Monthly Archives: August 2022

Top 5 SEC Enforcement Developments

Jina Choi, Michael D. Birnbaum, and Haimavathi V. Marlier are partners at Morrison & Foerster LLP. This post is based on their MoFo memorandum.

In order to provide an overview for busy in-house counsel and compliance professionals, we summarize below some of the most important SEC enforcement developments from the past month, with links to primary resources. This month we examine:

  • A framework for CCO liability;
  • Whether scheme liability claims under Rule 10b-5 require more than misstatements or omissions;
  • Charges against a former Coinbase product manager in a crypto asset insider trading action;
  • A blast of insider trading actions generated by the SEC’s own data analysis; and
  • Fines for three financial institutions for inadequate identity theft controls, in violation of Regulation S-ID.

1. SEC Holds Chief Compliance Officer (CCO) Liable for Failing to Implement Policies and Procedures

On July 1, 2022, Commissioner Hester M. Pierce issued a statement in support of a settled administrative hearing brought the day before against Hamilton Investment Counsel LLC (“Hamilton”), a registered investment adviser based in Georgia, and its CCO. Hamilton was found to have violated Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder, which require that registered investment advisers adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act; the CCO was charged with aiding and abetting those violations. Commissioner Pierce’s support of this action is significant given her prior statements setting forth her concerns regarding personal liability for CCOs and her analysis of how one framework could be adopted for this analysis.


DOL Proposes Significant Amendments to Prominent ERISA Exemption

Brian Robbins and Erica Rozow are partners and George Gerstein is senior counsel at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Robbins, Ms. Rozow, Mr. Gerstein, and Jeanne Annarumma.

On July 27, 2022, the U.S. Department of Labor (the “DOL”) proposed major changes (the “Proposal”) [1] to a core exemption used by many investment managers that have discretionary responsibility over the assets of funds and accounts that are deemed to hold “plan assets” under the U.S. Employee Retirement Income Security Act of 1974, as amended (“ERISA”). [2] The exemption, commonly known as the “QPAM Exemption,” [3] allows a manager of a “plan assets” fund or account (i.e., the “QPAM”) to enter into a myriad of transactions on behalf of the fund/account that would otherwise be prohibited under Section 406(a) of ERISA and Section 4975 of the U.S. Internal Revenue Code of 1986, as amended.

Should the DOL finalize these amendments, those that manage “plan assets” on a discretionary basis should reconsider whether it can, or is willing to, continue relying on the QPAM Exemption. Moreover, investment managers would most likely need to revise investment management agreements and provisions in ISDAs and other trading agreements, if representations regarding QPAM-status are included. Private fund sponsors will also be affected, namely, they will need to (i) evaluate whether the QPAM Exemption remains available, if a fund holds “plan assets,” and, if not, whether an alternative exemption may be available, (ii) revise, as necessary, subscription and offering documents that refer to the QPAM Exemption, and (iii) consider whether any of its portfolio companies act or intend to act as a QPAM and whether such companies can continue doing so. [4]


CFO Turnover in 2022 Slows, But Don’t Expect it to Stay

Linda Barham leads the Americas Financial Officers Practice; Jim Lawson co-leads the Global Financial Officers Practice; and Catherine Schroeder is a member of the Financial Officers Practice Knowledge team at Russell Reynolds Associates. This post is based on their Russell Reynolds memorandum.

Halfway through 2022, there have been 51 CFO transitions within the S&P 500, bringing turnover to 10% year to date. This number is slightly down from 12% at this time last year (Figure 1), likely due to CFOs favoring the job security of their current role as the market slows.

However, this slowing turnover may paint a misleading picture. Russell Reynolds Associates analyzed CFOs from the S&P 500 from 2019 to 2022 (N = 500) to compare turnover rates at the half-year (HY) mark and gain insight into the latest hiring trends such as gender diversity, internal versus external promotions, first-time in the role and CFO exits. We found that, while turnover was indeed down in the first half of 2022, multiple trends are suggesting that turnover will be on the rise in the second half of the year.

  1. Due to the expected increase in market volatility, CFOs should expect more scrutiny of their job performances from the CEO and Board, therefore increasing the potential for increased turnover.
  2. Better succession planning is leading to more internal and first-time CFO appointments, resulting in the fight for women CFO talent to carry on, with the percentage of newly appointed women CFOs continuing to outpace the broader S&P 500, although slightly down since last year.
  3. Finally, CFO retirement rates increased for the first time in three years, indicating that more turnover is likely on the horizon.

Figure 1. Trending CFO Turnover

Source: RRA analysis of S&P500 CFOs from 2019 to the end of June 2022, N= 500
Note: 3 of the new CFOs are interim


The Effect of Intermediary Coverage on Disclosure: Evidence from a Randomized Field Experiment

Andrew Belnap is Assistant Professor of Accounting at the University of Texas at Austin McCombs School of Business. This post is based on his recent paper, forthcoming in the Journal of Accounting & Economics.

