Yearly Archives: 2023

SEC Clawback Rules: Practical Considerations and FAQs

Posted by Keith Halverstam, Maj Vaseghi, and Jenna Cooper, Latham & Watkins LLP, on
Saturday, November 4, 2023
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Keith Halverstam, Maj Vaseghi, and Jenna Cooper are Partners at Latham & Watkins LLP. This post is based on a Latham memorandum by Mr. Halverstam, Ms. Vaseghi, Ms. Cooper, Joel Trotter, Holly Bauer, and Colleen Smith. Related research from the Program on Corporate Governance includes Rationalizing the Dodd-Frank Clawback (discussed on the Forum here) by Jesse Fried.

TheFAQsofferpracticaladviceforlistedcompaniesimplementingcompliantpolicies.

KeyPoints:

  • By December 1, 2023, all companies listed on the NYSE or Nasdaq must adopt clawback policies that comply with listing standards mandated by the SEC (the SEC Clawback Rules).
  • ThisrequirementtoadoptnewcompliantclawbackpoliciesappliestoallUS-listedcompanies, including listed foreign private issuers (FPIs).

Adopting a Clawback Policy

1. When will companies need to publicly disclose their policies?

Companies must file their policy as an exhibit to their first annual report filed on or after December 1, 2023 (Form 10-K for US domestic issuers, Form 20-F for FPIs, Form 40-F for filers under the multijurisdictional disclosure system (MJDS), and Form N-CSR for registered management investment companies).

The SEC Staff has clarified that companies need not provide checkbox and other clawback-related disclosure “until they are required to have a recovery policy under the applicable listing standard” — that is, December 1, 2023, even though the rules and forms already include checkboxes and other disclosure requirements. See Compliance and Disclosure Interpretation (C&DI) 121H.01 (emphasis added).

We believe the guidance in C&DI 121H.01 resolves any ambiguity potentially arising under the SEC releases approving the Nasdaq and NYSE listing standards, in which the SEC provided that listed issuers must provide “the required disclosures in the applicable Commission filings on or after the effective date of October 2, 2023” (emphasis added). In particular, C&DI 121H.01 clarifies that compliance with the required disclosures, including the exhibit filing, is not expected until December 1, 2023, when the recovery policy becomes mandatory under the listing standards.

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Understanding the Corporate Transparency Act’s Company Reporting Obligations

Posted by Nathan Barnett, Daniel Bell, and Sebastian Orozco Segrera, McDermott Will & Emery LLP, on
Friday, November 3, 2023
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Nathan Barnett and Daniel J. Bell are Partners and Sebastian Orozco Segrera is an Associate at McDermott Will & Emery LLP. This post is based on their McDermott memorandum.

Beginning January 1, 2024, the US Corporate Transparency Act (CTA) will require “reporting companies” to submit a report to the Financial Crimes Enforcement Network (FinCEN) containing personal information about the reporting company’s “beneficial owners.” Reporting companies formed before January 1, 2024, will have until January 1, 2025, to file their initial report with FinCEN. Willful failure to comply with reporting obligations can result in steep financial penalties. Proposed regulations issued on September 27, 2023, extend the period for which reporting companies formed on or after January 1, 2024, and before January 1, 2025, must file their initial report to within 90 days of the company’s formation. Reporting companies formed on or after January 1, 2025, must file an initial report within 30 days of the company’s formation.

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Weekly Roundup: October 27-November 2, 2023

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, November 3, 2023

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This roundup contains a collection of the posts published on the Forum during the week of October 27-November 2, 2023

Implementation of Share Buybacks and Their Impact on Corporate Governance

Posted by Michael Seigne (Candor Partners Limited), and Joerg R. Osterrieder (University of Twente), on Friday, October 27, 2023
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Anthropic Long-Term Benefit Trust

Posted by John Morley (Yale Law School), David Berger and Amy Simmerman (Wilson Sonsini Goodrich & Rosati), on Saturday, October 28, 2023
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Corporate Governance Standards Proposed by FDIC

Posted by Lawrence A. Cunningham, Matthew Bisanz, and Jeffrey Taft, Mayer Brown LLP, on Sunday, October 29, 2023
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Political grammars of justification and cost-benefit analysis in SEC rulemaking

Posted by Lisa Baudot (HEC Paris) and Dana Wallace (University of Central Florida), on Monday, October 30, 2023
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Strive Asset Management vs. Engine No. 1: How Did the Activists Vote?

