SEC Enforcement

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Davis Polk Client Memo: SEC Establishes Enforcement Division Climate and ESG Task Force

Yesterday, the Securities and Exchange Commission announced a newly created Climate and ESG Task Force in the Division of Enforcement. The announcement is a reminder for public companies, investment advisers and funds to prepare for increased enforcement scrutiny regarding ESG disclosures, plans, and investment products. The new task force also is the latest signal of an effort to portray an SEC enforcement program that is both more aggressive and increasingly focused on specific policy objectives.
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Davis Polk Client Memo: Stock Buybacks Under 10b5-1 Plan Draw SEC Rebuke

In a first-of-its-kind case, the SEC focused on a company’s accounting controls around Rule 10b5-1 buybacks and imposed a $20 million fine. The novel theory in the case highlights the need for policies and procedures around stock buyback authorizations and the entry into of 10b5-1 plans, including procedures a company needs to follow to determine that it is not in possession of MNPI when it enters into a 10b5-1 buyback plan.
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Davis Polk Client Memo: SEC Maintains Its Focus on Perk Disclosures

The SEC has shown its willingness to continue to take companies to task for not disclosing perquisites and personal benefits to executive officers in a manner that is consistent with the SEC’s expectations.  Unfortunately, the SEC’s standard is often challenging to put into practice.

This memo highlights recent SEC guidance on potential perks related to the COVID-19 pandemic, describes the SEC’s latest enforcement activity and summarizes the recent series of SEC enforcement activity involving executive perks.
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SEC Continues to Target Companies for Financial Reporting Failures

At the very end of the year, the SEC announced the entry of an administrative order instituting cease-and-desist proceedings in connection with financial reporting at a major rental car company, including earnings guidance.

According to the order, “under persistent pressure to meet budgets, and to generate opportunities to help close company-wide budget gaps or revenue shortfalls,” the company did not comply with GAAP in 2012 in accounting for contingencies, particularly in determining when to increase the allowance for or the amount to write-off related to recovering money to offset expenses for vehicle damage. 
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SEC Finds Violation of “Equal or Greater Prominence” Requirement of the Non-GAAP Disclosure Rules

The SEC instituted a cease-and-desist proceeding in a fairly straightforward enforcement action that nonetheless emphasizes the importance of the requirement that GAAP measures must be provided with “equal or greater prominence” when a company discloses non-GAAP measures.

The SEC found that a company provided non-GAAP financial measures, such as adjusted EBITDA, adjusted net income and free cash flow before special items, without giving equal or greater prominence to the comparable GAAP measures.
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SEC Enforcement Division Annual Report Reflects Areas of Focus on Public Companies

Cryptocurrency fraud and schemes against mom-and-pop retail investors may consume the limelight and make for good press, but the SEC enforcement division’s annual report also highlights continued interest in public company actions.

Individual accountability is one of the staff’s five key initiatives. In FY 2018, the Commission charged individuals in more than 70% of the enforcement actions it brought, including “numerous” CEOs and CFOs, as well as accountants, auditors and other gatekeepers.
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SEC Charges Former CEO and Company with Fraud for Denying Reputational Impact on Business

SeaWorld and two of its former executives, including the CEO, agreed to pay more than $5 million to settle fraud charges.  The SEC alleged that the company failed to inform investors about the impact of the documentary film Blackfish on the company’s reputation, and ultimately its business.

Released in July 2013, the film criticized SeaWorld’s treatment of killer whales. 
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Commissioner Jackson Defends Proxy Advisory Firms

On the heels of the SEC staff rescinding the letters to proxy advisory firms, Commissioner Jackson decried the influence of “corporate lobbyists” on the issue in his statement.

It is corporate lobbyists who have made regulating proxy advisors a top priority, as they complain that those advisors have too much power, he said.  Commissioner Jackson does not believe there is proof to that effect, citing academic studies, he said. 
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SEC Chairman Clarifies the Role of SEC Staff Views and Statements, Reinforced in Other Remarks and Statements on the Same Day

Yesterday, Chairman Clayton released a statement that while the SEC staff might express their views in myriad ways, ultimately those staff statements are “nonbinding and create no enforceable legal rights or obligations of the Commission or other parties.”

As he noted, the staff’s perspective may be provided in the form of written statements, compliance guides, letters, speeches, responses to frequently asked questions and responses to specific requests for assistance. 
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SEC Consider Capital Raising Enhancements, Including Concept Release on Exemptive Offerings

In a recent speech, SEC Chairman Jay Clayton said “To sum up my remarks in a sentence, we have taken a lot of steps intended to promote capital formation, and we have an ambitious capital formation agenda ahead of us.”  Here’s what may be next:

Thresholds for SOX 404 reporting.  The SEC has heard that the costs associated with providing auditor attestation reports on internal control over financial reporting can be a burden for smaller companies.  
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SEC Issues Sanctions for Inadequate Perk Disclosure