A fundamental factor in a firm’s disclosure choice is the extent to which market participants can process the information the firm discloses. Because market participants have limited attention and resources, they often rely on intermediaries to reduce processing costs by collecting, analyzing, and distributing firms’ disclosures and other information. By easing these frictions, intermediaries play a key role in capital markets and can significantly affect the cost-benefit equilibrium that firms face when making optimal disclosure decisions.

However, the ways in which intermediaries affect disclosure are relatively unexplored, in part due to several empirical challenges. First, intermediary coverage often occurs simultaneously with firm disclosure and other intermediaries’ coverage, making it difficult to isolate the effects of any one intermediary. Second, firm and disclosure characteristics typically drive intermediary coverage, introducing selection problems. Third, intermediaries often discuss multiple topics, making it difficult to isolate coverage of a particular disclosure.

In this paper, I examine the effect of coverage from two key intermediaries—non-governmental organizations (NGOs) and the media—on firms’ disclosure decisions. Specifically, I study whether coverage of a deficient disclosure can affect the targeted disclosure, how the disclosure changes, and why coverage affects the disclosure. To do this, I conduct a field experiment that, by randomizing intermediary coverage, can address the empirical challenges of this literature. In addition, I supplement the field experiment with a survey of tax executives, cross-sectional tests, and spillover tests that shed light on the roles played by stakeholders for which processing costs are reduced.


EU Corporate Sustainability Reporting Directive—What Do Companies Need to Know

Kolja Stehl and Leonard Ng are partners and Matt Feehily is senior managing associate at Sidley Austin LLP. This post is based on a Sidley memorandum by Mr. Stehl, Mr. Ng, Mr. Feehily, and Katie Chin.

Non–EU companies with a significant presence in the EU or with securities listed on an EU-regulated market will become subject to new EU rules on corporate sustainability disclosures (the Corporate Sustainability Reporting Directive, or CSRD). The text of the CSRD has now been agreed by the EU institutions. [1] CSRD is expected to become EU law later this year. Once implemented into the national law of EU member states, its requirements will be phased in from 2024.

CSRD will significantly expand the scope and content of the EU’s existing non-financial reporting regime under the Non-Financial Reporting Directive (NFRD). Under Article 8 of the EU Taxonomy Regulation, entities in scope of NFRD are also required to report on their Taxonomy alignment. The amendments made by CSRD therefore mean that a broader range of entities will also be required to make disclosures of their Taxonomy alignment. Another key difference between NFRD and CSRD is that the new rules will introduce a mandatory audit and assurance regime to ensure the reliability of data and avoid greenwashing and/or double accounting.

The new EU rules differ substantially from approaches taken in the U.S. and the UK. This post explores the implications of CSRD for companies with headquarters outside the EU, including the scope of application of CSRD and the content of its disclosure requirements.


ESG + Incentives 2022 Report

John Borneman is Managing Director, and Jennifer Teefey and Matthew Mazzoni are Senior Associates at Semler Brossy Consulting Group LLC. This post is based on a Semler Brossy memorandum by Mr. Borneman, Ms. Teefey, Mr. Mazzoni, Mira Yoo, and Jay Veale.

Related research from the Program on Corporate Governance includes Paying for Long-Term Performance (discussed on the Forum here) by Lucian Bebchuk and Jesse Fried; and The Perils and Questionable Promise of ESG-Based Compensation (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita.

There has been a rapid increase in the adoption of ESG metrics for executive incentive plans across the S&P 500 over the past several years. This has largely been driven by continued shareholder focus on human capital management (HCM) and environmental issues. By adding these ESG metrics to incentive plans, Companies are signaling a heightened sense of commitment to their stated ESG goals.

Key Takeaways

This year, there was a nearly 23% increase in the proportion of S&P 500 companies applying ESG metrics in incentive plans, at 70% prevalence compared to 57% prevalence a year ago. Diversity & Inclusion (D&I) and Carbon Footprint metrics had the largest year over year increases.

  • Investors are strongly focused on HCM and environmental topics as the most important ESG issues. In this year’s data, we have specifically analyzed the prevalence of metrics within these two categories
  • Although D&I continues to lead as the most prevalent metric (46%), companies appear to be taking a holistic approach to HCM in incentives by using other HCM metrics along with D&I
  • Environmental metrics remain uncommon in incentive plans. However, prevalence is increasing, with Carbon Footprint emerging as the environmental measure of choice


The Proposed SEC Climate Disclosure Rule: A Comment from Shivaram Rajgopal

Shivaram Rajgopal is the Roy Bernard Kester and T.W. Byrnes Professor of Accounting and Auditing at Columbia Business School. This post is based on his comment letter submitted to the U.S. Securities and Exchange Commission regarding the Proposed SEC Climate Disclosure Rule.

Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Does Enlightened Shareholder Value Add Value? (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here), both by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita; Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.; and Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.

