Monthly Archives: March 2022

SEC Proposes Unprecedented Cybersecurity Rules

Posted by Adam Fee, Antonia M. Apps, and George S. Canellos, Milbank LLP, on
Wednesday, March 2, 2022
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Adam Fee, Antonia M. Apps, and George S. Canellos are partners at Milbank LLP. This post is based on a Milbank memorandum by Mr. Fee, Ms. Apps, Mr. Canellos, Sean M. Murphy, Joel Harrison, and Matthew Laroche.

On February 9, 2022, the SEC voted to propose rules mandating sweeping cybersecurity measures for registered advisers and funds. [1] The proposal reflects the first SEC rules specifically addressing cybersecurity programs and reporting.

Most notably, the rules would impose a rapid reporting requirement when advisers face serious cyberattacks. Advisers would have to report any “significant cybersecurity incident” within 48 hours of its discovery by confidentially filing a proposed new Form ADV-C.

The reporting requirement would be triggered if (1) a cyberattack “significantly disrupts or degrades” the ability of an adviser or its private fund clients to “maintain critical operations,” or (2) the attack results in unauthorized access to “adviser information” or “fund information” resulting in “substantial harm” to the adviser, its clients, a fund, or investors. The proposed rule offers specific examples of “significant cybersecurity incidents,” including a malware attack that shuts down an adviser’s “websites or email functions” or a system breach that impedes a fund’s ability to “conduct its business” or results in the “theft of fund information.”

The 48-hour clock begins to tick as soon as an adviser has a “reasonable basis to conclude” that a significant incident has or is occurring. Certainty is not the standard. The proposed rules make clear that advisers must not wait until they “definitively conclude[] that an incident has occurred or is occurring.”

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The Need for Disclosure About Worker Voice

Posted by Larry W. Beeferman (Harvard Law School), on
Tuesday, March 1, 2022
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Larry W. Beeferman is a Fellow at the Labor and Worklife Program at Harvard Law School. This post is based on his recent paper.

An Introduction to Worker Voice

Despite an increasing focus on company disclosures about workforce-related policies and practices, little attention has been given to very important issues of worker voice: the opportunity and ability of workers to speak out and up about their experience at the workplace and how what they say is heard, discussed, and acted upon. At its core, worker voice is identified with freedom of association, unions, and collective bargaining. However, it may take other forms: directly, by solicitation of worker views through surveys, briefings, suggestion or innovation systems, town halls, quality circles and self-managed work teams; or indirectly, by means of staff associations, health and safety committees, works councils, and board representation.

Why It is Important for Companies and for Workers

Why is worker voice important? Large segments of the workforce have strongly expressed their need for voice not only on matters typically within the compass of collective bargaining—such as pay, benefits, job security and mobility, etc.—but also others—ranging from harassment, work schedules, and how work is done, to company strategy as to relates to the impact of technological change and the alignment of company practice with claimed company values.

Companies clearly are attentive to the impact of worker voice on financial performance. Some fiercely resist worker voice in the form of unions; others not only accept but also engage in overall constructive, win-win relationships with unions. Yet others set practices on the premise that “worker engagement, input, and collaboration” can spur “innovation, motivation and productivity” and that “inclusive, participatory workplaces” can enable attraction and retention of “better talent.”

Recently articulated company commitments to “stakeholder capitalism” necessarily warrant workers having a voice in how decisions which concern them as stakeholders are made.

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Overcoming the Hurdles to Board Leadership on Climate Change

Posted by Dan Konigsburg, Aurelien Rocher, and Jo Iwasaki, Deloitte, on
Tuesday, March 1, 2022
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Dan Konigsburg is Global Corporate Governance Leader, Aurelien Rocher is Senior Manager, and Jo Iwasaki is Corporate Governance Advisory Lead at Deloitte. This post is based on their Deloitte memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; 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).

Climate change has emerged as a central and existential risk for organizations—and fertile and critical ground for innovation. Yet new Deloitte research shows that many audit committees, an essential bulwark in helping companies manage and respond to risks and opportunities, haven’t yet sufficiently placed climate change initiatives at the core of their agendas.

Among the more than 350 board audit committee members in 40 countries surveyed in Q4 2021 by the Deloitte Global Boardroom Program, nearly 60% say they don’t regularly discuss climate change during meetings. And nearly half say they lack the basic literacy in climate issues they need to make informed decisions. While results vary by region (see sidebar, “EMEA moving ahead”), more than two-thirds (70%) say they have yet to complete an assessment of how climate change will affect their company’s operations, supply chain, and customers.

Alarmingly, this report finds that “systemic threat barely features on audit committee meeting agendas, and there seems to be little appreciation of the impact climate change will have on the company’s business model and long-term strategy,” says Kerrie Waring, CEO) of the International Corporate Governance Network, which promotes global standards of corporate governance and investor stewardship (figure 1).

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SEC Continues March Towards More Intrusive Regulation of Private Funds

Posted by David Blass, Michael Osnato, and Michael Wolitzer, Simpson Thacher & Bartlett LLP, on
Tuesday, March 1, 2022
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David Blass, Michael Osnato, and Michael Wolitzer are partners at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Blass, Mr. Osnato, Mr. Wolitzer, Marc Berger, Nicholas Goldin, and Meaghan Kelly.

In a split 3-1 vote earlier today [Feb. 9, 2022], the SEC proposed sweeping new rules targeted at private equity and other private funds. [1] The proposal, if adopted, would essentially change commercially negotiated terms, in particular the negotiated indemnification provision, by substantive regulation. It also would significantly expand the disclosure of standardized fee and expense information and broadly prohibit certain practices in the private funds industry. The proposed rules assume a bleak view of the conduct and business practices of private fund managers, as well as a view that private fund investors, generally some of the most sophisticated and well-represented investors in the world, are insufficiently prepared to protect their commercial interests. For example, and in an abrupt departure from longstanding, negotiated market practice, the proposed rules would prohibit, by regulation, a fund manager being indemnified in cases of ordinary negligence. Such a term has been commercially negotiated for decades, and questions are sure to emerge about whether such a prohibition exceeds the SEC’s authority and whether the SEC has provided a sufficient economic justification for that type of intrusive prohibition.

Taken together with the Commission’s recent proposed amendments to Form PF, [2] which would mandate confidential reporting of a wide range of ordinary course fund and portfolio company activity under the guise of monitoring systemic risk, today’s rule proposals suggest that the regulator is seeking fundamental changes in the manner it regulates the private funds industry. Commissioner Peirce in her dissent characterized the proposed rules as a “sea change.” [3]

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