The Downside of Sustainability Reporting

Not long ago, I wrote about the growth of sustainability reporting among public companies. (See this Doug’s Note.) It is now widely believed that effective sustainability reporting, also called “corporate social responsibility” reporting, facilitates a perception among investors, employees, customers, suppliers and other stakeholders that a company is committed to operational, compliance and governance values that enhance its reputation and increase shareholder value. This increase in quantity and quality of reporting has been encouraged by various non-profit organizations formed to flesh out and standardize disclosures.

It is important to remember, however, that the evolution of CSR reporting from fringe puff pieces to mainstream disclosure means that companies must also be alert to possible liability for misstatements or other inaccuracies. In fact, the last few years have seen a rise in the number of law suits claiming violations of securities or consumer protection laws due to CSR statements.

Basically, companies must analyze all CSR communications, whether in an SEC report, on their websites, in a special report, or otherwise, in accordance with their established disclosure controls and procedures. Resist the temptation to treat CSR disclosures as nothing more than soft marketing or public relations materials unrelated to the company’s “real” disclosures. Be sure that they are thoroughly reviewed prior to dissemination and are subject to the same layers of scrutiny, which may include the disclosure committee, chief risk officer, chief compliance officer, board risk oversight committee and other persons performing similar duties.

Here are some tips to keep in mind: read more…

T+2 is a Reality

Last September, the SEC proposed rules that would shorten the standard settlement period for securities transactions from three business days (T+3) to two business days (T+2). As predicted, the rules have now been finalized in short order and without controversy.


This is the latest, though probably not the last, step in the evolution of trade settlements. Trades actually settled on a T+5 cycle until 1993, when the adoption of Rule 15c6-1 mandated T+3 in an effort to reduce credit risk (the risk that the credit quality of one party to the transaction will deteriorate) and market risk (risk that the value of traded securities will change between trade execution and settlement).

Since then, the settlement cycle has been stuck on three business days despite dramatic advances in technology, multiple industry-driven recommendations to shorten the cycle and the adoption of a shorter settlement cycle in almost every other significant non-U.S. trading market. For example, T+2 (or less) already exists in most European markets, the U.K, Israel, Saudi Arabia and China, while others markets, like Australia, New Zealand, Japan and Canada, are expected to adopt T+2 in the near future.

The SEC actually considered T+1 and T+0 settlement cycles in its deliberations, but rejected them as requiring more extensive changes to technology and post-trade processes that would delay the benefits of moving to a T+2 cycle. Nevertheless, it would be reasonable to expect movement toward shorter trade settlements in the U.S. in the future.

The amended rule

Exchange Act Rule 15c6-1(a) has been amended to 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.

The T+2 requirement generally will apply to the same securities transactions currently covered by the T+3 settlement period. The T+2 will not apply to certain specified categories of securities, including, for example, exempted, government and municipal securities.

Effective date

The shift from T+3 to T+2 will be effective on September 5, 2017, which the SEC noted was sufficient time to plan for, implement and test changes to the various systems, policies and procedures necessary for an orderly transition. One commenter on the proposed rules also helpfully noted that September 5th effectiveness has the advantage of letting everyone work through the Labor Day weekend to deal with last-minute bugs. read more…

Don’t Forget the Say-on-Frequency Form 8-K

The proxy rules require that public companies submit a nonbinding proposal to their shareholders every six years regarding how often they should hold say-on-pay votes, known as “say-on-frequency.” Most companies held their first say-on-frequency vote in 2011 and will be including another vote in their 2017 proxy statements. (“Smaller reporting companies” were not required to hold their first say-on-frequency vote until 2013, meaning that they won’t have to do it again until 2019, and there are special rules for “emerging growth companies.”) Shareholders may choose to vote on executive compensation every year, every two years or every three years, or they may choose to abstain.

Though the vote is nonbinding, the charter of most compensation committees requires them to consider the outcome of the shareholder vote when deciding how best to proceed. Indeed, companies must amend their initial post-meeting Item 5.07 Form 8-K (which reports voting results) no later than 150 calendar days after the end of the shareholder meeting at which the vote was taken in order to “disclose the company’s decision in light of such vote as to how frequently the company will include a shareholder vote on the compensation of executives in its proxy materials….”

