Monthly Archives: December 2022

SEC Adopts Amendments to Modernize Fund Shareholder Reports and Disclosures

Whitney Chatterjee, Donald Crawshaw, and William G. Farrar are Partners at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Ms. Chatterjee, Mr. Crawshaw, Mr. Farrar, Eric M. Diamond, Joseph A. Hearn, and Frederick Wertheim.

Amendments Modify the Disclosure Framework for Mutual Funds and Exchange-Traded Funds to Create a New Layered Disclosure Approach to Highlight Key Information for Retail Investors


On October 26, 2022, the Securities and Exchange Commission (the “SEC”) adopted, by a unanimous vote, its previously proposed[1] amendments to the mutual fund and exchange-traded fund disclosure framework for annual and semi-annual shareholder reporting, with the goal of modernizing the disclosure framework for such funds and better tailoring fund disclosures to retail investors’ needs.[2] The final amendments modify the scope of rule 30e-3 to exclude open-end funds (as defined below) so that shareholders of such funds will directly receive in paper the new tailored annual and semi-annual reports. The final rules also amend investment company advertising rules with the stated goal of promoting more transparent and balanced statements concerning investment costs. The amendments to the disclosure framework and investment company advertising rules were adopted substantially as proposed with certain modifications.

Proposed amendments to funds’ prospectus disclosure of fund fees, expenses and principal risks and a new rule providing an alternative approach to satisfy prospectus delivery requirements for existing fund investors were not adopted. Among other things, the proposed amendments would have refined existing requirements for funds to disclose the acquired fund fees and expenses (“AFFE”) associated with investments in other funds by permitting open-end funds that invest 10% or less of their total assets in acquired funds to omit the AFFE line item in the fee table and instead disclose the amount of the fund’s AFFE in a footnote to the fee table and fee summary.[3] This change would have addressed, in part, concerns that current AFFE disclosure requirements overstate the costs of investing in business development companies (“BDCs”), and as a result, deter funds from investing in BDCs.[4] Commissioner Hester M. Peirce, in her statement supporting the rulemaking but noting that more can be done to improve mutual fund disclosure, emphasized that the final rules “jettison[ed]” the change to the AFFE disclosure, which she called a “small but important proposal” that could have facilitated investments in BDCs and the reintroduction of BDCs into indexes.[5]

The amendments will be effective 60 days after the date of publication in the Federal Register. However, as described below under “Compliance Dates,” extended transition periods will be available for compliance with certain amendments.


Weekly Roundup: November 25-December 1, 2022

More from:

This roundup contains a collection of the posts published on the Forum during the week of November 25-December 1, 2022

Lessons from the Chancery Court Decision in P3 Health Group

The PCAOB Is Missing In Action on Climate Risk

The corporate director’s guide to overseeing deals

The Unicorn Puzzle

Trends in E&S Proposals in the 2022 Proxy Season

The Rise of Rule 10b5-1 Enforcement and How Companies Can Mitigate Risk of DOJ and SEC Actions

The Attack on Share Buybacks

Communicating with the SEC When Your Organization Suffers a Cybersecurity Incident

Open Letter to Directors and Activists Regarding Amendments to Advance Notice Bylaws

Glass Lewis 2023 Policies Guidelines – ESG Initiatives

ESG Ratings: Considerations in Advance of Proxy Season

Cybersecurity for Investors: Why Digital Defenses Require Good Governance

Thoughts for Boards: Key Issues in Corporate Governance for 2023

Thoughts for Boards: Key Issues in Corporate Governance for 2023

Martin Lipton is a founding Partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Steven A. Rosenblum, Karessa L. Cain, and Hannah Clark.

While the world recovers from the worst of the pandemic, the economic, political and social repercussions will continue to play out in ways that, while unpredictable, are in some respects characterized by observable patterns of cause-and-effect and cyclicality. The pendulum has been swinging back as, for example, the Federal Reserve has been ratcheting up interest rates and tightening liquidity, activist activity is once again on the rise, Republicans have taken control of the House, and back-to-office policies have been eased into effect. In this environment, stasis is the exception rather than the norm, and boards must continue to be nimble and open-minded in navigating the pitfalls and opportunities of this systemic recalibration.

