Monthly Archives: June 2021

A New Angle on Cybersecurity Enforcement from the SEC

John F. Savarese, Wayne M. Carlin, and Sabastian V. Niles are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum.

In recent years, companies across a wide range of industries have wrestled with the challenge of making appropriate disclosures about cybersecurity risks and vulnerabilities. Earlier this week, an SEC enforcement action, In the Matter of First American Financial Corp. (June 14, 2021) (“FAFC”), shed important new light on these cyber disclosure issues. Importantly, the case did not involve a third-party attack or actual data breach. Rather, it arose from an existing weakness in FAFC’s systems, and centered on the company’s public statements when the vulnerability was publicized in a press report. The case charges that FAFC failed to maintain disclosure controls and procedures sufficient to ensure that all available relevant information concerning the problem was analyzed for inclusion in the company’s disclosures. The SEC has not previously employed this theory as the exclusive basis for a cyber-related enforcement action. FAFC settled without admitting or denying the SEC’s findings.

FAFC is a real estate settlement services provider. According to the SEC’s order, in mid-2019, a cybersecurity journalist contacted FAFC seeking comment on a story about a security vulnerability in one of the company’s web-based applications. FAFC provided a statement to the reporter and also released it to other media outlets, noting, among other things, that “security, privacy and confidentiality are of the highest priority, and we are committed to protecting our customers’ information. The company took immediate action to address the situation . . . .” Shortly thereafter, FAFC filed a Form 8-K, in which it stated that it “shut down external access to a production environment with a reported design defect that created the potential for unauthorized access to customer data.”


The Board Diversity Census of Women and Minorities on Fortune 500 Boards

Carey Oven is national managing partner at the Center for Board Effectiveness and chief talent officer of Deloitte Risk & Financial Advisory and Deloitte & Touche LLP; and Linda Akutagawa is president and CEO of the Leadership Education for Asian Pacifics (LEAP). This post is based on a Deloitte memorandum by Ms. Oven, Ms. Akutagawa, Lorraine Hariton, Michael C. Hyter, Dale Jones, Cid Wilson, and Caroline Schoenecker. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here).

While stakeholders and shareholders increase demands for gender, racial, and ethnic diversity in the boardrooms of America’s companies, many forward-thinking boards recognize the benefits of such change. This business case for board diversity is not new and may no longer be forward-thinking. The protests over racial injustices and state legislative action on board composition in 2020 made clear that the need for greater representation of women and minorities in the boardrooms of America’s largest companies can no longer be held up or held back. As demographics and buying power [1] in the United States become increasingly more diverse, corporate boards are working to obtain greater diversity of background, experience, and thought in the boardroom.

Since 2004, the Alliance for Board Diversity (ABD or “we”) has had a mission to increase the representation of women and minorities on corporate boards and amplify the need for diverse board composition. During this time, ABD has celebrated the movement forward on diverse board representation, but the fact remains that progress has been painfully slow. In 2019, Catalyst estimated that minority women are more than 20% of the US adult population (“Women of Color in the United States: Quick Take,” February 1, 2021, Catalyst). To reach a point of 20% of Fortune 100 seats held by minority women would take until 2046 at the current rate of change.


Gensler Plans to “Freshen Up” Rule 10b5-1

Cydney S. Posner is special counsel at Cooley LLP. This post is based on her Cooley memorandum.

[On June 7, 2021], in remarks before the WSJ’s CFO Network Summit, SEC Chair Gary Gensler scooped the Summit with news of plans to address issues he and others have identified in Rule 10b5-1 plans. Problems with 10b5-1 plans have long been recognized—including by former SEC Chair Jay Clayton—so it will be interesting to see if any proposal that emerges will find support among the Commissioners on both sides of the SEC’s aisle. In an interview, Gensler also responded to questions about climate disclosure rules, removal of the PCAOB Chair, Enforcement, SPACs and other matters.

Rule 10b5-1 background. Corporate executives, directors and other insiders are constantly exposed to material non-public information, making it sometimes difficult for them to sell company shares without the risk of insider trading, or at least claims of insider trading. To address this issue, Congress developed the Rule 10b5-1 safe harbor. In general, Rule 10b5-1 allows an insider, when acting in good faith and not in possession of MNPI, to establish a formal trading contract, instruction or plan that specifies pre-established dates or formulas or other mechanisms—that are not subject to the insider’s further influence—for determining when the insider can sell shares, without the risk of insider trading. To be effective, the contract, instruction or plan must also conform to the specific requirements set forth in the Rule. In effect, the Rule provides an affirmative defense designed to demonstrate that a purchase or sale was not made “on the basis of” MNPI. If a 10b5-1 contract, instruction or plan is properly established, the issue is not whether the insider had MNPI at the time of the purchase or sale of the security; rather, that analysis is performed at the time the instruction, contract or plan is established.


