Monthly Archives: October 2020

On the SEC’s 2010 Enforcement Cooperation Program

Andrew J. Leone is Keith I. DeLashmutt Professor of Accounting Information & Management at Northwestern University Kellogg School of Management; Edward X. Li and Michelle Liu are Associate Professors of Accounting at CUNY Baruch College Zicklin School of Business. This post is based on their recent paper, forthcoming in the Journal of Accounting & Economics.

Leniency programs can be powerful enforcement tools. For example, the Department of Justice’s Antitrust Leniency Program has been successful in cracking down on cartel activities since 1993. By encouraging violators’ self-reporting and voluntary remediation, regulators can conserve valuable resources and rectify more misconduct than they otherwise would. However, the Securities and Exchange Commission’s (SEC’s) leniency program, which began with the 2001 Seaboard Report, long illustrated a different reality. Files (2012) finds that cooperating with the SEC can leave firms worse off. The press also harshly criticized the SEC for failing to detect egregious frauds during the Financial Crisis, despite a budget surge since 2001. To address these concerns, the SEC issued a new initiative in 2010 and, for the first time, formalized a multitude of new cooperation polices in the SEC Enforcement Manual. In our forthcoming paper in the Journal of Accounting & Economics, we investigate the effects of these policy changes.


Maintaining Investor Trust: Independent Oversight in the System of Quality Control

J. Robert Brown, Jr. is a Board Member at the Public Company Accounting Oversight Board. This post is based on his recent remarks at the Massachusetts Public Employee Retirement Administration Commission.

“You can’t really know where you are going until you know where you have been.”

Thank you, John [Parsons], for the kind introduction.

It is a pleasure to have an opportunity to speak to a group of professionals dedicated to protecting the well-being of our teachers, firefighters, policemen, and other local and state workers. It’s also a pleasure to be in Massachusetts, albeit virtually. The Commonwealth of Massachusetts is one of significant achievement, including the first subway in the U.S., the first college in North America, and, perhaps most important for me, the fig newton cookie. I look forward to a time when I can be back in Massachusetts in person.

Before I go on, I want to note that the views I share today are my own and do not necessarily reflect the views of the Public Company Accounting Oversight Board (“PCAOB”), my fellow Board members, or the staff of the PCAOB.

I want to talk today about the vital importance of quality control.


2020 Aggregate Share-Based Compensation

James Garriga and Alex Yu are Consultants and Steven Knotz is a Principal at FW Cook. This post is based on their FW Cook report. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).


Fair Value Transfer

Best measure of a company’s aggregate annual long-term incentive grant levels because it adjusts for differences in cost between LTI grant types

Grant Date Fair Value of All Long-Term Incentive Awards Made During Year


Company Market Capitalization at Grant

Inversely proportional to company size…


Cross-Border Venture Capital, Technology Flows, and National Security

Josh Lerner is the Jacob H. Schiff Professor of Investment Banking at Harvard Business School. This post is based on a recent paper by Professor Lerner; Ufuk Akcigit, the Arnold C. Harberger Professor in Economics at the University of Chicago; Sina Ates, Economist at the Federal Reserve Board of Governors; Yulia Zhestkova, a Ph.D. Candidate in Economics at the University of Chicago; and Richard Townsend, Associate Professor of Finance at the UCSD Rady School of Management. Related research from the Program on Corporate Governance includes Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups, by Jesse Fried and Brian Broughman (discussed on the Forum here) and Do VCs Use Inside Rounds to Dilute Founders? Some Evidence from Silicon Valley by Jesse Fried and Brian Broughman (discussed on the Forum here).

One of the most contentious issues in public policy regarding U.S. entrepreneurship over the past four years has been the treatment of foreign investors. The military community has highlighted the extent of foreign venture investments in Silicon Valley, particularly from Chinese corporations, individuals, and financial institutions. These analysts have also emphasized that these investments are often in critical areas, such as artificial intelligence, fintech, robotics, and virtual reality, and expressed the fear that these activities may be leading to technology flows that, while legal, are nonetheless detrimental to U.S. economic and military interests. A particular concern is corporate venture investments, since these investors well-suited to gain insights from their interactions with the companies in their portfolios and to exploit these discoveries. Brown and Singh (2018) highlight, for instance, Alibaba’s and Enjoyor’s investment in Magic Leap, Baidu’s purchase of shares in Velodyne, and Lenovo and Tencent’s investments in Meta, companies that specialized in areas such as augmented reality, active remote sensing, and artificial intelligence.


