November One-Minute Reads

SEC charges four companies with misleading cyber disclosures

Resulting from an investigation involving public companies potentially impacted by the compromise of SolarWinds’ Orion software and other related activity, the Securities and Exchange Commission (SEC) announced charges against four current and former public companies for making materially misleading disclosures regarding cybersecurity risks and intrusions. According to the SEC’s orders, the four companies – Unisys, Avaya Holdings, Check Point Software Technologies and Mimecast – learned in 2020 and 2021 that the threat actor likely behind the SolarWinds Orion hack had accessed their systems without authorization, but each negligently minimized its cybersecurity incident in its public disclosures. The companies agreed to pay civil penalties ranging from $990,000 to $4 million. For further reading, see this October 24 PubCo post.

SEC charges furniture company and two former executives with accounting violations

On October 29, 2024, the SEC announced charges against furniture retailer The Lovesac Company – along with Lovesac’s former chief financial officer (CFO) and Lovesac’s former controller – for accounting violations in connection with expenses Lovesac incurred shipping its furniture to customers that were not properly recorded and reported in previously published financial results for the periods in which they were incurred. The complaint, filed in the US District Court for the District of Connecticut, alleges that in April 2023, Lovesac’s finance team found invoices, totaling approximately $2.2 million in shipping expenses, for products shipped during fiscal year 2023 that were not recorded in Lovesac’s books and records until the first quarter of fiscal year 2024, which would have significantly impacted certain of the company’s financial metrics for the first quarter of the 2024 fiscal year.

The SEC alleges that the CFO and controller improperly accounted for these shipping expenses by pushing them to later periods to avoid impacting the company’s financial metrics for the first quarter of fiscal year 2024, and to get around a costly restatement of Lovesac’s 2023 financial statements. The complaint also alleges that the former CFO and controller engaged in fraudulent conduct that rendered a number of related SEC filings materially false and misleading, that the CFO had ultimate authority over the company’s public filings and falsely certified Quarterly Report on Form 10-Q for the first quarter of fiscal year 2024 while knowing it was materially false and misleading, and that the CFO submitted a false and misleading management representation letter to the company’s outside auditor and otherwise failed to alert the company’s auditors to the fraudulent accounting, in addition to failing to implement sufficient internal controls that could have prevented or detected the fraudulent accounting. Lovesac agreed to a settlement to resolve the claims against it by, among other things, paying a civil penalty of $1.5 million.

SEC charges advisory firm with failing to adhere to its own investment criteria for ESG-marketed funds

On October 24, 2024, the SEC charged WisdomTree Asset Management with making misstatements and for compliance failures relating to the execution of an investment strategy that was marketed as incorporating environmental, social and governance (ESG) factors. According to the SEC’s order, WisdomTree claimed from March 2020 to November 2022 that the funds would not invest in companies involved in certain products or activities, including fossil fuels and tobacco products. This representation was included in prospectuses for three ESG-marketed, exchange-traded funds and to the board of trustees overseeing the funds. The SEC claims, however, that the ESG-marketed funds invested in companies that were involved in fossil fuels and tobacco – including coal mining and transportation, natural gas extraction and distribution, and retail sales of tobacco products. The order further claims that WisdomTree did not have any policies or procedures concerning the screening process to exclude such companies from their funding, in addition to using data from third-party vendors that did not screen out all companies involved in fossil fuel and tobacco-related activities. WisdomTree agreed to a cease-and-desist order and censure, along with paying a $4 million civil penalty. For additional insight, see this October 24 article in ESGDive.

ISS issues updates to its executive compensation policy FAQs

As outlined in this October 21 Cooley alert, Institutional Shareholder Services (ISS) has added two new questions to its FAQs, which are outlined below. ISS also advised that a subsequent update is expected in December 2024.

# 27. Are there any forthcoming changes to ISS’ realizable pay methodology? Yes. Effective for February 1, 2025, meetings and later, ISS will not display a realizable pay chart for companies that have experienced multiple (two or more) CEO changes within the applicable three-year window. Otherwise, realizable pay will be displayed as before.

# 46. What is needed in order for ISS to consider a clawback policy “robust,” as displayed in the “Executive Compensation Analysis” section of the research report? In order to receive credit for a “robust” clawback policy in the “Executive Compensation Analysis” section of the research report, a company’s clawback policy must extend beyond minimum Dodd-Frank requirements and explicitly cover all time-vesting equity awards. A clawback policy that adheres only to minimum Dodd-Frank requirements will not be considered robust, because those requirements generally do not cover all time-vesting equity awards.

