Monthly Archives: September 2022

About the SEC’s Climate Proposal

Maura Hodge, Sam Jeffery, and Julie Santoro are partners at KPMG LLP. This post is based on their KPMG memorandum.

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; For Whom Corporate Leaders Bargain (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here), both by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita; and 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.

About the proposal

  • On March 21, 2022, the SEC issued proposed rule, The Enhancement and Standardization of Climate-Related Disclosures for Investors.
  • The comment period closed on June 17. We have identified key themes from the responses.
  • Regardless of this proposal, compliance with existing requirements includes the 2010 climate-related guidance issued by the SEC staff.

Get a recap

Toward a final rule

  • The SEC’s Spring 2022 regulatory agenda shows publication of a final rule in October 2022.
  • Other ESG-related items on the regulatory agenda include proposals related to human capital management disclosures (October 2022) and corporate board diversity (April 2023); and finalization of ESG requirements for investment companies and investment advisers (see our Defining Issues on the proposals).


Deregulation and Board Policies: Evidence from Performance Measures Used in Bank CEO Turnover Decisions

Rachel Hayes is Professor of Accounting at the University of Utah David Eccles School of Business; Xiaoli Tian is Associate Professor of Accounting at Georgetown University McDonough School of Business; and Xue Wang is Associate Professor of Accounting at The Ohio State University Fisher College of Business. This post is based on their recent paper, forthcoming in The Accounting Review.

The banking industry has undergone substantial changes since the late 1970s, largely due to deregulation and rapid market developments. Over that period, banks’ growth opportunities expanded, and banks entered new markets, both geographic and product. Motivated by the 2008 financial crisis, researchers and policymakers have shown a renewed interest in corporate governance in the banking industry, with most of the attention focused on the incentives arising from compensation and ownership (e.g., Fahlenbrach and Stulz 2011; Cheng, Hong, and Scheinkman 2015; DeYoung, Peng, and Yan 2013). In particular, several studies attribute changes in the structure of CEO compensation and incentives to the effects of banking deregulation on market opportunities and competition (e.g., Cunat and Guadalupe 2009; DeYoung et al. 2013).

We add to this discussion by examining the interplay between banking deregulation and CEO turnover decisions. Using the staggered adoption of interstate branching laws between 1995 and 1997 as our setting, we investigate whether the performance and risk exposure information used in bank CEO turnover decisions has been affected by the trend towards deregulation in the banking industry. We argue that the examination of measures used in CEO turnover decisions provides unique insights into governance—because directors themselves must make decisions about a CEO’s continued employment, turnover decisions directly reflect board policies. In contrast, most variation in CEO wealth stems from changes in the value of stock and option holdings, so the incentives arising from the CEO’s compensation are partly delegated to the equity markets (Hall and Liebman 1998; Edmans, Gabaix, and Jenter 2017). Furthermore, the board’s management of tensions between financial stability and shareholders’ demand for higher returns is an important aspect of bank governance in the banking deregulation setting. CEO incentives embedded in equity compensation encourage risk taking that might or might not enhance firm value (Bolton, Mehran, and Shapiro 2015; Stulz 2015). In essence, equity compensation is an out-of-the-money call option whose value increases with risk, and may not provide incentives to constrain extreme risk taking. The CEO turnover setting can provide evidence about board policies that mitigate downside tail risk exposure, along with other insights that are not directly evident from examining incentives from CEO compensation and ownership.

We investigate whether banking deregulation affects the weights on performance and risk exposure measures used in bank CEO turnover decisions. Using the difference-in-differences framework, we study how deregulation affects the relation between bank CEO turnover and performance (measured by both earnings and stock returns), as well as the relation between turnover and extreme risk exposure (measured by tail risk). We find that bank CEO turnover is significantly less sensitive to accounting performance in the post-deregulation period. In contrast, bank CEO turnover becomes significantly sensitive to stock return after deregulation. Moreover, we find a positive relation between idiosyncratic tail risk and CEO turnover in the post-deregulation period for banks. The positive relation between bank CEO turnover and idiosyncratic tail risk is consistent with the notion that bank boards use turnover policies to discipline extreme risk-taking activities as the banking industry is deregulated.


Enhanced ESG Disclosures for Investment Funds and Advisers: A Comment from BlackRock

Paul Bodnar is Global Head of Sustainable Investing and Elizabeth Kent is a Managing Director at BlackRock, Inc. This post is based on a comment letter by BlackRock submitted to the U.S. Securities and Exchange Commission regarding the proposed rules on ESG disclosures for investment funds and advisers.

This post is based on a comment letter submitted to the SEC regarding the proposed rules on ESG disclosures for investment funds and advisers by BlackRock. Below is the text of the letter with minor adjustments to eliminate the correspondence-related parts.

