SEC and PCAOB Leadership Announce Potential Relief to Companies Affected by the Coronavirus

Yesterday, senior leaders of the Securities and Exchange Commission (SEC) and the Chairman of the Public Company Accounting Oversight Board (PCAOB) issued a joint statement (Statement) noting the potential effect that the coronavirus may have on reporting companies, reminding companies of their disclosure obligations and notifying companies affected by the virus that they may contact the SEC for guidance or a determination of their eligibility for relief from filing deadlines. The Statement comes in the wake of numerous articles contemplating the virus’ effect on businesses that rely on global supply chains. On Tuesday, one Wall Street Journal commentator posited that “the coronavirus could cause supply-chain disruptions that are unlike anything we have seen in the past 70 years.”
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SEC Chairman Releases Statement on Proposed Changes to Financial Reporting and Discusses Climate-Related Disclosure

Today, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) voted to propose amendments to certain financial disclosure requirements under Regulation S-K, specifically those requirements related to Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).  In addition to these proposed amendments, the SEC issued guidance for registrants to consider when using metrics and key performance indicators in their MD&A disclosures.  The press release announcing these developments explains that the proposals are part of an overarching effort by the SEC to improve and “modernize” the disclosure regime for the benefit of both investors and issuers.

SEC Chairman Jay Clayton issued a statement in support of the proposed amendments and related guidance, a statement that largely focuses on a topic that the Chairman himself notes is “not the particular focus of today’s Commission action” – environmental and climate-related disclosures.
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Glass Lewis Is Currently Accepting Peer Group Submissions

Glass Lewis is currently accepting peer group submissions on its website until next Friday, January 31, 2020, from public companies making proxy filings through July 31, 2020. For all other companies making proxy filings through January 31, 2021, the deadline for submissions is July 31, 2020.

Glass Lewis utilizes its Pay-for-Performance Model with its A-F grading system (the “P4P Methodology”) to assess the degree to which a company’s executive compensation aligns with the company’s performance. In turn, these assessments inform the quantitative input for Glass Lewis’ Say-on-Pay voting recommendations. Glass Lewis advises that its new proprietary peer group methodology now drives the P4P Methodology and is critical to its Say-on-Pay recommendations.
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A Snapshot of Board-Shareholder Engagement Trends

Directors of SEC-registered public companies are increasingly taking a more active role in the shareholder engagement process given the evolving corporate governance landscape, including the increasing number of requests for their participation by some of the largest institutional investors. The Conference Board and Rutgers University’s Center for Corporate Law and Governance have recently published a report showing the emerging practices surrounding when and how corporate directors engage with shareholders based on a survey administered in 2018. Because board-shareholder engagements are often undisclosed and private, the results from this survey provide greater insight about how these communications are evolving and may help public company boards prepare for their shareholder engagements going forward.
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Potential Replacement for SEC Commissioner Jackson is Reported

Caroline Crenshaw, a lawyer, is expected to be the nominee to fill the seat currently held by SEC Commissioner Robert J. Jackson Jr.  Ms. Crenshaw, whose potential nomination was reported by news outlets earlier this summer, currently serves as counsel to Commissioner Jackson.  She has served in this role since 2018, focusing on topics such as share buybacks and dual-class shares.

Ms. Crenshaw, who joined the SEC in 2013, also served under former SEC Democratic Commissioner Kara Stein, who left the agency this past January.  In addition to her role at the SEC, Ms. Crenshaw, a 2004 and 2009 graduate from Harvard University and the University of Minnesota Law School, respectively, holds the rank of captain in the Army Judge Advocate General’s Corps reserve.
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Davis Polk Client Memo: IRS Issues Proposed Regulations under Section 162(m)

On December 16, 2019, the IRS issued proposed regulations under Section 162(m) of the Internal Revenue Code, which generally have the effect of limiting the tax deductibility of a public company’s compensation arrangements.

The proposed regulations provide highly anticipated guidance clarifying the substantial changes made to Section 162(m) by the Tax Cuts and Jobs Act.

This memorandum summarizes certain key aspects of the proposed regulations and identifies the components of the proposed regulations about which the IRS is seeking comment.

Read the full memo here.

Law Clerk Alexa Póo contributed to this publication.
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A Profile of Some of the Largest U.S. Tech Boards

The 2019 U.S. Technology Spencer Stuart Board Index (Tech Index) reflects the board practices and trends of 200 public tech companies with the highest revenues based on proxy statements released between July 1, 2018 and July 1, 2019.

I. Selected Spencer Stuart Perspectives

  • Like the S&P 500 companies, the largest tech companies are enhancing board diversity on multiple fronts including gender, skills and experiences as they add new independent directors.
  • The profile of the new director class is shifting, and CEO experience is required less often. While a technology background remains a priority, tech boards are also adding directors with more diverse functional and industry backgrounds.

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SEC Chairman Clayton Testifies Before Senate Banking Committee

On Tuesday, December 10, 2019, Chairman Jay Clayton testified before the Senate Committee on Banking, Housing, and Urban Affairs (Committee) on the “Oversight of the Securities and Exchange Commission.” After Committee Chairman Mike Crapo delivered his opening remarks, which were supportive of the agency, Chairman Clayton gave an overview of the agency’s initiatives over the past year. Given that most of the governance-related topics that Chairman Clayton addressed were also raised back in September before the House Financial Services Committee, which we discussed, there were no real surprises.

Nonetheless, Chairman Clayton verbally reiterated that during SEC examinations, examiners will be looking for and reviewing the nature and extent of climate change disclosures, made both inside and outside SEC filings.
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Davis Polk Client Memo: Human Capital and Climate Risk Disclosure – Analysis of 2019 Mandatory and Voluntary Reporting

To help guide public companies in preparing their annual reports and proxy statements for the 2020 season, we examined the climate change and human capital management disclosures that have been provided by the largest public companies in six industries. A key finding is that to date 10-Ks and proxy statements have generally contained only disclosures that are required by law. Nonfinancial information – which may be important to certain stakeholders, though may also be immaterial under federal securities laws – is overwhelmingly limited to standalone, voluntary ESG reports. Our memo looks at broad trends shaping this ever-changing disclosure landscape and what may be to come.
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What Risk Trends in 2020 Should Be on Directors and Officers’ Radar Screens?

Last week, a global insurance company identified what it believes are the risk trends in 2020 that “have significant implications” to directors and officers (D&Os). The firm’s perspective provides a window into the types of trends insurers and underwriters are watching.

1. “Bad news” events resulting in more litigation

The insurer notes that there has been a rise in nonfinancial-based claims against D&Os stemming from what the firm calls “bad news” events, such as cybersecurity attacks, toxic culture (i.e., #MeToo movement), product liability, corruption and environmental disasters. The insurer warns that “bad news” events can prompt a regulatory investigation or cause share prices to fall, which the report states can “often result in significant securities or derivative claims.
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