Posted by Alyssa Stankiewicz and Lindsey Stewart, Morningstar, Inc, on Monday, October 30, 2023
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Machine-Learning the Skill of Mutual Fund Managers

Posted by Ron Kaniel (University of Rochester Simon Business School), on Tuesday, October 31, 2023
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The Compensation Committee’s Evolving Role in Human Capital Management

Posted by Blair Jones, Rachel Ki, and Jennifer Teefey, Semler Brossy LLC, on Tuesday, October 31, 2023
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From Transcripts to Insights: Uncovering Corporate Risks Using Generative AI

Posted by Alex Kim, Maximilian Muhn, and Valeri Nikolaev (University of Chicago, Booth School of Business), on Wednesday, November 1, 2023
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SPARCs: An Attractive Alternative to Traditional SPACs?

Posted by Mike Nordtvedt, Rezwan Pavri, and Austin March, Wilson Sonsini Goodrich & Rosati, on Wednesday, November 1, 2023
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A Hard Look at Portfolio Primacy Theory As a Financial Rationale for SEC-Mandated ESG Disclosure

Posted by Amanda Rose (Vanderbilt Law School), on Thursday, November 2, 2023
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SEC charges executives with fraudulent revenue recognition practices

Posted by Cydney S. Posner, Cooley LLP, on Thursday, November 2, 2023
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SEC charges executives with fraudulent revenue recognition practices

Posted by Cydney S. Posner, Cooley LLP, on
Thursday, November 2, 2023
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Cydney S. Posner is Special Counsel at Cooley LLP. This post is based on her Cooley memorandum.

As part of its fiscal-year-end enforcement surge, the SEC filed charges against three former executives of Pareteum Corporation, a telecommunications and cloud software company, for fraudulent revenue recognition practices—a settled action against the former controller and a complaint against the former CFO and former Chief Commercial Officer (also, formerly CEO).  As described in the complaint, the SEC charged the former executives with orchestrating a fraudulent scheme to overstate revenue by recording revenue from non-binding purchase orders and concealing the practice from the company’s auditors. From 2018 through mid-2019, the SEC alleged, the defendants’ improper revenue recognition practices resulted in the company’s overstating revenue by “approximately $12 million for fiscal year 2018 (60% of the ultimately restated revenue), and by approximately $30 million for the first and second quarters of 2019 (91% of the ultimately restated revenue).” In addition, the former CFO, the SEC charged, did not establish sufficient internal accounting controls to assess whether revenue should be recognized under GAAP. According to the press release, Pareteum previously settled with the SEC on accounting and disclosure fraud charges in 2021 and filed for bankruptcy in 2022. Notably, the U.S. Attorney’s Office for the SDNY has announced parallel criminal charges against the former CFO and CCO. According to the Associate Director of Enforcement for the SEC’s Philadelphia Regional Office, as the SEC alleged in its complaint, “Pareteum’s executives artificially inflated Pareteum’s revenue numbers to create the illusion of robust revenue growth….Investors should be able to trust public companies to issue truthful and accurate financial statements, and we will hold accountable any executives who abuse that trust and defraud investors.”

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A Hard Look at Portfolio Primacy Theory As a Financial Rationale for SEC-Mandated ESG Disclosure

Posted by Amanda Rose (Vanderbilt Law School), on
Thursday, November 2, 2023
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Amanda M. Rose is Professor of Law at Vanderbilt University Law. This post is based on her article forthcoming in the Columbia Business Law Review. 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? (discussed on the Forum here) both by Lucian A. Bebchuk and Roberto Tallarita; Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita; The Limits of Portfolio Primacy (discussed on the Forum here) by 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.

