Article Archives

Sustainability Reporting After the Paris Climate Accord

It’s fair to say that President Trump’s June 1 announcement that the U.S. will withdraw from the Paris climate accord has been widely reported. It’s also fair to say that the announcement triggered a host of passionate reactions, positive and negative, around the world. Within corporate America, a number of high-profile corporations (for example, Apple, Disney, Facebook, General Electric, Google, Salesforce, Tesla and Twitter) pledged to continue their efforts to cut greenhouse gas emissions and adhere to the spirit of the accord. This leads one to wonder whether withdrawal from the Paris climate accord might, per the law of unintended consequences, actually increase investor emphasis on corporate social responsibility (CSR) and the number of companies that voluntarily report their sustainability initiatives. It’s an intriguing possibility. Momentum for sustainability reporting has been building for years. In fact, the vast majority of S&P 500 companies now publish some type of sustainability or CSR report, and disclosures have begun to appear in SEC filings, particularly proxy statements. Mid-size and smaller companies, lacking the resources of their larger brethren, have been slower to do so, though some have begun and others are giving it serious consideration. Increased pressure from institutional investors, employees and other stakeholders, now coupled with widespread concern over withdrawal from the accord, could tip the reporting balance, especially for companies in sustainability-sensitive industries or companies that otherwise want to send a certain message. One challenge for all companies is to make sense out of the CSR reporting landscape. First of all, the terminology itself—sustainability, CSR, environmental, social and governance (ESG), and triple bottom line, to name a few—is confusingly ambiguous...  Read More

Introducing a Fresh Perspective on Governance, Risk and Compliance

With the fifth anniversary of Doug’s Note fast approaching (and more than 250 posts and 250,000 reads in the rearview mirror), it seemed like a good time to consider where to go from here. Where, as it turns out, was to create a companion blog devoted to governance, risk and compliance, which are among the hottest issues in corporate America these days. Parker Poe’s GRC Blog reflects the joint contributions of our GRC team, co-led by Jane Lewis-Raymond, former chief compliance officer and general counsel of a large public company, and by me. Together, we provide more than 50 years of experience counseling public and private companies of all shapes and sizes on compliance program design, risk assessment, enterprise risk management, crisis management, remediation and training. Essential to the blog’s success are the contributions of our larger GRC team, which consists of attorneys whose practices focus on such key areas of corporate compliance as: Anti-Bribery & Anti-Corruption Antitrust & Consumer Protection Criminal & Regulatory White Collar Compliance Crisis Management Cybersecurity & Data Privacy Employment Environmental Government Contracting & False Claims Act Compliance Immigration SEC Reporting & Compliance Tax Trade Compliance Our GRC Blog includes insights on such matters as creating a compliance culture, ensuring compliance with the Federal Sentencing Guidelines and the DOJ’s program evaluation guidance, the interplay of compliance professionals, executive management and boards of directors, balancing GRC goals against the realities of budget and personnel constraints, and a whole lot more. Recent posts include, for example: Take-aways from the recent global ransomware attack (click here), The board of directors’ role in compliance programs (click here) , Where...  Read More

Brexit’s Impact on the U.S. Capital Markets

You may have heard by now that the U.K. plans to leave the European Union at some point in the next few years. Since the British voted back on June 23, 2016, there has been no shortage of learned analysis/rank speculation about Brexit’s future impact on the U.K. and EU economies and financial markets. Opinions range from dire to blasé, with reality likely to fall (as it is wont) somewhere in the middle. One surprising consequence, however, may be Brexit’s impact on U.S. capital markets. In a recent Heard on the Street column in The Wall Street Journal, Paul J. Davies theorizes from London that post-Brexit EU companies may have no choice but to tap the U.S. capital markets to make up for less convenient access to U.K. investors. It’s an intriguing, and believable, hypothesis. Mr. Davies notes that much of the capital used to fund business expansion comes from savings, mostly in the form of pension funds, insurance companies and investment funds. He cites statistics provided by the Financial Stability Board, Investment Company Institute, European Central Bank and OECD showing that eurozone savings total less than 150% of its total GDP, as compared to more than 250% of GDP in the U.K. and 240% of GDP in the U.S. He notes further that there currently is no single set of capital markets laws and standards within the EU, making it hard to raise capital simultaneously in several eurozone countries. Therefore, frequent or large eurozone issuers often turn to the U.K.’s massive capital markets. Post-Brexit, that may not be feasible. As a result, Mr. Davies says, EU companies may...  Read More