Back in 2011 when these rules were still new, more than a few companies failed to make the necessary Form 8-K disclosures. While this may not sound like a big deal, in fact it is. A missed Form 8-K filing can render a company ineligible to use Form S-3 during the 12 months following the date that the Form 8-K should have been filed. For companies planning to raise capital in the public markets, that could be a major problem.

A practical way to be sure this filing doesn’t fall through the cracks is to include the required disclosure in the initial post-meeting Item 5.07 Form 8-K (filed within four business days after the meeting), rather than waiting until after consideration at a subsequent compensation committee meeting. Because the overwhelming majority of companies will be recommending annual consideration of executive compensation and because most institutional shareholders and proxy advisory firms prefer annual frequency, it is safe to assume that shareholders will strongly support the board’s recommendation. read more…

Sustainability Reporting Continues to Mature

Several years ago, voluntary sustainability reporting in proxy statements, annual reports to shareholders, websites and special sustainability reports to various stakeholders began to take hold, even as the SEC continued to resist calls for mandatory sustainability reporting and even in the general absence of guidance regarding what to disclose and how. (See this Doug’s Note.) Around the same time, several non-profit organizations formed for the purpose of bringing order to these disclosures. Among them was the Sustainability Accounting Standards Board (SASB), which enjoys a board of directors made up of a particularly distinguished list of executives, investors, professionals and academics, and chaired by Michael Bloomberg.

Since then, sustainability reporting has continued to increase in quantity and quality, and SASB has maintained its position as a well-known, respected standard-setter. In keeping with the maturation of these disclosures, SASB recently published an interesting and detailed “staff bulletin” describing its Approach to Materiality for the Purpose of Standards Development.

The bulletin explains the SASB’s efforts to align its disclosure standards with existing federal securities law concepts of materiality (as set forth, for example, in TSC Industries v. Northway, Basic v. Levinson and the SEC’s MD&A rules and guidance). It caught my eye because the alignment of mandatory SEC reporting and voluntary sustainability reporting is essential not only to effective disclosure controls and procedures, but also to consistent and meaningful stakeholder communications. read more…

It’s Official–Exhibit Hyperlinks are Here (Almost)

Last August, the SEC proposed rule amendments that would require companies to include a hyperlink to each exhibit listed in the exhibit index of a registration statement, periodic report or current report. At the time, I wrote that “these amendments are unlikely to be controversial, and you should expect them to be final in short order.” (See this Doug’s Note.) And while that observation admittedly did not require special powers of clairvoyance, it nevertheless turned out to be true.

This week the SEC issued final rules designed to make it easier to access and retrieve exhibits to company filings through the use of hyperlinks. This will avoid the cumbersome process of first determining the filing in which an incorporated-by-reference exhibit physically appears and then searching through the company’s EDGAR filings to locate the relevant document.

Hyperlink requirement.

Item 601 of Regulation S-K requires companies to include an exhibit index that lists each exhibit included with the filing. Item 601 has now been amended to require that each exhibit to Forms S-1, S-3, S-4 and S-8 (among others) under the Securities Act and Forms 10, 10-K, 10-Q and 8-K (among others) under the Exchange Act include an active hyperlink to the particular document. This applies whether or not the exhibit is incorporated by reference.

For periodic reports, an active hyperlink must be included for each exhibit listed when the report is filed. For registration statements, a hyperlink must be included in the initial filing and in each amendment (pre-effective and post-effective) thereafter. (This is a change from the proposed rule, which limited hyperlinks to the registration statement that becomes effective.) read more…

NYSE’s Annual Guidance Memo

Earlier this month, the staff of NYSE Regulation issued its annual guidance memorandum, which highlights recent NYSE developments and other points of emphasis for the coming year. This year’s guidance includes nearly twenty items that the staff deemed noteworthy. Borrowing the guidance memorandum’s main headings, I have summarized below those items that seem particularly worthy of attention.

What’s New for 2017?