SEC Amends Rules for Whistleblower Program

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

On September 23, 2020, the SEC voted (by a vote of three to two) to adopt amendments to the rules related to its whistleblower program. The program provides for awards in an amount between 10% and 30% of the monetary sanctions collected in the SEC action based on the whistleblower’s original information. It is widely acknowledged that the program, which has been in place for about ten years, has been a resounding success. According to the press release, since inception, the SEC has obtained over $2.5 billion in financial remedies based on whistleblower tips. Most of those funds have been, or are scheduled to be, returned to affected investors. In addition, since inception, the SEC has awarded approximately $523 million to 97 individuals in whistleblower awards, with the five largest awards—two at $50 million, and one each at $39 million, $37 million and $33 million—made in the past three and a half years. So why mess with success? The press release indicates that the amendments “are intended to provide greater transparency, efficiency and clarity, and to strengthen and bolster the program in several ways. The rule amendments increase efficiencies around the review and processing of whistleblower award claims, and provide the Commission with additional tools to appropriately reward meritorious whistleblowers for their efforts and contributions to a successful matter.” The SEC also adopted interpretive guidance regarding the meaning of “independent analysis” as used in the definition of “original information,” and the SEC’s whistleblower office released guidance for award determinations. Although the final amendments may sound anodyne, the discussion at the SEC’s open meeting was quite contentious. The amendments to the whistleblower rules become effective 30 days after publication in the Federal Register.


Audit Committee Reporting to Shareholders

Steve W. Klemash is Americas Leader at the EY Center for Board Matters, Jennifer Lee is Audit and Risk Specialist at the EY Center for Board Matters, and Bridget M. Neill is Americas Vice Chair, Public Policy at EY. This post is based on their EY memorandum.

For the ninth consecutive year, the EY Center for Board Matters has reviewed voluntary proxy statement disclosures by Fortune 100 companies relating to audit committees, including their oversight of the audit.

These disclosures are an important tool for investors and other stakeholders to gain insight into the activities of audit committees, whose role in promoting high-quality and reliable financial reporting is widely acknowledged. The Securities and Exchange Commission (SEC), for example, has affirmed that independent audit committees have proved to be one of the most effective financial reporting enhancements included in the Sarbanes-Oxley Act. [1] The transparency provided by these disclosures can help strengthen investor confidence in financial reporting and US capital markets.

This post provides data on the types of audit committee-related disclosures that the largest public companies are providing on a voluntary basis, above what is required by US securities laws and regulations. It also includes some samples of the disclosures we examined to illustrate the information being provided to investors.


Promoting Consistency in Corporate Sustainability Reporting

Katherine Brennan is Deputy General Counsel, Corporate Secretary & Chief Compliance Officer and Connor Kuratek is Chief Corporate Counsel and Assistant Corporate Secretary at Marsh & McLennan Companies; and Betty Moy Huber is counsel at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Ms. Brennan, Mr. Kuratek, Ms. Huber, and Paula H. Simpkins. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here);  For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

Five framework- and standard-setting institutions announced a joint statement on September 11, 2020 reflecting their collaborative vision to develop a comprehensive global corporate reporting system for disclosing sustainability topics such as climate change, biodiversity, wages and skills. The participants include the Global Reporting Initiative (GRI), CDP (formerly the Carbon Disclosure Project), Climate Disclosure Standards Board (CDSB), International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB).

