business. To address these concerns, the proposed amendments would add as an example that the failure to disclose the use of standards or requirements that materially differ from relevant standards or requirements of the SEC may be misleading, depending upon particular facts and circumstances.

Codification of the SEC’s Interpretation of “Solicitation”

The SEC is proposing to codify previous interpretations to make clear that the terms “solicit” and “solicitation” include any proxy voting advice that makes a recommendation to a shareholder as to its vote, consent, or authorization on a specific matter for which shareholder approval is solicited, and that is furnished by a person who markets its expertise as a provider of such advice separately from other forms of investment advice and sells such advice for a fee. The SEC believes the furnishing of proxy voting advice by a person who has decided to offer such advice separately from other forms of investment advice to shareholders for a fee with the expectation that its advice will be part of the shareholders’ voting decision-making process, is conducting the type of activity that raises the investor protection concerns about inadequate or materially misleading disclosures that Section 14(a) of the Exchange Act and the SEC’s proxy rules are intended to address.

PWP Xerion Holdings III LLC v Red Leaf Resources, Inc. discussed disputed consent rights in connection with a joint venture.  In so doing, Vice Chancellor Laster had to consider the meaning of the word “affiliate.”

Citing Websters, the Court noted under the plain meaning of the term, someone “affiliated” with a person or organization is “closely associated with” the person or organization, “typically in a dependent or subordinate position.” The Court stated as customarily interpreted, an officer or director of an entity is affiliated with that entity.

The Court looked to other definitions of “affiliate” as well.  Under Section 203 of the Delaware General Corporation Law, “‘[a]ffiliate’ means a person that directly, or indirectly through 1 or more intermediaries, controls, or is controlled by, or is under common control with, another person.”  The term “‘control, including the terms ‘controlling,’ ‘controlled by’ and ‘under common control with,’ means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting stock, by contract or otherwise. . . .” The Court also discussed similar definitions in a stockholders agreement the parties had entered into and the definition under Rule 144 of the Securities Act.

The Court noted under these control-based definitions:

  • An officer or employee of an entity is affiliated with that entity.
  • An officer meets the definition because he is under the control of and accountable to the governing body of the entity he serves.
  • An employee is similarly under the control of and accountable to the entity that employs him.

The foregoing discussion may largely be dicta in the context of the overall holding. It’s not my understanding however that transactional lawyers generally think all officers and employees are affiliates, whether when drafting an acquisition agreement or interpreting the term under securities laws.

ISS announced the launch of its benchmark voting policy comment period which will help set policy for the upcoming proxy season.

The draft policy takes the format with the existing policy in a left column with black line changes and the clean updated policy in the right column followed by ISS commentary.

Policies under consideration for the United States include:

  • Sunset Provisions for Dual-Class Stock Structures. The proposed update is intended to provide clarity on policy application at newly-public companies by creating two distinct policies to address (1) problematic governance provisions and (2) multi-class capital structures with unequal voting rights. The change specifically creates a policy to address ISS defined problematic capital structures at newly-public companies and provides a framework for addressing acceptable sunset structures. In line with the current implementation of the policy, the proposed update also clarifies and narrows the focus of the policy to certain ISS defined highly problematic governance structures.
  • Share Repurchase Programs. In the absence of the following ISS identified abusive practices, support will generally be warranted for a grant of authority to the board to engage in a buyback. The revised policy would require the absence of the following concerns: (1) the use of targeted share buybacks as greenmail or to reward company insiders by purchasing their shares at a price higher than they could receive in an open market sale, (2) the use of buybacks to boost EPS or other compensation metrics to increase payouts to executives or other insiders, and (3) repurchases that threaten a company’s long-term viability (or a bank’s capitalization level).
  • Shareholder Proposals on Independent Board Chairs. The proposed update largely codifies the existing ISS policy application for proposals on independent board chairs. While ISS would maintain a holistic approach to evaluating proposals for independent board chairs, the proposed policy now explicitly states the types of factors that will be given substantial weight. Identification of such factors will generally result in ISS recommending support for proposals on independent board chairs. The overview of how ISS will analyze the scope and rationale of the proposal, the company’s current board leadership structure, the company’s governance structure and practices, company performance, and the overriding factors will be updated and subsequently relocated to ISS’ Policy FAQ document. The impact of the proposed update on ISS’ vote recommendations on shareholder proposals seeking an independent board chair is indeterminate at this time.