  • In October 2016, NYSE began a multi-stage rollout of what it calls “Listing Manager,” which “allows listed companies to manage their entire lifecycle” via a login section at The various compliance modules currently available through will transition to Listing Manager over time, beginning with cash and stock distribution notifications, which are already functional on Listing Manager.
  • As of September 30, 2016, companies are no longer required to report their shares issued and outstanding, which will instead be reported to NYSE by company transfer agents.
  • NYSE expects the transition from T+3 to T+2 (see this Doug’s Note) to be effective on September 5, 2017, though the actual date is contingent on various factors.

Important Reminders. read more…

The Demise of Pay Ratio Disclosures?

Dating back to their adoption in August 2015, as mandated by Dodd-Frank’s Section 953(b), the pay ratio rules have led a strange existence. For a while, companies generally ignored them because their effective date was so far in the future—for calendar-year companies, disclosures are first required in spring 2018 proxy statements regarding 2017 compensation. Furthermore, it was widely speculated that Dodd-Frank would, in the meantime, be revised to modify or eliminate what was broadly perceived to be a fundamentally flawed effort to contain executive compensation. It could even be argued that the SEC itself dragged its feet on pay ratio rulemaking to allow time for this to occur. (See this Doug’s Note.) Yet, as the effective day eventually rounded into view, highlighted by new guidance from the Division of Corporation Finance regarding some of the rule’s vaguer points, the reality of looming implementation overtook most companies.

But now, the long-awaited cracks in pay ratio’s foundation may be appearing. Last week, Acting SEC Chairman Michael Piwowar issued yet another statement (see this Doug’s Note regarding his earlier conflict minerals statement) directing the SEC staff to take a fresh look at the rule. Chairman Piwowar noted that companies “are now actively engaged in the implementation and testing of systems and controls designed to collect and process the information necessary for compliance.” (One certainly hopes that is the case, given the potentially enormous scope of the task.)

Chairman Piwowar then stated his understanding that some companies “have begun to encounter unanticipated compliance difficulties that may hinder them meeting the reporting deadline.” While it would be quibbling to question whether such compliance difficulties are truly “unanticipated,” it nevertheless seems accurate to say that the process probably won’t go smoothly and that the resulting proxy statement disclosures are likely to be all over the board.

He is, therefore, seeking public comment within the next 45 days on any “unexpected challenges” that companies have experienced and whether relief is needed and has directed the SEC staff to take those comments into consideration. Finally, Chairman Piwowar acknowledged that any further staff action regarding pay ratio will need to be taken as soon as possible to allow companies time to “plan and adjust their implementation processes accordingly.”

What does this mean? read more…

More Conflict Minerals Drama

Well, it wouldn’t be February without a “helpful” reminder that Form SD filings are due on May 31st and a new development that casts confusion over the process. This year, the confusion comes in the form of last week’s statement from Acting SEC Chairman Michael S. Piwowar declaring that he has “directed the staff to reconsider whether the 2014 guidance on the conflict minerals rule is still appropriate and whether any additional relief is appropriate.”

Leaving aside the bigger issue of whether anything about conflict minerals reporting is appropriate, this development once again means that companies will be approaching their filing deadlines without a clear understanding of what is going on.

Prior conflict minerals developments…

In April 2014, the Court of Appeals for the D.C. Circuit in National Association of Manufacturers v. SEC held that the 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 continues to work its way through the litigation process. In the meantime, companies have been filing Form SDs without stating that their products are “DRC conflict free” since doing so, according to the SEC’s guidance, would trigger the requirement for an independent private sector audit.

Acting Chairman Piwowar’s recent statement…

Acting Chairman Piwowar supported his statement, in part, with some personal observations:

“While visiting Africa last year, I heard first-hand from the people affected by this misguided rule. The disclosure requirements have caused a de facto boycott of minerals from portions of Africa, with effects far beyond the Congo-adjacent region. Legitimate mining operators are facing such onerous costs to comply with the rule that they are being put out of business. It is also unclear that the rule has in fact resulted in any reduction in the power and control of armed gangs or eased the human suffering of many innocent men, women, and children in the Congo and surrounding areas. Moreover, the withdrawal from the region may undermine U.S. national security interests by creating a vacuum filled by those with less benign interests.”