The Securities & Exchange Commission (“SEC”) is poised to adopt a controversial set of new disclosure mandates related to climate change, and pressure is on for the SEC to adopt additional ESG disclosure mandates. Given limitations on the scope of the SEC’s rulemaking authority, ESG disclosure advocates—which include many of the largest traditional asset managers—often argue that ESG disclosure mandates would serve the interests of purely financially motivated investors, and the SEC has explicitly justified its proposed climate-related disclosure mandates in terms of their financial significance to investors. Some allege that this is subterfuge, that in fact those calling for SEC-mandated ESG disclosures are motivated by a desire to promote other policy objectives, or to advance their own personal financial interests rather than those of investors. In my forthcoming article, A Hard Look at Portfolio Primacy Theory as a Financial Rationale for SEC-Mandated ESG Disclosure, I sidestep this heated, and increasingly partisan, question, and instead subject one popular financial argument for SEC-imposed ESG disclosure mandates to much-needed analytical rigor.

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SPARCs: An Attractive Alternative to Traditional SPACs?

Posted by Mike Nordtvedt, Rezwan Pavri, and Austin March, Wilson Sonsini Goodrich & Rosati, on
Wednesday, November 1, 2023
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Mike Nordtvedt and Rezwan Pavri are Partners and Austin March is an Associate at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR memorandum by Mr. Nordtvedt, Mr. Pavri, Mr. March, Bryan King, Heath DeJean, and Sally Yin. Related research from the Program on Corporate Governance includes SPAC Law and Myths (discussed on the Forum here) by John C. Coates, IV.

On September 29, 2023, the U.S. Securities and Exchange Commission (SEC) declared effective a registration statement for Pershing Square SPARC Holdings, Ltd., which is contemplating a unique variation on the traditional special purpose acquisition company (SPAC) structure. This variation, called a SPARC—or special purpose acquisition rights company—was spearheaded by billionaire investor Bill Ackman through his investment fund, Pershing Square Capital Management, L.P., and was designed to address several pain points for SPACs, which have lost popularity after frenzied activities in 2020 and 2021.

Ackman’s SPAC, Pershing Square Tontine Holdings, previously gained notoriety in 2020 as the largest ever SPAC with $4 billion raised, but that capital was ultimately returned to investors in 2022 after the SPAC failed to consummate a business combination within the prescribed time period.

What Is a SPARC?

Like a traditional SPAC, a SPARC is a shell company that is seeking to identify and combine with a private company, with the post-combination entity being a capitalized public company. Unlike a traditional SPAC, a SPARC does not raise any public capital at its onset.

More specifically, pursuant to its effective registration statement, the Pershing Square SPARC is distributing special purpose acquisition rights at no cost to former investors in Ackman’s dissolved SPAC. These acquisition rights will provide the holder, among other things, the opportunity to purchase securities in connection with a future business combination by the SPARC at the same price as the SPARC sponsor.

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From Transcripts to Insights: Uncovering Corporate Risks Using Generative AI

Posted by Alex Kim, Maximilian Muhn, and Valeri Nikolaev (University of Chicago, Booth School of Business), on
Wednesday, November 1, 2023
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Alex Kim is a PhD Student, Maximilian Muhn is an Assistant Professor of Accounting, and Valeri Nikolaev is James H. Lorie Professor of Accounting and FMC Faculty Scholar at University of Chicago, Booth School of Business. This post is based on their recent paper.

In an era marked by political turbulence, climatic unpredictability, and rapid technological transformations, corporations are subject to multi-dimensional risks. As these risks have become more and more complex and important over time, they have profound implications for sustainable growth and stakeholder value. Therefore, in our latest study “From Transcripts to Insights: Uncovering Corporate Risks Using Generative AI”, we examine the potential of Generative AI technologies, specifically large language models (LLMs) such as ChatGPT, to assess corporate risks from firm disclosures, assisting stakeholders in making well-informed decisions amidst rising uncertainty.

Recent studies develop textual measures of corporate risks generally by calculating dictionary-based bigram frequencies. This methodology relies on the coexistence of risk-related terminologies within pre-constructed lexical dictionaries. For instance, bigram-based search algorithm recognizes instances where “economic policy” is cited alongside the term “risk”. Such literature has undeniably enhanced our comprehension of corporate risks. Yet, what we find in our study is that AI can offer deeper, more sophisticated insights into textual data, providing a layered understanding of diverse corporate risks.

