|SEC Announces Enforcement Task Force Focused on Climate and ESG Issues|
On March 4, 2021, the Securities and Exchange Commission (SEC) announced the creation of the “Climate and ESG Task Force" in the SEC's Division of Enforcement. The purpose of the Task Force is to “develop initiatives to proactively identify ESG-related misconduct." The Task Force's initial focus will be to identify “any material gaps or misstatements in issuers' disclosure of climate risks under existing rules." The Task Force will also “analyze disclosure and compliance issues relating to investment advisers' and funds' ESG strategies."
In carrying out these responsibilities, the Task Force will coordinate the Enforcement Division's resources to identify potential violations, including through “the use of sophisticated data analysis to mine and assess information across registrants." In addition, the Task Force will evaluate and pursue tips, referrals, and whistleblower complaints on ESG-related issues, and assist teams working on ESG-related matters across the Enforcement Division. The SEC's press release also provided a link to the SEC's website “Report Suspected Securities Fraud or Wrongdoing," noting that “tips, referrals and whistleblower complaints on ESG related issues" can be submitted there.
The Task Force includes 22 members from the SEC's headquarters, regional offices and specialized units within the Enforcement Division. The Task Force will be led by Acting Deputy Director of Enforcement Kelly L. Gibson, who noted that “proactively addressing emerging disclosure gaps that threaten investors and the market has always been core to the SEC's mission." The SEC also announced that the Task Force will work closely with other SEC Divisions and Offices, including the Divisions of Corporation Finance, Investment Management, and Examinations.
The creation of the Climate and ESG Task Force follows a series of announcements by the SEC regarding increased activity on climate change and related matters. In response to this recent “steady flow of SEC 'climate' statements and press releases," SEC Commissioners Hester Peirce and Elad Roisman issued on the same day a joint public statement titled “Enhancing Focus on the SEC's Enhanced Climate Change ...
|Nasdaq Amends Proposed Rules to Allow Primary Direct Listings|
As discussed in Gibson Dunn's Current Guide to Direct Listings, the New York Stock Exchange (NYSE) recently amended its rules to permit a primary offering in connection with a direct listing. The Nasdaq Stock Market LLC (Nasdaq) also had proposed rules permitting primary offerings in connection with a direct listing. On February 24, 2021, in the course of the SEC's review, Nasdaq amended its original proposal to bring its rules more in line with those adopted by the NYSE and approved by the SEC - clearing up some confusion caused by the original proposal.
The NYSE requires that all shares to be offered in a direct listing with a primary capital raise be sold within the price range specified in the applicable registration statement. Nasdaq's original proposal had required that all shares be sold at a price that exceeds the price that is equal to 20% below the lowest price specified in the applicable registration statement (Initial Proposed Minimum Offering Price). In addition, Nasdaq had proposed to calculate the value of a listing company's shares for purposes of the minimum value requirement using the Initial Proposed Minimum Offering Price. In December 2020, the SEC issued a notice to Nasdaq that criticized the original proposal for its use of the Initial Proposed Minimum Offering Price for valuation purposes and inconsistency in the proposed rules that would allow a direct listing with a primary offering to be conducted if the “expected" offering price was up to $0.50 less than the Initial Proposed Minimum Offering Price. In addition, the SEC criticized Nasdaq's original proposal for not establishing a maximum price at which the shares may be sold in a primary direct listing. The absence of a maximum price had caused confusion among market participants because of the conflict with the SEC's rule that the full amount of all securities being offered must be covered by the applicable registration statement.
Nasdaq's amended proposal is largely consistent with the NYSE's approved rules. Nasdaq's amended proposal (1) requires that all shares to ...
|ISS Issues Significant Update to Governance QualityScore |
On January 29, 2021, Institutional Shareholder Services (ISS) updated the ISS ESG Governance QualityScore (“QualityScore") product to include 17 new factors and various other changes, representing what ISS calls “the largest Governance QualityScore methodology release in recent years."
QualityScore is ISS's ESG ratings product that in the U.S. covers the S&P 500 and Russell 3000. U.S. public companies are rated in four categories—Board Structure, Shareholder Rights & Takeover Defenses, Compensation/Remuneration, and Audit & Risk Oversight—based on publicly available data applicable to over 147 data points. This data is updated on an ongoing basis to reflect company disclosures and is “augmented by proprietary analytics and information stemming from ISS analyses, interpretations, and proxy voting policies and subsequent recommendations to [ISS] clients for these shareholder meetings." Companies receive scores in each of the four categories as well as an overall score. The scores range from 1 to 10 with a score of 1 reflecting “higher quality and relatively lower governance risk," compared to a score of 10 reflecting “relatively lower quality and higher governance risk."
Summary of January 2021 Updates
The January 2021 QualityScore updates include:
- Eleven new factors in the Audit category that are in two new subcategories: Information Security Risk Oversight and Information Security Risk Management.
- Three new factors in the Board Structure category, including: whether the board “exhibit[s]" ethnic and racial diversity, in the Diversity and Inclusion subcategory; the percentage of the sustainability committee that is independent (or the committee that oversees sustainability issues if not a separate committee), in the Board Practices subcategory; and an unscored question that is for informational purposes only regarding the percentage of the board that has familial relationships with other directors, in the Board Composition subcategory.