Weekly Roundup: June 18–24, 2021

More from:

This roundup contains a collection of the posts published on the Forum during the week of June 18–June 24, 2021.

Competition Laws, Governance, and Firm Value

The Biden Administration’s Executive Order on Climate-Related Financial Risks

Benchmarking of Pay Components in CEO Compensation Design

Speech by Commissioner Roisman on Whether the SEC Can Make Sustainable ESG Rules

Do ESG Mutual Funds Deliver on Their Promises?

Nasdaq Permits Primary Direct Listings and Proposes Relaxation of Pricing Limits

Prepared Remarks by SEC Chair Gensler at London City Week

Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent remarks at London City Week. The views expressed in the post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Thank you for that kind introduction, Anthony. As is customary, I’d like to note that I’m not speaking on behalf of my fellow Commissioners or the SEC staff.

I’m honored to be speaking again at London City Week. It’s been eight years since I last spoke here. That was about benchmark interest rates and the London Interbank Offered Rate (LIBOR). I may come back to that, but I’m mostly going to take the opportunity to discuss three key areas of the reform agenda at the Securities and Exchange Commission.

The SEC was set up in the 1930s by Franklin Delano Roosevelt and the U.S. Congress to look after working families’ savings in the depths of the Great Depression.

Congress passed a number of laws with the same basic ideas—among them, that investors get to decide what risks they wish to take, as long as companies provide appropriate disclosures; that working families should be protected with regard to their investment advisers; and that the stock exchanges themselves should be free of fraud and manipulation.

Those protections put in place by Congress and the early SEC have stood the test of time. I think they’re a large part of our economic success—why the U.S. has the largest, most vibrant capital markets in the world.


M&A Advisor Misconduct: A Wrong Without a Remedy?

Andrew F. Tuch is Professor of Law at Washington University in St. Louis. This post is based on his recent paper, forthcoming in the Delaware Journal of Corporate Law.

Rarely have investment banks faced liability in their role as advisors on merger and acquisition (“M&A”) transactions. At first glance, this is puzzling. M&A deals are ubiquitous and frequently attract lawsuits. Moreover, in their other activities, most notably securities underwriting, investment banks are frequent litigation targets, being seen as deep-pocketed defendants. And yet, in advising on often-contentious M&A deals, they have succeeded spectacularly by generally avoiding liability altogether.

In M&A Advisor Misconduct: A Wrong Without a Remedy?, I examine this anomaly, explaining the doctrinal and practical reasons for it. The article puts in context a recently successful shareholder strategy to bring M&A advisors to heel. It shows how this litigation strategy—a direct action by shareholders alleging aiding and abetting liability against the corporation’s M&A advisor based on the underlying wrong of directors—may delicately side-step the traditional obstacles. This strategy has succeeded on occasion, provoking widespread alarm in the investment banking community—but the approach marks only a modest increase in liability risk for M&A advisors. The liability framework for M&A advisors remains piecemeal and unlikely to be effective in deterring M&A advisor misconduct.


Nasdaq Permits Primary Direct Listings and Proposes Relaxation of Pricing Limits

David J. Goldschmidt and Michael J. Zeidel are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum.

On May 19, 2021, the Securities and Exchange Commission (SEC) approved Nasdaq’s proposal to permit companies to issue shares and raise capital in primary direct listings conducted on the Nasdaq Global Select Market without the involvement of traditional underwriters. The changes, which are effective immediately, closely align Nasdaq’s direct offering framework with that of the New York Stock Exchange (NYSE), which, as discussed in our previous client alert “NYSE Direct Listing Rules Approved; Nasdaq Proposes Substantially Similar Rules,” has permitted such listings since December 2020.

On May 26, 2021, shortly following the SEC’s approval of the primary direct listings proposal, Nasdaq proposed additional modifications to make direct listings more attractive to issuers. Under the current rules, issuers must disclose the price range within which they expect their securities to price in the direct listing, and securities must directly list within that price range, unless an issuer files a post-effective amendment to the registration statement. If Nasdaq’s proposed rules are approved, these price range requirements will be relaxed, permitting deviations of up to 20% above or below the disclosed price range in all cases, and deviations of more than 20% above the disclosed price range if certain conditions are met.


Do ESG Mutual Funds Deliver on Their Promises?

Quinn Curtis is Albert Clark Tate, Jr., Professor of Law at the University of Virginia School of Law, Jill Fisch is the Saul A. Fox Distinguished Professor of Business Law at the University of Pennsylvania Law School, and Adriana Z. Robertson is Honourable Justice Frank Iacobucci Chair in Capital Markets Regulation and Associate Professor of Law and Finance at the University of Toronto Faculty of Law. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here); and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here).