BlackRock, Inc. (together with its subsidiaries, “BlackRock”) respectfully submits the following response to the Securities and Exchange Commission’s (“SEC”) proposed rule “Enhanced Disclosures by Certain Investment Advisers and Investment Companies About Environmental, Social, and Governance Investment Practices” (“the proposal”). [1] We commend the SEC for taking this step to promote investors’ access to consistent, comparable, and reliable information about investment funds’ and investment advisers’ incorporation of environmental, social, and governance (“ESG”) criteria into their investment processes.


SEC Releases Final Rules Regarding Pay-Versus-Performance (PVP) Disclosures

Ira T. Kay is Managing Partner and Mike Kesner is Partner at Pay Governance LLC. This post is based on their Pay Governance memorandum. 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.

Executive Summary

The Securities and Exchange Commission (SEC) released its final version of the rules mandated by Dodd-Frank regarding the disclosure of pay versus performance (PVP) on August 25, 2022. Initial rules were proposed in 2015, and follow-up proposals and invitations for comment were extended in late 2021 and early 2022 by the SEC. The SEC PVP disclosure is intended to provide investors with a clear analysis of the alignment of the top executives’ compensation actually paid (CAP) with the company’s financial and stock price performance. This analysis, while complex, may be viewed by investors as a window into the governance and workings of the company’s pay for performance model.

Pay Governance LLC has prepared this post with the intent of providing our clients and interested parties with a comprehensive yet clear picture of this new SEC disclosure requirement. This Executive Summary provides a snapshot of the new rules. The sections that follow the Executive Summary provide our interpretation of the SEC rules along with some commentary on the implications of the new disclosure. We want our readers to know, however, that we will be providing additional analysis and recommendations regarding the rules in the weeks ahead as we have time to study the SEC’s recommended rules more carefully.

We also encourage SEC-filing companies to begin gathering the data and developing the PVP discussion needed to comply with the new disclosure requirements. There is a great deal of disclosure detail that companies can begin to draft immediately; please refer to the last section of this post where we have recommended steps companies can take to initiate this process.


2022 Proxy Season Review: Say-on-Pay and Equity Compensation Plan Voting

Jeannette Bander, Heather Coleman, and Marc Treviño are partners at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Ms. Bander, Ms. Coleman, Mr. Treviño, June Hu, Brittney Kidwell, and Rebecca Rabinowitz.


The data on say-on-pay negative recommendations derives from ISS publications and SEC disclosure summarizing the rationales with respect to the negative recommendations issued by ISS at annual meetings of Russell 3000 and S&P 500 companies through June 30, 2022. We estimate that around 90% of U.S. public companies held their 2022 annual meetings by that date.

ISS Say-on-Pay and Equity Compensation Plan Voting

A. Companies Maintain Strong Say-on-Pay Performance

The following summarizes say-on-pay voting results for full-year 2021 and through June 30 for 2022. The number of failed say-on-pay votes has increased meaningfully since 2018. Among the S&P 500, the number of failed votes has more than doubled since 2018 (18 in 2022 compared to seven in 2018), while the number among the Russell 3000 has increased from 54 in 2018 to 64 in 2022. However, broadly speaking, U.S. companies received similar support on say-on-pay votes in 2022 as they did in prior years. This year, shareholder support on say-on-pay votes averaged 88% among S&P 500 companies (same as 2021, compared to 90% in 2020 and 2019 and 91% in 2018), and 90% among the broader Russell 3000 (compared to 91% in 2018 through 2021).


Glass Lewis Comment Letter to the SEC on Enhanced Disclosure of ESG Issues

Nichol Garzon-Mitchell is Chief Legal Officer and Senior Vice President of Corporate Development at Glass, Lewis & Co. This post is based on a comment letter submitted by Glass Lewis 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; and 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.

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

Founded in 2003, Glass Lewis is a leading independent proxy advisor. Glass Lewis serves more than 1,300 institutional investor clients—primarily public pension funds, mutual funds and other institutions that invest on behalf of individual investors and have a fiduciary duty to act, including through proxy voting, in the best interests of their beneficiaries. As a proxy advisor, Glass Lewis provides proxy research and vote management services to institutional investor clients throughout the world. While, for the most part, investor clients use Glass Lewis research to help them make proxy voting decisions, these institutions also use Glass Lewis research when engaging with companies before and after shareholder meetings. Glass Lewis engages with some 1000 companies in over 40 jurisdictions each year. Many of our clients leverage these engagement meetings, as well as Glass Lewis’ related active ownership services, as part of their own stewardship programs. Further, through Glass Lewis’ web-based vote management system, Viewpoint, Glass Lewis provides investor clients with the means to receive, reconcile, and vote ballots according to custom voting guidelines and record-keep, audit, report, and disclose their proxy votes.

The proposed rules seek to ensure that funds’ and advisers’ use of ESG factors is transparent and aligned with their stated objectives. In the release’s words, the proposed rules are intended “to create a consistent, comparable, and decision-useful regulatory framework for ESG advisory services and investment companies to inform and protect investors while facilitating further innovation in this evolving area of the asset management industry.”