Thwarting Shareholder Activism Through Engagement

As the 2017 proxy season draws to a close for most companies, it is obvious that shareholder activism remains alive and well, though the actual number of public activist campaigns appears to have tapered off slightly as compared to recent years. Activism takes many forms, ranging from takeover proxy battles to proxy access proposals to single-issue social welfare proposals. Particularly noteworthy is an apparent trend among institutional investors to target small and mid-size companies, perhaps believing (perhaps correctly) that these companies are ill-prepared to resist their forays. Companies have a wide array of defensive techniques at their disposal, depending on the nature of the activist’s approach, one of which is effective shareholder engagement. The good news is that more and more institutions are welcoming, and even encouraging, engagement with their portfolio companies. And while small and mid-size companies still sometimes struggle to get the attention of major institutions, this has become less problematic now that shareholder engagement is standard practice in corporate America. Although many of the governance benefits of shareholder engagement are widely known, often overlooked is its ability to thwart shareholder activism. Better communication between the company and its major shareholders reduces misunderstandings about management’s strategy or the reasons behind its latest moves. Misunderstandings, in turn, may lead to activism, or a willingness to side with activists. Strong relationships with traditionally non-activist institutional shareholders (by far the larger percentage) have the ability to actually deter activist behavior before it even happens, or to nip it before it gains too much momentum. For example, many activist shareholders own a relatively small percentage of the target company, particularly as compared...  Read More

Compliance Program Oversight—The Board’s Overlooked Role

It’s long been axiomatic that an effective compliance program cannot exist without a strong ethics and compliance culture, which in turn requires the proper “tone from the top.” Yet, when most companies think “top,” they think C-suite. After all, tone starts with the CEO, right? And the C-suite is where you find many CCOs, or the executive to whom the CCO directly reports. Also, that’s where decisions are made about staffing the compliance function, allocating funds to implement the program and the host of other operational matters that determine whether the program is robust, minimalistic or non-existent. Often overlooked, however, is the crucial role of the board of directors. Most directors have a general understanding that their fiduciary duties include compliance oversight. After all, it’s been more than 20 years since the Delaware Court of Chancery held in its famous Caremark decision that directors could, in certain circumstances, be determined to have breached their fiduciary duty and, therefore, be liable for company losses due to compliance program failures. Later, the Delaware Supreme Court in Stone v. Ritter held that a director’s failure to implement and oversee aspects of a compliance program could constitute an unindemnifiable breach of the duty of loyalty. But how well do boards really understand their compliance program obligations? And to what extent do many boards devote time and effort to ensuring that their performance would pass muster under the microscope of hindsight when (not if) a compliance breach occurs? Is it enough for them to know that someone in the company has been given the title of CCO? Is it enough to allocate 30 minutes...  Read More

A Compliance Calendar Tip: Update for T+2

A few weeks ago, the SEC finalized rules to shorten the standard settlement period for securities transactions from three business days (T+3) to two business days (T+2). Amended Exchange Act Rule 15c6-1(a) will prohibit a broker-dealer from entering into a contract for the purchase or sale of a security (subject to certain exceptions) that provides for payment of funds and delivery of securities later than two business days after the trade date (known as “T”), unless otherwise expressly agreed to by the parties at the time of the transaction. (See this Doug’s Note.) The shift from T+3 to T+2 will be effective on September 5, 2017 to give everyone sufficient time to plan for, implement and test changes to the various systems, policies and procedures necessary for an orderly transition. Most of this preparation burden will, of course, fall on the direct participants in the securities trading industry. However, any company that pays regular cash dividends may need to adjust its annual compliance calendar to accommodate the new rule. Most companies that pay regular cash dividends include these relevant dates in their annual compliance calendars: The date on which the dividend is expected to be declared by the board of directors, The dividend payment date, and The ex-dividend date (the date set by the stock exchanges on which the security’s purchase price no longer reflects the dividend because the trade will settle after the record date). NYSE and NASDAQ rules currently state that shares will trade ex-dividend two business days prior to the dividend record date, which makes sense under the current T+3 timeline. However, the exchanges have now...  Read More