On July 2, 2018, the SEC issued an order criticizing an issuer’s disclosure of executive perquisites and requiring the issuer to take measures to ensure that its future disclosures comply with SEC standards. The SEC staff alleged that, over the course of 2013 to 2016, annual proxy statements issued by The Dow Chemical Company omitted disclosure of about $3 million worth of perquisites, including the use of the company aircraft and other expenses, which, according to the staff, should have been disclosed as “other compensation” to its named executive officers in the Compensation Discussion & Analysis (CD&A).
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SEC Issues Updated Cybersecurity Guidance

On February 21, the Securities and Exchange Commission released updated interpretive guidance on cybersecurity disclosure, reaffirming staff guidance issued in 2011, providing more detailed guidance on disclosure of cybersecurity risks and incidents, advising companies to ensure that their disclosure controls and procedures take account of cybersecurity risks and noting the implications of cybersecurity incidents for insider trading prohibitions and Regulation FD compliance.
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Mr. Clayton Goes to Washington

SEC Chair nominee Jay Clayton’s March 23rd hearing before the Senate Banking Committee covered much of the expected ground. In a series of responses designed to avoid controversy, Clayton repeatedly returned to the three core mandates of the SEC – capital formation, investor protection and efficient markets – as touchstones for his future leadership of the Commission, should he be confirmed.
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SEC Continues Enforcement Actions Based on Nondisparagement Language in Severance Agreements

Late last year, the SEC issued two orders after finding companies violated its whistleblower rules due to certain language in their severance agreements, including clauses that prohibit employees from disparaging the companies in communications with regulators unless authorized in writing or otherwise required by law.  See our client memo >
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Report on SEC Whistleblower Office Discusses Focus on Restrictive Severance and Confidentiality Agreements

The SEC’s 2016 report to Congress on its whistleblower program announced that it paid out $57 million in fiscal 2016, more than the total amount awarded during the entire first five years of the program. Since its inception, 35 whistleblowers have received more than $130 million by helping originate or contribute to enforcement actions that resulted in $584 million in financial sanctions.
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Implications for Issuers from Recent Auditor Independence Enforcement Cases

The SEC recently found that EY violated the auditor independence rules in two cases based on the audit partners’ close personal relationships with members of the issuer finance teams.  In addition to a specific list of prohibitions, the SEC rules on auditor independence includes a catch-all that an accountant is not independent if a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the accountant is not capable of exercising objective and impartial judgment. 
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Report Shows Activists Don’t Nominate Women, as Congress Pressures the SEC to Require More Board Diversity Disclosure for Public Companies

According to an analysis by Bloomberg, since 2011, 5 of the biggest U.S. activist funds have nominated women just 7 times in seeking 174 board seats.  Bloomberg examined Elliot Management, Icahn Associates, Pershing Square, Third Point and Value Act.

Not one of Icahn Associates’ 42 nominees to fill 94 board seats in the past five years was a woman. 
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Enforcement Division May Investigate Failure to Disclose Cyber Breaches

At SEC Speaks 2016, the SEC Enforcement Division indicated that they are interested in investigating public companies’ failure to disclose cyber breaches.

No such case has been brought yet. The SEC’s enforcement actions on cyber incidents have been limited to the failure of registered firms to have policies and procedures to protect customer information accounts and hackers who steal material non-public information to gain market advantages.
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SEC Proposes Dodd-Frank Clawback Rule

On July 1, 2015, the SEC proposed a rule implementing Section 954 of the Dodd-Frank Act.  The proposed rule directs the stock exchanges to adopt listing standards that would require listed issuers to adopt and comply with a written clawback policy to recover any excess incentive-based compensation erroneously paid to any current or former executive officer because of material non-compliance with financial reporting requirements that resulted in a financial restatement.
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SEC Issues Rule Proposal on Clawback of Executive Compensation

At an open meeting yesterday, the Commission voted to propose broad rules directing the national exchanges and associations to establish listing standards requiring companies to develop and implement clawback policies.  We will issue a client memo on the proposal shortly.  The key provisions are complex and are set forth below, based on the fact sheet released by the SEC:

Companies covered:  all listed companies, including foreign private issuers, emerging growth companies and controlled companies

Applicable executives current and former executive officers modeled on Section 16 of the Exchange Act

Incentive-based compensation subject to recovery any incentive-based compensation that is granted, earned or vested, based wholly or in part on the attainment of any “financial reporting measure”

Financial reporting measure measures based on the accounting principles used in preparing a company’s financial statements, any measures derived wholly or in part from such financial information, and stock price and total shareholder return 

No-fault clawback trigger The trigger for a clawback is an accounting restatement to correct a material error. 
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SEC Announces Enforcement Action Against Restrictive Language in Confidentiality Agreements

The SEC, which has recently been investigating workplace agreements out of concern that they may impede whistleblowing activity protected by the Dodd-Frank Act, announced yesterday its first enforcement action against a company related to the use of restrictive language in confidentiality agreements. Companies should be mindful of this type of enforcement action and take the necessary steps to review and revise their own various agreements addressing confidentiality.
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