He further noted the ongoing litigation and the fact that the temporary interim transition period provided for in the rule has expired. He then solicited public comment on both the rule and the staff’s 2014 guidance during a 45-day comment period

What does this mean? read more…

Long-Term, Principles-Based Governance–A New Paradigm

Last August, I wrote about the Commonsense Principles of Corporate Governance recently advocated by a group of executives at thirteen major companies and investor institutions for the purpose of providing “a basic framework for sound, long-term-oriented governance.” (See this Doug’s Note.) At the time, they reminded me of the U.K.’s long-standing emphasis on principles-based governance, as set forth, for example, in the U.K. Corporate Governance Code applicable to companies with a Premium listing on the London Stock Exchange and addressing such categories as Leadership, Effectiveness, Accountability, Remuneration and Relations with Shareholders. Likewise, the U.K. Stewardship Code sets forth seven basic principles of conduct to be followed by institutional investors and asset managers to “protect and enhance the value that accrues to the ultimate beneficiary.”

Now comes The New Paradigm with the following intriguing subtitle: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth. This thoughtful 22-page document is interesting not only because it follows so closely on the heels of the Commonsense Principles (which it cites several times) and expressly draws on the U.K.’s and Europe’s experiences with principles-based governance, but also because it is authored by Martin Lipton (and others) and presented last fall at the International Business Council of the World Economic Forum. Mr. Lipton is, of course, a pre-eminent legal authority on corporate governance, while the World Economic Forum is, according to its website, an independent non-profit established in 1971 and headquartered in Geneva, Switzerland that “strives in all its efforts to demonstrate entrepreneurship in the global public interest while upholding the highest standards of governance” with “moral and intellectual integrity.”

The New Paradigm.

The New Paradigm is based on the principle that “short-termism and attacks by short-term financial activists significantly impede long-term economic prosperity” by eroding “the foundation for future innovation, ingenuity in product enhancements and…research and development” and “undercuts investments in employees, factories and equipment, expansion into new markets and the pursuit of other long-term projects that require up-front costs but have the potential for sustainable value creation and social impact.”

To overcome short-termism, Mr. Lipton proposes principles (the headings of which I quote below) and detailed sub-principles to be followed by both corporations and investors. He notes with approval that implementation relies on initiatives, commitment and follow-through by those two groups, rather than on new legislation or regulation. read more…

It’s Time to Consider Virtual Annual Meetings

More and more companies are moving to virtual-only or hybrid (both virtual and physical) annual shareholder meetings, though they remain in a substantial minority. Other companies sometimes pause to consider virtual meetings as they begin the annual proxy season sprint, then abandon the notion due to the press of time. Many (most?) companies haven’t yet considered them at all.

In truth, there is much to be thought through, and much to be put in place, before taking the virtual meeting plunge—so much so that companies with spring proxy seasons have likely missed their chance for this year. Now is the perfect time, however, to tee up the issue for next year while management and the board of directors is focused on the annual meeting process.

What is a virtual annual shareholders’ meeting?

Virtual meetings can take many forms. Some are solely audio, much like most quarterly earnings calls. Others include video, much like a typical webcast. And as mentioned above, some companies (often those transitioning from physical to virtual-only meetings) hold hybrid meetings.

Essentially, shareholders are issued a verifiable control number that allows them to access a secure meeting page, where they may listen to the meeting presentation and vote (if they have not already done so by proxy or if they wish to change their prior vote). Often they can ask questions, whether in real time by audio or electronically, or by submitting questions ahead of time.

The meeting details and logistics of a virtual meeting can be tailored to the needs of each company, based on its analysis of its shareholder base and the message it wants the switch to convey. While a number of vendors provide a virtual meeting platform and support services, Broadridge appears to be the market leader.

What issues should be considered?

The primary goals for shifting to a virtual meeting are cost reduction and being perceived as technologically savvy. Though there was some early concern that companies might use virtual meetings to hide from direct interaction with their shareholders and that activists would, therefore, oppose them, that has not happened as electronic communication has become mainstream in all aspects of our society.

More specific issues include: read more…