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The Compensation Committee’s Evolving Role in Human Capital Management

Posted by Blair Jones, Rachel Ki, and Jennifer Teefey, Semler Brossy LLC, on
Tuesday, October 31, 2023
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Blair Jones is a Managing Director, Rachel Ki is an Associate, and Jennifer Teefey is a Senior Associate Consultant at Semler Brossy LLC. This post is based on a NACD Directorship magazine publication.

Many leaders delved into human capital management (HCM) when the economy was booming, just before the Great Resignation. Boards and compensation committees worked to understand talent issues and make their companies more attractive, inclusive, and engaging.

Now that the labor market is shifting, HCM has become even more critical as companies navigate new market-related challenges. The issues are not abating, just evolving, as stakeholders press for more attention on employees. While many companies worked diligently on the symptoms, they may have missed some underlying nuances driving core HCM issues. Compensation committees now have an opportunity, if not an imperative, to step up oversight and partner with management on these complex talent issues.

Compensation committees partnering with management is important for companies that are still settling on an HCM strategy. In the technology industry, for example, many companies are shifting from a “growth at all costs” mind-set to a focus on profitability. They hired aggressively in 2020 and 2021 to ensure they had the resources to pursue new product development and customer groups. It seemed the COVID-19 pandemic had permanently accelerated demand for their products, so they paid heavily to recruit and retain people at all levels of the organization.

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Machine-Learning the Skill of Mutual Fund Managers

Posted by Ron Kaniel (University of Rochester Simon Business School), on
Tuesday, October 31, 2023
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Ron Kaniel is the Jay S. and Jeanne P. Benet Professor of Finance at the University of Rochester Simon Business School. This post is based on an article forthcoming in Journal of Financial Economics by Professor Kaniel, Zihan Lin, Markus Pelger, and Stijn Van Nieuwerburgh. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors (discussed on the Forum here) by Lucian Bebchuk, Alma Cohen, Scott Hirst; Index Funds and the Future of Corporate Governance: Theory, Evidence and Policy (discussed on the Forum here) and The Specter of the Giant Three (discussed on the Forum here) both by Lucian Bebchuk and Scott Hirst.

A central challenge in mutual fund research has been to discern whether fund managers have skill and, if so, whether it is persistent. Prior research has made limited progress in answering these questions. We revisit the issue using modern machine learning tools to predict mutual fund performance.

Utilizing a neural network model, we estimate relations among a large set of fund attributes to identify the US mutual funds with the best performance.  We use the model’s predictions to form the best-performing decile of funds each month and to compute portfolio weights within the top decile. Not only is the model able to identify skilled funds, but it also is able to predict outperformance that lasts for more than three years. Since we are predicting one-month ahead returns, as opposed to longer-horizon returns, this puts a lower bound on the persistence in outperformance.

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Strive Asset Management vs. Engine No. 1: How Did the Activists Vote?

Posted by Alyssa Stankiewicz and Lindsey Stewart, Morningstar, Inc, on
Monday, October 30, 2023
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Alyssa Stankiewicz is an Associate Director of Sustainability Research and Lindsey Stewart is a Director of Investment Stewardship at Morningstar, Inc. This post is based on their Morningstar 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; Companies Should Maximize Shareholder Welfare Not Market Value (discussed on the Forum here) by Oliver D. Hart and Luigi Zingales; Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee (discussed on the Forum here) by Robert H. Sitkoff and Max M. Schanzenbach; and Exit vs. Voice (discussed on the Forum here) by Eleonora Broccardo, Oliver Hart and Luigi Zingales.

Strive Asset Management and Engine No. 1 are firms on opposite ends of the environmental, social, and governance spectrum that have attracted more attention than assets. Both firms offer index-tracking funds that focus on voting decisions to allow fund investors to express their preferences on governance and sustainability matters. Now that both have voting records sizable enough to bear examination, this is a good opportunity to look at the signals the two firms’ voting decisions are sending.

Both Engine No. 1 and Strive are in the middle of strategic changes. Engine No. 1 sold its ETF business to TCW and announced its renewed focus on private investments; Strive announced it would reduce its “anti-woke rhetoric” in light of its message being misunderstood by investors. All the same, the firms’ proxy voting records shine a light on the importance of manager due diligence, even when selecting an otherwise plain-vanilla index fund.

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