Importantly, the infrastructure of corporate governance – namely, the structure and allocation of responsibilities and decision-making authority, and related principles, policies and information flows to facilitate such functioning – continues to serve as the anchoring framework for the board’s oversight of dynamic business conditions. Despite the complexity and range of issues that boards today must grapple with, the basic principles of governance continue to provide the best guideposts: engaged oversight, informed decision making, conflict-free business judgments, and balancing of competing interests to promote the overall best interests of the business and sustainable long-term growth in value.


Cybersecurity for Investors: Why Digital Defenses Require Good Governance

Diana Lee is Director of Corporate Governance and an ESG Analyst for Responsible Investment team at AllianceBernstein. This post is based on her AllianceBernstein memorandum.

Hacker attacks and data breaches have pushed cyber and data security to the top of company agendas everywhere. Investors must get to grips with the governance issues and growing business risks as a digitally powered world grapples with the need for more secure defenses.

Cyber and data security is a hot topic across sectors. Ever-evolving threats are forcing companies to continuously evaluate their defenses and readiness—to help minimize the damage of a potential attack. Public statements of preparedness often overstate the actual level of defenses in place.

Despite company awareness, cybersecurity isn’t a high priority for many investors. We think that’s a mistake—especially since governance issues are an important component of an environmental, social and governance (ESG) focus. Unprepared companies risk financial losses, penalties and reputational damage that can undermine a business, brand and compromise a stock or bond’s return potential. We spoke with cybersecurity professionals across multiple fields and reviewed the regulatory landscape to provide guidelines for investors on assessing cyber-risk management.

Counting the Costs of Escalating Attacks

Cyberattacks are very costly. In the first half of 2022, at least 2.8 billion malware attacks were recorded globally, an increase of 11% over the previous 12 months, according to cybersecurity company SonicWall.

The cost of a data breach reached a record $4.4 million per breach on average globally in 2022, based on a study by the Ponemon Institute and IBM Security. Recovery costs vary depending on the sophistication of a firm’s systems, and whether remote work was a factor, which tends to increase the expense.

Some industries are more at risk than others (Display). Yet in today’s online world, no company is safe. Increased risk has prompted increased regulation. In the US alone, three new regulations were released in the past year: the SEC cybersecurity rule, the Cyber Incident Reporting for Critical Infrastructure Act, and the Ransomware and Financial Stability Act of 2021. Meanwhile, governments are on high alert as state-sponsored cyberattacks surged at the onset of the Russia-Ukraine war. In this evolving environment, companies can’t afford to ignore the problem.


ESG Ratings: Considerations in Advance of Proxy Season

Michael Mencher is Special Counsel and Vince Flynn is an Associate at Cooley LLP. This post is based on their Cooley memorandum.

As companies prepare for the 2023 proxy season, their ESG performance, as evaluated and rated by various third-party ratings providers, is a key focus. With the growing importance of ESG to institutional investors, specialized funds and the general investing public, ESG ratings are an increasingly important investor relations concern. While such ratings may influence investor decision-making throughout the year, for many companies and boards, ESG matters take on heightened importance in advance of annual meetings and related shareholder engagement efforts. As a result, in the lead up to proxy season, many companies contemplate ratings improvement strategies, including proxy statement and other disclosure updates, policy adoptions and governance changes. With the ever-growing variety and complexity of ratings, however, developing effective strategies can be a challenge. Objectives and methodologies vary greatly among ratings providers, and there is often limited comparability (or even significant conflict) between different scores, leaving many companies confounded as to where to begin. Below, we’ve highlighted a few key considerations and action items to assist companies in taking steps toward improving their ESG ratings ahead of the upcoming proxy season.

Which ESG ratings apply to my company?

Whether your company is subject to a particular ESG rating is generally based on the company’s index, size and market. For US-based companies, for example, ISS’s Governance QualityScore applies to Russell 3000 and S&P 1500 issuers, and Sustainalytics’ ESG Risk Ratings apply to large- and medium-cap issuers. Some ratings providers, including Moody’s and Refinitiv, even provide ESG ratings for certain private companies.

To determine which ESG ratings apply to your company, we generally recommend reviewing your ISS and Glass Lewis proxy reports to determine which ESG ratings are included therein, engaging your investors to determine which ESG ratings they use that apply to your company, and reaching out to the ratings providers themselves. In many cases, particularly if your company is in the Russell 3000, ratings providers will proactively contact companies to verify the data underlying their ESG ratings, which often creates a meaningful opportunity to build a relationship upon which to facilitate timely and accurate updates to your rating.


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