Public Companies Update – September One-Minute Reads

SEC drafts strategic plan for 2022 to 2026

On August 24, 2022, the US Securities and Exchange Commission announced that it had published a draft of its strategic plan for fiscal years 2022 to 2026, with an accompanying request for public comment. The draft strategic plan lays out three overarching goals to: “(1) [p]rotect working families against fraud, manipulation, and misconduct; (2) [d]evelop and implement a robust regulatory framework that keeps pace with evolving markets, business models, and technologies; and (3) [s]upport a skilled workforce that is diverse, equitable, inclusive, and is fully equipped to advance agency objectives.” The strategic plan also includes several components for each primary goal. For a more detailed overview, refer to this Cooley PubCo blog post on the SEC’s strategic plan.

SEC charges crypto company with Section 5 violations

In our August edition of One-Minute Reads, we discussed a recent novel insider trading case in which the SEC found certain digital assets to be securities, and the potential for this finding to lead to enforcement actions against crypto asset companies for the sale and offer of unregistered securities in violation of Section 5 of the Securities Act. As of August 16, this possibility has come to fruition, as the SEC announced charges against a group of entities and their founder for their roles in unregistered crypto offerings. According to the SEC complaint, the company conducted an unregistered offering of a crypto asset, including via an initial coin offering, illegally raising over $16 million in proceeds through unregistered offers and sales of these securities. We will follow this litigation as it progresses and continue to monitor for other SEC actions relating to digital assets as securities subject to Section 5.

SEC chair comments on the Sarbanes-Oxley Act

On July 27, SEC Chair Gary Gensler gave remarks at the Center for Audit Quality on what we have learned from the Sarbanes-Oxley Act (SOX) in commemoration of its 20th anniversary. Gensler addressed the role SOX played in restoring public trust after the Enron and WorldCom scandals, while also highlighting key areas where there is still room for improvement. Notably, Chair Gensler asked the Public Company Accounting Oversight Board (PCAOB) to consider adding updated auditor independence standards to its agenda, and stated that the SEC may “take a fresh look at the SEC’s auditor independence rules as well.” Gensler acknowledged the importance of SOX in establishing the PCAOB, but noted that it has been too slow to update auditing standards, though he expects there could be measurable progress on standard-setting in the next year. He also touched on auditing inspections, investigations and enforcement – highlighting the PCAOB’s role in the recent charges against Ernst & Young for cheating by its auditors on ethics exams – as well as the Holding Foreign Companies Accountable Act (HFCAA) and the lack of US inspections of audits and investigations in China. See this Cooley PubCo blog post on the HFCAA for additional color, and refer to this Cooley PubCo blog post on SOX for more information on Gensler’s remarks.

Semler Brossy issues report on ESG executive compensation metrics

On July 18, Semler Brossy published its ESG + Incentives 2022 Report, providing benchmark data on the prevalence and types of environmental, social and corporate governance (ESG) metrics being used by the S&P 500 in their executive compensation programs. Per the report:

1. 70% of the S&P 500 that filed their proxies between April 2021 and March 2022 included an ESG metric in their compensation programs (compared to 57% during the same period in the previous year).
2. Of these companies, 95% included human capital management metrics in their compensation programs (the most common related to diversity, equity and inclusion) – in comparison, 23% included environmental metrics and 41% included other metrics, such as cybersecurity.
3. Notably, 98% of all companies that incorporated ESG metrics into their compensation programs have done so in their annual incentive plans (ESG metrics in long-term incentive plans remain relatively uncommon, at just 14%).
4. The most prevalent structure for ESG metrics is as part of a scorecard (41%), followed by a discretionary structure wherein ESG is included as an additional layer that might impact final payouts (23%).

Glass Lewis releases 2022 proxy season review

On August 4, Glass Lewis released its Proxy Season 2022 Briefing, providing an overview of its initial observations and voting recommendations from the 4,574 reports on US publicly traded companies with an annual meeting held between January 1 and June 30, 2022. Some key takeaways from Glass Lewis’s report include:

1. Support was recommended for 86% of directors, with negative recommendations stemming most commonly from initial public offering governance concerns, insufficient board gender diversity, no independent lead or presiding director, and having an affiliate on a committee.
2. Support was recommended for 84.3% of say-on-pay votes, with negative recommendations stemming most commonly from concerning pay practices (excessive grants/compensation at 41.6%), poor program or award design structure (34.9%), pay/performance disconnects (34.7%), other concerning pay practices (16.7%), and insufficient responses to shareholders (15.8%).
3. Support was recommended for 85.7% of equity plans, with negative recommendations stemming most commonly from the presence of evergreen provisions (44.7%), repricing provisions (27.3%), timing or excessive nature of grants (12.4%), costs of plan (13%), and excessive dilution/overhang (6.8%).

Cooley tax team highlights implications of Inflation Reduction Act

On August 16, President Joe Biden signed the Inflation Reduction Act (IRA) into law, which includes several significant tax provisions, among other important items. This client alert on the IRA from the Cooley tax team highlights a few key tax provisions of the act, mainly the corporate alternative minimum tax (AMT), which imposes a 15% AMT on US corporations with profits exceeding a certain threshold, and a 1% excise tax on the fair market value of any stock repurchases by publicly traded US corporations and certain US subsidiaries of publicly traded non-US corporations, subject to several exceptions. The corporate AMT will apply for tax years beginning after December 31, 2022, with the excise tax taking effect for applicable buybacks after this same date.

PwC publishes summary of SEC comment letter trends

PwC recently published its annual summary of SEC comment letter trends, which details the trends in Division of Corporate Finance comments on company filings from July 2021 through June 2022. These are the top 10 issues by comment volume, and compared to last year:

1. Non-GAAP (generally accepted accounting principles) measures are up.
2. Management discussion and analysis (MD&A) are up.
3. Segment reporting is down.
4. Risk factors and climate change matters are up.
5. Revenue recognition is down.
6. Fair value measurement is unchanged.
7. Disclosure controls and internal control over financial reporting (ICFR) are unchanged.
8. Inventory and cost of sales are unchanged.
9. Form compliance and exhibits are unchanged.
10. Business combinations are unchanged.

The PwC report also covered industry-specific comment letter trends.

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