- Three new factors in the Compensation category, including: evaluating the level of disclosure of diversity and inclusion performance metrics in executive incentive plans...
|Now Available: Considerations for Preparing Your 2020 Form 10-K|
As we do each year, we offer our observations on new developments and recommended practices for calendar-year filers to consider in preparing their annaul report on Form 10-K. In addition to the many challenges of the past year, the SEC adopted and provided guidance on a number of changes to public company reporting obligations impacting disclosures in the 10-K for 2020. In particular, we discuss the recent amendments to Regulation S-K, disclosure considerations in light of COVID-19, a number of technical considerations that may impact your Form 10-K, and other considerations in light of recent and pending changes in the executive branch and at the SEC. The full memo is available at the following link:
|SEC Proposes Changes to Rule 144, Form 144, Form 4 and Form 5|
On December 22, 2020, the Securities and Exchange Commission (the “SEC") proposed and published for comment amendments to Rule 144, Form 144, Form 4, Form 5 and Rule 101 of Regulation S-T. These amendments primarily seek to (a) mitigate the risk of unregistered distributions in connection with sales of market-adjustable securities under the current Rule 144 safe harbor by revising the holding period for such securities to begin upon the conversion or exchange of such securities, and (b) update and streamline Form 144 by mandating electronic filing and eliminating the Form 144 filing requirement with respect to non-reporting issuers. Comments on the proposed rules will be due 60 days after publication of the proposal in the Federal Register and may be submitted electronically using the SEC's internet comment form (http://www.sec.gov/rules/submitcomments.htm) or by mail to the following address: Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. All submissions should refer to File Number S7-24-20.
Rule 144 – Holding Period for Certain Conversions and Exchanges
The proposed amendments to Rule 144(d)(3)(ii) would eliminate the ability to tack the holding period of securities acquired upon the conversion or exchange of certain market-adjustable securities (also referred to as floating rate convertibles or future-priced convertibles) issued by an unlisted issuer. Rule 144 currently provides that the holding period for such securities can be tacked back to when the securities surrendered for conversion or exchange were acquired. If adopted, the holding period for affected securities would begin when the conversion or exchange of the market-adjustable security was complete.
The adopting release emphasizes that Rule 144 would remain unaffected for most convertible and variable-rate securities transactions. The changes would only apply to if both:
- if the issuer is an unlisted issuer (i.e., an issuer without a class of securities listed, or approved for listing, on a national exchange) at the time of the conversion or exchange; and
- the securities surrendered are “market-adjustable securities", by which the Commission means securities that contain terms, such as conversion rate or price adjustments, that offset declines in market value of the underlying securities.
Securities containing price protection (otherwise known as “ratchet") provisions would be “market-adjustable securities." However, convertible or exchangeable securities containing standard anti-dilution provisions, including adjustment...
|SEC Adopts New Rule Relating to Submissions through EDGAR and Electronic and Remote Online Notarization|
On December 11, 2020, the Securities and Exchange Commission (the “SEC") announced its adoption of a new rule under Regulation S-T in connection with its administration of the Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR") to promote the reliability and integrity of EDGAR submissions, and also the adoption of revisions to Volumes I and II of the EDGAR Filer Manual and related rules under Regulation S-T, including provisions regarding electronic notarizations and remote online notarizations, which include electronic signatures.
Rule 15 under Regulation S-T
1. The new Rule 15 under Regulation S-T allows the SEC to take the following actions to promote the reliability and integrity of submissions made through EDGAR:
2. Sensitive Personally Identifiable Information: if the SEC determines that a submission contains personally identifiable information that if released may result in financial or personal harm to an individual:
- redact such personally identifiable information from the submission;
- prevent dissemination of the submission; and/or
- remove the submission from the SEC's public website;
3. Cybersecurity Threat: prevent any submission to EDGAR that poses a cybersecurity threat, including but not limited to, submissions containing any malware or virus;
4. System or SEC Staff Errors: correct and/or prevent public dissemination of any submission to EDGAR, if the SEC determines that such submission:
- has not been processed by EDGAR;
- has been processed incorrectly by EDGAR; or
- contains an error attributable to the SEC staff;
5. Incorrect EDGAR Identifier: remove and/or prevent public dissemination of a submission, if the SEC determines that a submission is made under an incorrect EDGAR unique identifying number;
6. Disputes Over Authority: prevent a filer's ability to make submissions, if the SEC determines that a dispute exists regarding the authority to make submissions on behalf of a filer, until the dispute is resolved;
7. Misleading or M...
|SEC (Finally) Adopts Resource Extraction Disclosure Rules (Again)|
On December 16, 2020, the Securities and Exchange Commission (the “SEC") adopted final rules (available here) requiring certain disclosure by public companies that engage in the commercial development of oil, natural gas or minerals. Under the final rules, domestic or foreign “resource extraction issuers" (the definition of which is discussed below) will have to file a Form SD on an annual basis that includes information about payments related to the commercial development of oil, natural gas or minerals that are made to a foreign government or the U.S. federal government.