Jay Clayton Confirmed as SEC Chairman

A new era at the SEC officially began last week when Jay Clayton was sworn in as the 32nd Chairman of the SEC. The Senate’s confirmation of Mr. Clayton on May 2nd by a 61 to 37 vote continued the Trump Administration’s practice of tapping well-known Wall Street professionals to serve in key government positions. In this case, Mr. Clayton was a partner in the New York office of Sullivan & Cromwell, where according to the SEC’s news release he advised companies on “securities offerings, mergers and acquisitions, corporate governance and regulatory and enforcement proceedings.” These companies notably included Goldman Sachs, which has been a recurring theme with President Trump’s appointees. While his former ties will, no doubt, prevent Mr. Clayton from participating in SEC matters directly related to Goldman Sachs, his Wall Street background could well influence his perspective regarding the SEC’s future regulatory agenda. That agenda is expected to shift toward re-analyzing the regulations implemented as a result of Dodd-Frank while Congress seeks to roll back many of that act’s statutory imperatives. For example, a bill currently making its way through the House, known as the Financial Choice Act, would among other things and according to its executive summary: Provide an “off-ramp” from the post-Dodd-Frank supervisory regime and Basel III capital and liquidity standards for banking organizations that maintain high levels of capital, including easing restrictions on their ability to pay dividends and the maintenance of leverage ratios, Repeal the designation of firms as “systematically important financial institutions” and modify the bankruptcy code to accommodate the failure of large, complex financial institutions, thereby eliminating Dodd-Frank’s “orderly liquidation...  Read More

Whistleblower Retaliation Remains in the SEC’s Crosshairs

Whistleblower tips and awards for securities law violations have increased dramatically over the past year, according to the staff of the SEC Enforcement Division’s Office of the Whistleblower. Also during that time, the Whistleblower Office has stepped up its vigilance over retaliation by companies against whistleblowers, imposing penalties against companies more frequently and expanding the scope of what constitutes illegal retaliation. Furthermore, there is so far no reason to think the new Trump Administration will seek to reverse this trend. Direct retaliation can take many forms, most of which are recognizable by attentive management. Note, however, that certain less obvious behaviors may also be deemed retaliatory. For example, in one case an employee submitted a complaint about the company’s accounting practices through its internal procedures and to the SEC. When the SEC notified the company of its decision to investigate that complaint, the company was able to determine the whistleblower’s identity and revealed it in an internal email related to the investigation. The Fifth Circuit Court of Appeals in Halliburton, Inc. v. Administrative Review Board, United States Department of Labor concluded that illegal retaliation had occurred, stating that the “undesirable consequences” of being revealed to one’s colleagues as having accused them of fraud were “obvious.” (See this Doug’s Note.) The SEC has also focused recently on indirect forms of illegal retaliation embedded in company policies and agreements. Provisions in such documents may inadvertently violate Rule 21F-17(a) under the Securities Exchange Act, which provides that: “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing,...  Read More

Securities Act and Exchange Act Form Revisions

In 2012, the Jumpstart Our Business Startups (JOBS) Act created a new category of companies known as “emerging growth companies (EGCs).” The JOBS Act also requires that, once every five years, the SEC indexes various EGC thresholds to reflect changes in the Consumer Price Index for All Urban Consumers. Last week, those new thresholds became effective upon their publication in the Federal Register. The SEC simultaneously revised the cover pages of various Securities Act and Exchange Act forms used by virtually all public companies. Two new check boxes must now appear on the covers of: Forms S-1, S-3, S-4, S-8, S-11 and the corresponding foreign private issuer “F” forms, and Forms 10-K, 10-Q, 8-K and 10. The new boxes must indicate: Whether the person filing the report is an EGC, and If so, whether the company has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. The takeaways Due to the form changes, almost every public company (not just EGCs) is impacted. The cover page revisions are now effective for all future filings on the forms listed above. Click here to see the new text of the forms themselves and the related new instructions. All the...  Read More

Conflict Minerals–What Just Happened and What Didn’t

The conflict minerals saga continues. Background In April 2014, the Court of Appeals for the D.C. Circuit in National Association of Manufacturers v. SEC held that the conflict minerals rule’s requirement that companies state that their products have not been found to be “DRC conflict free” violated the First Amendment. Subsequently, the SEC staff released guidance relieving issuers of the obligation to put those labels in their reports. The case was subsequently remanded to the district court for further consideration, and on August 18, 2015, the Court of Appeals reaffirmed its prior decision. In response to these developments, Acting SEC Chairman Michael S. Piwowar issued a statement in January 2017 declaring that he had “directed the staff to reconsider whether the 2014 guidance on the conflict minerals rule is still appropriate and whether any additional relief is appropriate.” (See this Doug’s Note.) Last week, the D.C. Circuit Court entered final judgment in the case, which upheld its prior rulings, and remanded it to the SEC for appropriate action. This past Friday, the SEC issued a statement noting that the D.C. Circuit’s remand to the SEC has “presented significant issues for the Commission to address” and that several comments were received in response to Acting Chairman Piwowar’s January request. Therefore, “in light of the uncertainty regarding how the Commission will resolve those issues,” the Division of Corporation Finance will not recommend enforcement action if companies “only file disclosure under the provisions of paragraphs (a) and (b) of Item 1.01 of Form SD,” which conspicuously excludes the need to comply with paragraph (c). What does this mean? Companies that use conflict minerals...  Read More