This post is based on a comment letter submitted to the SEC regarding the Proposed SEC Climate Disclosure Rule by Professor Rajgopal. Below is the text of the letter with minor adjustments to eliminate the correspondence-related parts.

I write in support of your proposed climate risk disclosures. To frame my comments, it is useful to summarize what the climate risk disclosure rule would require registrants to disclose:

  • the firm’s governance of climate-related risks and relevant risk management processes;
  • how any climate-related risks identified by the firm 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;
  • how any identified climate-related risks have affected or are likely to affect the firm’s strategy, business model, and outlook; and
  • the impact of climate-related events 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.

My support is based on my assessment of the costs and benefits of the proposal. Let us start with the costs.

1. Compliance costs are not a significant portion of market capitalization

On page 390 of the proposal, the SEC estimates costs in the first year of compliance to be around $640,000 and annual costs in subsequent years to be $530,000 for larger companies. On page 399, the SEC estimates assurance costs for large companies to be around $75,000 to $145,000. A well-done academic paper by Alexander et al. (2013) estimated the average annual costs of complying with section 404(b) for accelerated filers at $1.2 million.


More Prescriptive Proposals, Less Support for 2022 Proxy Season

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

This proxy season, companies saw more shareholder proposals than in the past, a change that has been widely attributed to actions by the SEC and its Division of Corporation Finance that had the effect of making exclusion of shareholder proposals—particularly proposals related to environmental and social issues—more of a challenge for companies. As discussed in this article in the WSJ, investors are taking the opportunity to press for more changes at companies. Nevertheless, the prescriptive nature of many of the proposals, especially climate-related proposals, has prompted many shareholders, including major asset managers, to vote against these proposals. Will next season reflect lessons learned by shareholder proponents from this proxy season?


Tech Companies Lean on Cyber to Go Faster and Gain Trust

Alex Holt is Global Head of Technology, Media & Telecommunications, Mark Gibson is U.S. National Sector Leader of Technology, Media & Telecommunications, and Vijay Jajoo is Principal of Cyber Security Services, at KPMG LLP. This post is based on their KPMG memorandum.

Tech company leaders name cyber security as both the greatest threat and greatest operational priority. In response, they are investing in skills, culture, and technology to build cyber resiliency, accelerate digital and business model transformation, and foster stakeholder trust.

Technology companies continue to provide the products and services that have powered digital transformation throughout the COVID-19 pandemic and allowed the wheels of global industry to keep turning. Yet this digital acceleration has also caused an explosion in the number of potential cyber vulnerability points due to an immediately virtual workforce, increased cloud adoption, hastily reworked supply chains, and new business partnerships. The rapid integration of new technologies also created an avalanche of new data to be stored and protected.

While some of these trends were already underway, the pandemic dramatically accelerated them. Technology companies were forced to react quickly like all others. In this new reality, technology company CEOs rank cyber risk as the greatest threat to their organization’s growth over the next three years, higher than even supply chain disruption, climate change, or talent risk.

They also cite cyber security resiliency as their most important operational priority. Additional research indicates the average cost of a data breach involving one million compromised records is $52 million, and the cost escalates from there. When more than 50 million records are compromised, the average cost of the breach is $401 million.


The Proposed SEC Amendments to Shareholder Proposal Rule: A Comment from Shareholder Rights Group

Sanford Lewis is Director of the Shareholder Rights Group. This post is based on a comment letter submitted to the U.S. Securities and Exchange Commission regarding the Proposed SEC Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals Under Exchange Act Rule 14a-8 by the Shareholder Rights Group. Related research from the Program on Corporate Governance includes The Case for Increasing Shareholder Power and Letting Shareholders Set the Rules, both by Lucian A. Bebchuk.

This post is based on a comment letter submitted to the SEC regarding the Proposed SEC Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals Under Exchange Act Rule 14a-8 by the Shareholder Rights Group. Below is the text of the letter with minor adjustments to eliminate the correspondence-related parts.

The Shareholder Rights Group (SRG) is an association of proponents of shareholder proposals, organized to defend investor rights to engage with public companies on governance and long-term value creation. We are writing in support of the proposed rulemaking on Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals Under Exchange Act Rule 14a-8.

The proposed amendments to Rule 14a-8, the shareholder proposal rule, would clarify when a proposal can be excluded as substantially implemented, and when a proposal seeking different objectives or means may block another proposal submitted for the current or subsequent year. We support these overdue changes which would reduce costs and uncertainties to proponents and issuers alike. We appreciate the leadership of Chairman Gensler, the Commissioners and SEC staff making the proposal process more efficient, objective and predictable.

The current rules have placed the staff in the awkward position of making highly subjective determinations on substantial implementation, duplication or resubmission, and have increased the number and length of no action requests. They have also led to exclusion of numerous proposals, the consideration of which would have been of clear benefit to companies and their investors.


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