ESG investing is growing explosively, and the interest in ESG investing by retail investors continues to increase. A substantial proportion of retail ESG investing occurs through ESG mutual funds. The number of ESG mutual funds, and the assets they hold have each doubled in the past three years, and the COVID-19 pandemic has done nothing to slow this trend. But does this rapidly growing sector of the investment industry actually deliver investment exposure to ESG goals, or has the demand for ESG investing led to overpriced, greenwashed funds that are merely marketed as ESG to chase the latest investment fad or extract higher fees from investors? While these concerns have attracted attention from both the Securities & Exchange Commission (“SEC”) and the Department of Labor (“DOL”), much of the regulatory conversation to date has relied on theoretical concerns and anecdotal evidence. This, combined with the rapidly evolving market for ESG funds, demonstrates the compelling need for greater empirical analysis directly targeting the regulators’ concerns.

Our paper provides that evidence. Using market-wide data on fund portfolios, voting, fees, and performance, we specifically target the concerns articulated by the SEC and the DOL. We combine detailed information on mutual funds with four proprietary datasets evaluating company-level ESG performance: ISS, S&P, Sustainalytics, and TruValue Labs. Using this unique and comprehensive dataset, we explore the practical differences between ESG and non-ESG funds as well as the differences among ESG funds along four dimensions—portfolio composition, voting behavior, costs, and performance. Our goal is to provide an overview of the market as it currently stands for the purpose of informing regulatory initiatives that have the potential to reshape the ESG landscape.


Speech by Commissioner Roisman on Whether the SEC Can Make Sustainable ESG Rules

Elad L. Roisman is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on his recent speech. The views expressed in this post are those of Mr. Roisman and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you Gary [LaBranche] and the National Investor Relations Institute for inviting me to speak at your 2021 Virtual Conference. Of course, I will clarify up front that the views I express are my own and do not necessarily reflect those of the Commission.

I. Introduction

I appreciate the unique and important role Investor Relations (“IR”) teams play in our capital markets, serving as a primary channel for communication between companies’ leaders and groups such as analysts, as well as asset managers and investors who hold ownership positions in those companies. It seems that an increasing amount of that communication involves environmental, social, and governance (or “ESG”) matters. Looking through this conference’s three-day agenda, eight of the forty scheduled sessions are devoted to ESG and related topics. It would not surprise me to hear that IR teams spent at least a similar proportion of their work days focusing on these issues.

You no doubt know that the Commission has increased its attention on ESG matters as well, and the Chair has expressed his intent to propose new disclosure requirements relating to climate change and human capital. [1] I recently shared my belief that the Commission will need to find answers to several questions before it is able to promulgate such rules that would stand the test of time and fit into our historic frameworks. [2] While the complete list is longer, there are three questions I will focus on today:

  1. What precise items of “E,” “S,” and “G” information are investors not getting that are material to making informed investment decisions?
  2. If we were able to identify the information investors need, how would the SEC come up with “E” and “S” disclosure requirements—now, and on an ongoing basis? What expertise do we need?
  3. If the SEC were to incorporate the work of external standard-setters with respect to new ESG disclosure requirements: how would the agency oversee them—in terms of governance, funding, and substantive work product—on an ongoing basis? And what kind of new infrastructure would be required inside the SEC and at the standard-setters themselves?


Commissioner Roisman Suggests Ways to Reduce the Costs of ESG Disclosure

Cydney S. Posner is special counsel at Cooley LLP. This post is based on her Cooley memorandum. 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); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

In remarks [June 3, 2021] before the ESG Board Forum, Putting the Electric Cart before the Horse: Addressing Inevitable Costs of a New ESG Disclosure Regime, SEC Commissioner Elad Roisman weighed in with his views on mandatory prescriptive ESG requirements and the likely associated costs. As he has indicated before, he’s not really keen on the idea, particularly the environmental and social components of potential requirements. As a general matter, while investors want to see comparable standardized environmental data, in his view, standardization of that type of information is really hard to do; some of it “is inherently imprecise, relies on underlying assumptions that continually evolve, and can be reasonably calculated in different ways. And ultimately, unless this information can meaningfully inform an investment decision, it is at best not useful and at worst misleading.” But, if a new regulatory regime requiring ESG disclosure is adopted—and it certainly looks that way— he has some ideas for ways to make it less costly for companies to comply.

In contrast to Commissioner Allison Lee, Roisman believes that more disclosure requirements are practically superfluous because the SEC’s disclosure framework already requires companies to disclose information that is material to investors, and that includes ESG information. More specifically, he noted that the SEC issued guidance in 2010 on the application of existing SEC rules to the material effects of climate (see this PubCo post) and amended Reg S-K to expressly require disclosure about human capital (see this PubCo post). What’s more, he sees no basis for omitting disclosure of any other material risks. So why is more regulation requiring ESG disclosure even necessary?


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