The Energy and Environment Legal Institute has requested the SEC to take appropriate action to prevent and prohibit registrants from making materially false and misleading claims and statements related to global climate change.  As support for its cause, the Institute refers to a press release by a public company and categorizes the claims as “greenwashing.”  While there is no legal definition of greenwashing, some think it occurs when a company or organization spends more time and money claiming to be “green” through advertising and marketing than actually implementing business practices that minimize environmental impact.

In the complained of press release, the Institute notes:

  • A public company cannot sign the Paris Climate Agreement or meet its goals.
  • The public company does not emit a significant amount of greenhouse gases and cannot possibly make any difference to average global temperature.
  • It is not at all clear that electric vehicles result in less emissions.
  • The reality is that public company’s renewable energy policy is raising energy costs for the company without providing any sort of actual climate benefit.
  • Scientific research indicates that deforestation cools, rather than warms the planet.

No court or regulatory agency has affirmed the accuracy of the Institute’s comments or found that the complained of press release was false and misleading or violated law.

In a settled enforcement action, the SEC resolved allegations related to non-monetary transactions regarding certain Comscore transactions.  The enforcement action also involved disclosures surrounding the number of customers.

In 2014 and 2015, Comscore disclosed its total number of customers and net new customers added in quarterly earnings calls. Comscore also disclosed its customer total in periodic filings with the Commission. According to the SEC the number of net new customers added per quarter was an important performance indicator for Comscore that analysts tracked and reported on. During this time, in an effort to conceal the fact that quarterly growth in Comscore’s customer total had slowed or was declining, a Comcast employee allegedly approved and implemented multiple changes to the methodology by which the quarterly customer count was calculated. These changes were neither applied retroactively nor disclosed to the public per the SEC order.

Initially, the employee allegedly approved the incremental lowering – over at least four quarters – of the dollar threshold pursuant to which certain then existing customers were considered Comscore customers for purpose of the disclosure. When that dollar threshold reached the point where it could not be lowered any further, the employee allegedly approved adding different categories of agency end-users to the customer count over at least three different quarters. Prior to these changes, Comscore consistently counted only the agency as its client.

The employee allegedly implemented these changes to the customer count methodology to show a consistent net increase in Comscore’s total customers. For seven of the eight quarters during 2014 and 2015, Comscore’s disclosed net customers added was in the 40s – creating the illusion of a smooth and steady growth in its business. In fact, had the methodology remained consistent, Comscore’s customer total would have shown a decline over the two-year period and been lower by hundreds of customers. By the end of 2015, Comscore’s customer count total was overstated by more than 15%.

Comscore and the employee did not admit or deny the allegations in the SEC orders.

The SEC’s Division of Corporation Finance has realigned the work of its disclosure program to promote collaboration, transparency and efficiency. As a result of the realignment, the disclosure program staff will focus their efforts through one of four groups:

  • Disclosure Review Program. The SEC will conduct the majority of its selective and required filing reviews in seven industry focused offices. Kyle Moffatt will lead the Disclosure Review Program and continue to serve as the Division’s Chief Accountant.
  • Specialized Policy and Disclosure. Michele Anderson will continue to oversee the work of the Offices of International Corporate Finance, Mergers and Acquisitions and Structured Finance and will oversee corporate governance policy matters across the Division. Former Assistant Director Sonia Barros will work with Ms. Anderson on these governance matters.
  • Office of Risk and Strategy. Shelly Luisi will continue to lead the SEC’s work in this area. Cecilia Blye will join Catherine Brown and Angela Crane to provide filing review teams with guidance on developing risks and evolving disclosures.
  • Office of Assessment and Continuous Improvement. Cicely LaMothe will lead this new office which will evaluate the effectiveness of the SEC’s disclosure review program. Former Assistant Directors Barbara Jacobs and Amanda Ravitz and former Senior Assistant Chief Accountants Andrew Mew and Jim Rosenberg will join her in this work.

The Division will continue to assign companies and filings to review offices by their principal industry focus using Standard Industrial Classification codes and will reassign all companies currently assigned to the previous eleven AD Offices to one of the following seven offices:

Office Chief Senior Advisor
Energy & Transportation Brad Skinner John Reynolds
Finance Melissa Rocha John Nolan
Life Sciences Suzanne Hayes Daniel Gordon
Manufacturing Anne Nguyen Parker Martin James
Real Estate & Construction Joel Parker Pamela Long
Technology Larry Spirgel Craig Wilson
Trade & Services Mara Ransom Jim Allegretto

Company reassignments to these offices will occur on September 29. A company’s office assignment will appear, as it does now, at the top of the company’s EDGAR filing history on sec.gov.