Relevance to Companies.  The overarching purpose of the new system is to reduce the reporting burden on companies while improving the completeness, consistency and comparability of sustainability data available for decision-making. The participants’ plan is that companies who choose to disclose sustainability topics need to collect data only once. The companies then can choose the appropriate communication channel, such as an integrated report, a sustainability report or a website posting, depending on the applicable disclosure standard. This statement comes at a time when European Union regulators and market participants are considering how to strengthen the EU’s Non-Financial Reporting Directive, and whether companies should be required to disclose against some of the frameworks already issued by certain of the participants.


SEC Amends Disclosure Requirements for Business Sections, Legal Proceedings and Risk Factors

Mark S. Bergman and Raphael M. Russo are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on their Paul Weiss memorandum.

On August 26, 2020, the SEC adopted amendments to Regulation S-K that update disclosure requirements in Item 101(a) (description of the general development of the business), Item 101(c) (narrative description of the business), Item 103 (legal proceedings) and Item 105 (risk factors). The SEC believes the changes will result in a more principles-based, registrant-specific and cost efficient approach to disclosure that will facilitate an understanding of the performance of a registrant’s business, its financial position and prospects through the eyes of its management and board of directors.

Since Regulation S-K does not apply to foreign private issuers unless a form reserved for foreign private issuers (e.g., Form F-1, F-3 or F-4) specifically refers to Regulation S-K, the amendments to Items 101 and 103 apply only to domestic registrants and foreign private issuers that have elected to file on domestic forms. The amendments to Item 105 apply to both domestic and foreign private issuers.

The amendments become effective 30 days after the date of the publication of the adopting release (“Adopting Release”) (available here) in the Federal Register.


Stockholder Claims Dismissed Even After Corwin Defense Fails

is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here); and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

In a recent decision, the Delaware Court of Chancery found that the board omitted material information from its proxy statement recommending stockholders vote in favor of an all-cash acquisition of the company, and thus “Corwin cleansing” [1] did not apply. Nonetheless, the court dismissed all claims against the directors because the complaint failed to adequately allege that they acted in bad faith, as required by the company’s Section 102(b)(7) exculpation provision. See In re USG Corp. S’holder Litig., Consol. C.A. No. 2018-0602-SG (Del. Ch. Aug. 31, 2020).

This decision provides helpful guidance regarding the kind of information that should be included in a merger proxy statement. It also provides a reminder that Corwin is not the only defense available to directors at the motion to dismiss stage. In particular, Section 102(b)(7) remains a powerful tool to support dismissal of stockholder claims against directors, even in cases where the proxy omits material information and/or the transaction is subject to “Revlon duties.” [2]


USG Corporation (“USG”) was a public building materials company best known for manufacturing and selling Sheetrock brand drywall and wall products. Gebr. Knauf KG and certain of its affiliates (“Knauf”) owned 10.6% of USG’s common stock. In March 2017, Knauf (through its financial advisor) reached out to Berkshire Hathaway Inc. (“Berkshire Hathaway”), which owned 31.1% of USG’s common stock, regarding a potential acquisition of USG. Following discussions, Knauf and Berkshire Hathaway agreed in principle to a price of $40 per share.


SASB’s Proposed Revisions to Its Conceptual Framework and Rules of Procedure

Jeffrey Hales is a professor of accounting at the University of Texas at Austin and Chair of the SASB Standards Board and Tom Riesenberg is SASB’s Director of Legal and Regulatory Policy.

Lawyers don’t typically use conceptual frameworks in their work, but accountants, social scientists, and many other professionals do. For example, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) both have well-established conceptual frameworks. Standard setters develop conceptual frameworks for two reasons: first, they provide an intellectual grounding in core principles and objectives that guide standard-setting efforts; and, second, they provide a common language that improves the ability of a standard setter to communicate ideas and intentions with key stakeholders.

Indeed, it has been argued that FASB’s conceptual framework has been key to the “FASB’s institutional success by disavowing a neutral posture towards its constituents’ conflicting interests and explicitly privileging the user interest over the preparer interest.” [1] The IASB has taken a similar position. Following these precedents, the Sustainability Accounting Standards Board (SASB) also has a conceptual framework in place that, among other things, establishes that the SASB Standards are designed primarily to facilitate disclosure of sustainability information that is useful to investors, lenders, and other creditors.


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