What's the History Here?
The SEC's release sets forth the tortured, more-than-eight-year history of this rulemaking process (see previous Gibson Dunn posts regarding this topic in 2019, 2015, 2013 and 2010). The SEC adopted these rules by mandate pursuant to Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act") after having earlier-adopted versions of the rules vacated in 2012 by the U.S. District Court for the District of Columbia (a ruling which the SEC declined to appeal) and disapproved in 2016 by Congress pursuant to its authority under the Congressional Review Act (the “CRA"). While Congress disapproved of the rules adopted in 2016, it did not repeal Section 1504 of the Dodd-Frank Act, so the SEC's rulemaking mandate remained in place. Revised rules cannot be substantially similar to the ones disapproved by Congress under the CRA. As such, the SEC proposed new rules in 2019 that differed from the 2016 rules (see this earlier blog post for a breakdown of the differences between the 2016 rules and the 2019 proposed rules). Today's newly adopted rules follow the proposed 2019 rules with a few minor differences (which are discussed in more detail below).
What Does This Entail?
The final rules implement Section 13(q) of the Securities Exchange Act of 1934, as amended, and will require disclosure of the following company-specific, project-level information in an amended version of Form SD (available on page 212 of the adopt...
|Summary of Select Director Education Opportunities Available|
Gibson Dunn's summary of director education opportunities has been updated as of December 2020 and is available at the links below. Boards of Directors of public companies find this a useful resource as they look for high quality education opportunities.
Gibson-Dunn-Selected-Director-Education-Opportunities - December 2020.pdf
Thank you to associates Eileen Park and Benjamin Leffler for their assistance with this month's update.
|Summary Chart and Comparative Blackline Reflecting Recent Amendments to MD&A Requirements Now Available|
On November 19, 2020, the SEC announced that it had adopted amendments to Item 301 (“Selected Financial Data"), Item 302 (“Supplementary Financial Information") and Item 303 (“Management's Discussion and Analysis of Financial Condition and Results of Operations") of Regulation S-K. This article provides (1) a high level summary of the amendments, effective dates and Commissioners' views, (2) a detailed description of the amendments in tabular format, and (3) a blackline comparison of the changes to Item 302(a) and Item 303 of Reg S-K.
These amendments are intended to improve disclosure by enhancing its readability, discouraging repetition and eliminating information that is not material and to “allow investors to view the registrant from management's perspective." According to Chairman Jay Clayton, the amendments apply “a principles-based, registrant-specific approach to disclosure," aimed at “giving investors greater insight into the information management uses to monitor and manage the business."
High Level Summary
Summary of the Amendments
The key changes are:
- elimination of Item 301, Selected financial data.
- revision of Item 302(a), Supplementary financial information, to replace the current requirement for quarterly tabular disclosure with a principles-based requirement for material retrospective changes.
- revisions to the rules for disclosure of Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A"), in particular:
- inclusion of new Item 303(a), Objective, to state the principal objectives of the company's MD&A.
- revision of Item 303(a), Full fiscal years (amended as Item 303(b)), and Item 303(b), Interim periods (amended as Item 303(c)) to modernize, clarify and streamline the items;
- replacement of Item 303(a)(4), Off-balance sheet arrangements, with an instruction to discuss such obligations in the broader context of the MD&A.
- elimination of Item 303(a)(5), Tabular disclosure of contractual obligations.
- revision of current Items 303(a)(1) and (2) (amended as Item 303(b)(1)), Liquidity and capital resources, to specifically require disclosure of material cash ...
|SEC Updates Rules Relating to Electronic Submission of Documents|
On November 17, 2020, the Securities and Exchange Commission (the “SEC") announced that it had approved amendments to Regulation S-T and the Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR") Filer Manual relating to the use of electronic signatures for SEC filings, including registration statements, reports on Forms 10-K, 10-Q and 8-K, and Section 16 reports. The new rules expressly provide for the use of e-signature methods (e.g., “DocuSign" and “AdobeSign") for these filings, subject to new authentication procedures summarized below.
In general, where a document submitted electronically to the SEC is required to be signed, the signature appearing in the filing must appear in the electronic filing in typed form, not a manual or graphic format. Signatures that are not required in a filing may appear as in manual or graphic form (e.g., the signature in a letter to shareholders included in a Proxy Statement).
Under Rule 302(b) of Regulation S-T, when a typed signature must be used, the signatory must sign either a signature page or another document that authenticates, acknowledges or otherwise adopts the signature appearing in the filing, which the filer must retain in its records to authenticate that the signer authorized his or her signature to be typed into the filed document. The amendments define this signed record as an “authentication document" and provide that it may be electronically signed, provided that certain conditions are met.
1. New Electronic Signature Attestation Document for Signatories
New Rule 302(b)(2) of Regulation S-T provides that, before a signatory may electronically sign an authentication document, the signatory must manually sign another document (an “electronic signature attestation document") by which the signatory agrees that the use of the person's electronic signature constitutes the legal equivalent of his or her manual signature on authentication documents.
A form of electronic signature attestation document is attached to this posting and available Send comment to Editor
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