NYSE’s Proposed Relaxed Pricing Limits for Primary Direct Listings

Pamela Marcogliese is partner, Taryn Zucker is counsel, and Lauren Lee is an associate at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields memorandum.

On December 22, 2020, the U.S. Securities and Exchange Commission (“SEC”) approved the New York Stock Exchange’s (“NYSE”) rule proposal that fundamentally changed the structure of direct listings by permitting companies to issue shares and raise capital in primary direct listings conducted on the NYSE (“primary direct listings”). [1] Despite this rule change, to date, no companies have conducted a primary direct listing, seemingly due to the pricing limitations that apply. Namely, unlike in a traditional firm commitment underwritten IPO, in primary direct listings, the auction price must be within the price range included in the issuer’s effective registration statement, without the ability to deviate from that the price range that exists in typical underwritten IPOs.

The NYSE noted the challenge of this pricing limitation in its proposed rule change submission to the SEC described below. In the submission, the NYSE noted that the price range limitation applicable to primary direct listings increases the likelihood that an offering is delayed or cancelled, not only in circumstances in which an offering cannot be completed due to lack of investor interest, but also “because it contemplates there being too much investor interest. In other words, if investor interest is greater than the company and its advisors anticipated, an offering would need to be delayed or cancelled.”


Proposed Additional Amendments to Form PF

Jessica Forbes and Philip Heimowitz are partners and Mark Highman is special counsel at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Forbes, Mr. Heimowitz, Mr. Highman, and Conor Almquist.

On August 10, 2022, the Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”) proposed additional amendments (the “Proposed Amendments”) [1] to Form PF, the periodic report filed by registered investment advisers that manage private funds. [2]

The Proposed Amendments significantly expand the scope of information to be reported by private fund advisers and would, among other things, (1) require more detailed information as to hedge fund investment strategies, counterparty exposures, and investment performance, (2) include separate reporting regarding digital assets such as cryptocurrency, and (3) change how advisers report complex fund structures. The Proposing Release also seeks comment on whether to change the definition of hedge fund.

Some of the more significant aspects of the Proposed Amendments are summarized below.

I. Background

Form PF was introduced in 2011, when the SEC adopted Rule 204(b)-1 under the Investment Advisers Act of 1940 (the “Advisers Act”) requiring SEC-registered investment advisers with private fund assets under management of at least $150 million to file and periodically update Form PF. Form PF is a confidential filing required to be made on an annual basis, unless the investment adviser is a large hedge fund adviser or a large liquidity fund adviser, in which case the filing must be made quarterly. Information required to be reported on Form PF includes information regarding the adviser’s identity and assets under management, and information regarding the size, leverage, and performance of private funds managed by the adviser. Advisers with hedge fund, liquidity fund, or private equity fund assets under management exceeding certain specified thresholds are required to report additional information regarding those funds. The SEC proposed other amendments to Form PF on January 26, 2022. [3] Those proposed amendments have not yet been adopted.


Speech by Chair Gensler on Kennedy and Crypto

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

Thank you. It is good to be back with SEC Speaks.

I’d like to thank the Practising Law Institute for working with our agency on this program, and my colleagues Gurbir Grewal and William Birdthistle for co-chairing this event. As is customary, I’d like to note my views are my own, and I’m not speaking on behalf of the Commission or SEC staff.

Joseph Kennedy, the first Chairman of the SEC, had a saying: “No honest business need fear the SEC.” [1]

In the depths of the Great Depression, Congress and President Franklin Delano Roosevelt (known for a slightly more famous quotation about “fear”) enacted the first federal securities laws.

The Securities Act of 1933 was about companies raising money from the public. Investors could decide which risks to take; companies that issued securities to the public were required to provide full, fair, and truthful disclosures to the public. FDR called this law the “Truth in Securities Act.”

Congress knew, however, that their job wasn’t done. The following year, they passed the Securities Exchange Act of 1934. That statute covered intermediaries, such as the exchanges themselves and the broker-dealers. The basic idea was that the public deserves disclosure and protections not only when a security is initially issued, but also on an ongoing basis when the security is traded in the secondary markets.

Congress knew the job still wasn’t done. They understood that, when advisers manage someone else’s money, there may be additional opportunities for conflicts of interest between those advisers and clients. Thus, six years later, Congress said funds and advisers had to register, under the Investment Company Act and Investment Advisers Act of 1940.


Weekly Roundup: September 2-8, 2022

More from:

This roundup contains a collection of the posts published on the Forum during the week of September 2-8, 2022

Separating Ownership and Information

Energy Industry Reacts to SEC Proposed Rules on Climate Change

Carve-Outs’ Popularity Soars as Businesses Pursue Growth

Corporate Response to the War in Ukraine: Stakeholder Governance or Stakeholder Pressure?

The Politics of Values-Based Investing

Quarterly Activist Ownership Analysis

Page 4 of 6
1 2 3 4 5 6