ISS ESG releases methodology updates for Governance QualityScore

ISS ESG announced the release of methodology enhancements to its Governance QualityScore. The release is a comprehensive expansion for Governance QualityScore and includes the introduction of 12 new factors and extension of existing factors to new markets for more comprehensive assessments of corporate governance risk. The new factors cover information security, CEO noncompete clauses and virtual-only shareholder meetings.

SEC wins on Rule 14a-8 in Fifth Circuit

On November 14, 2024, the US Court of Appeals for the Fifth Circuit rejected the National Center for Public Policy Research (NCPPR) challenge to the legality of the SEC’s Rule 14a-8 process (National Center for Public Policy Research v. SEC (5th Cir.; 11/14)). This ends a long dispute where, in December 2022, the NCPPR submitted a shareholder proposal to The Kroger Co. requesting it to issue a public report detailing the potential risks associated with omitting “viewpoint” and “ideology” from its written equal employment opportunity policy. In response, the SEC issued a no action letter in April 2023, advising that the SEC would not recommend enforcement action if Kroger omitted its proposal from its proxy materials in reliance on Rule 14a-8(i)(7), stating that, in its view, the proposal related to and did not transcend ordinary business matters.

Following the no action letter, NCPPR petitioned the Fifth Circuit for review. The court dismissed the challenge on two jurisdictional grounds – first, that the claim was moot, as Kroger had included the proposal in its 2023 proxy statements, and second, noting a lack of subject matter jurisdiction, ruling that the SEC’s no-action process under Rule 14a-8 did not involve a formal SEC order subject to judicial review. For further insight, see this November 18 PubCo post.

Glass Lewis publishes 2025 proxy voting guidelines

Glass Lewis has released its 2025 Benchmark Policy Guidelines for the US, UK and Europe, including guidelines for shareholder proposals and ESG-related issues. The 2025 voting policy guidelines will apply to shareholder meetings held after January 1, 2025. Glass Lewis also will publish updates to its Benchmark Policy Guidelines for additional local markets and its Thematic Policy Guidelines by mid-December. The guidelines for the US include added or updated sections on board oversight of artificial intelligence, board responsiveness to shareholder proposals and change-in-control provisions for executive compensation. Glass Lewis also clarified its policy on reincorporation proposals and executive pay programs. For further information, .

FASB issues standard requiring disaggregation of expenses

In November 2024, the Financial Accounting Standards Board (FASB) published the Accounting Standards Update (ASU) No. 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40). This update is intended to improve the disclosures about public company expenses and address requests from investors for more detailed information about the types of expenses – including purchases of inventory, employee compensation, depreciation, amortization and depletion – in commonly presented expense captions, such as cost of sales, selling, general, and administrative (SG&A) expenses, and research and development.

FASB notes that during its 2021 agenda consultation initiative, investors observed that expense information is critically important in understanding a company’s performance, assessing its prospects for future cash flows, and comparing its performance over time and with that of other companies. Investors indicated that more granular expense information would assist them in better understanding an entity’s cost structure and forecasting future cash flows. The ASU addresses this feedback by requiring public companies to disclose, in the notes to financial statements, specified information about certain costs and expenses at each interim and annual reporting period. Specifically, they will be required to:

• Disclose the amounts of purchases of inventory; employee compensation; depreciation; intangible asset amortization; and depreciation, depletion and amortization recognized as part of oil- and gas-producing activities (or other amounts of depletion expense) included in each relevant expense caption.
• Include certain amounts that are already required to be disclosed under current generally accepted accounting principles (GAAP) in the same disclosure as the other disaggregation requirements.
• Disclose a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively.
• Disclose the total amount of selling expenses and, in annual reporting periods, an entity’s definition of selling expenses.

The amendments in the ASU are effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Early adoption is permitted. For further insight, see this November 11 PubCo post.

PCAOB pauses NOCLAR

Per this November 15, 2024, Bloomberg Tax article, the Public Company Accounting Oversight Board (PCAOB) has put NOCLAR (noncompliance with laws and regulations) rulemaking, which was initially slated to be finalized by year-end, on hold following the election. The PCAOB proposed the NOCLAR standards in June 2023, with the goal of strengthening its requirements for auditors to identify, evaluate and communicate possible or actual noncompliance with laws and regulations, including fraud. The PCAOB posted an update on its Standard-Setting, Research, and Rulemaking Projects page, with an anticipated timing for NOCLAR of 2025. For additional insight, see this November 19 Governance Beat post.

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