Public Companies Update – August One-Minute Reads

SEC adopts final proxy voting advice rules

On July 13, the Securities and Exchange Commission announced it had adopted final rules governing proxy voting advice that, among other things, rescind certain provisions it adopted in 2020, which included conditions that proxy voting advice businesses (e.g., ISS and Glass Lewis) were to satisfy in order to rely on the exemptions from the proxy rules’ information and filing requirements.

The final rules rescind two of the conditions:

• That companies that are the subject of proxy voting advice have such advice made available to them in a timely manner.
• That clients of proxy voting advice businesses are provided with a means of becoming aware of any written responses by companies to proxy voting advice.

The final rules also rescind a note to Rule 14a-9 added in 2020, which contained examples of material misstatements or omissions related to proxy voting advice. These final rules will be effective 60 days after publication in the Federal Register. For more information, refer to our client alert about the final rules, as well as this SEC proxy voting advice fact sheet and this PubCo blog post about the new amendments.

SEC proposes amendments to shareholder proposal rule

On July 13, the SEC also announced it had proposed amendments to Rule 14a-8, the rule governing shareholder proposals, which would narrow certain substantive bases for a company to exclude a shareholder proposal from its proxy statement. In November 2021, Staff Legal Bulletin No. 14L narrowed the interpretations of certain substantive bases for exclusion, making it more difficult for companies to exclude shareholder proposals. (Refer to this client alert on the bulletin and this PubCo blog post about the bulletin for more information.)

This new proposal may further limit the ability of companies to exclude shareholder proposals by narrowing three more bases for exclusion.

1. Substantial implementation exclusion: Under the proposed amendments, a proposal would only be excludable under this provision if the company has already implemented the “essential elements” of the proposal.
2. Duplication exclusion: Under the proposed amendments, a proposal would only be excludable under this provision “if it addresses the same subject matter and seeks the same objective by the same means” as another proposal submitted for the same shareholder meeting.
3. Resubmission exclusion: Under the proposed amendments, a proposal would constitute a resubmission under this provision if it “substantially duplicates” a prior proposal by addressing “the same subject matter and seeks the same objective by the same means.”

The SEC is now accepting public comments on the proposed rules. For more information, refer to our client alert about the SEC proposal, as well as this SEC shareholder proposals fact sheet and this PubCo blog post about the proposed rules.

Spencer Stuart publishes Nominating/Governance Chair Survey

In June, Spencer Stuart published the results of its annual Nominating/Governance Chair Survey. Key takeaways from the survey include:

• 65% of respondents consider environmental, social and corporate governance (ESG) the committee’s biggest focus for the next few years, followed by CEO succession (46%), board composition and diversity (37% each), and board performance/effectiveness (34%).
• 22% of respondents said that one or more directors should no longer be on the board, with the most common reasons being that their skills and expertise are no longer current (46%) or relevant (33%) to the board.
• 58% of respondents indicated that developing a boardroom succession strategy is the top board composition priority over the next three years, with prioritization of racial/ethnic diversity at 54% and gender diversity at 24%.
• 66% of respondents expressed that adding new skills to the board is the most common reason for board refreshment; as part of this, the top recruiting priorities for board positions are technology experience (38%), being a member of an historically underrepresented group (34%), and global perspective experience (26%).

SCOTUS issues important administrative law decision

On June 30, the US Supreme Court issued a ruling in West Virginia v. EPA limiting the power of the “administrative state,” which may portend trouble for the SEC’s proposal on climate-related disclosure. The Supreme Court held that the Clean Air Act of 1970 does not give the Environmental Protection Agency authority to issue broad systemic regulations governing greenhouse gas emissions from power plants. The court rooted its opinion in the major questions doctrine, which holds that courts must be “skeptical” of agency efforts to assert broad authority in regulating matters of “vast economic and political significance,” requiring, in those instances, that the agency point to “clear congressional authorization to regulate.”

Given the basis for this decision, the major questions doctrine may be used against other significant agency regulations too, including those of the SEC. Media and politicians already have specifically singled out the proposed SEC rule on climate change as potentially falling within this doctrine (e.g., this Reuters article on the Supreme Court emission ruling and this Wall Street Journal article on the SEC’s climate rule). For more information on the decision and its potential ramifications for agency rulemakings, refer to this PubCo blog post about the SCOTUS ruling.

SEC files charges in novel insider trading case involving digital assets

On July 21, the SEC announced that it had charged a former Coinbase manager and two others with insider trading relating to digital assets. In its complaint, the SEC alleged that the former manager knew what crypto assets (or tokens) would be made available for trading – information Coinbase identified as material nonpublic information in its policies – and tipped off his brother and friend. Notably, the SEC found that the defendants “allegedly purchased at least 25 crypto assets, at least nine of which were securities” (emphasis added).

Consistent with the SEC’s recent position toward cryptocurrency, SEC Division of Enforcement Director Gurbir Grewal commented, “We are not concerned with labels, but rather the economic realities of an offering. In this case, those realities affirm that a number of the crypto assets at issue were securities, and, as alleged, the defendants engaged in typical insider trading ahead of their listing on Coinbase.” This finding that crypto assets are securities has sent ripples through the industry, as companies behind crypto assets could now be open to SEC enforcement actions for the sale and offer of unregistered securities. Importantly, the SEC’s characterizations of these assets as securities are mere allegations and must be proven in the course of litigation. For more information on the case, refer to this Bloomberg Law article.

Deloitte examines boards’ cybersecurity oversight responsibilities

In June, Deloitte’s Center for Board Effectiveness published “A new chapter in cyber,” an article that discusses the cybersecurity oversight responsibility of boards in light of proposed rules issued by the SEC in March. (Refer to this client alert about cybersecurity disclosures and this PubCo blog post about the SEC’s proposal for more information.) Deloitte notes certain factors boards may consider in determining whether they should add someone with cybersecurity expertise to the board, including their operating model, culture and investor expectations. Deloitte also recommends that boards increase their focus on cybersecurity risk governance, including by:

• Conducting a cyber risk assessment.
• Evaluating the company’s cyber incident response plan, including by ensuring the plan has been practiced through scenario planning or wargame exercises led by senior management.
• Reviewing cybersecurity budgets annually to ensure the resources are adequate to manage and mitigate cyber risk.
• Assessing the company’s cyber risk policies.
• Having an external party review the company’s cyber risk programs.
• Examining high-level third-party risk assessment reports.

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