E-Minders April 2022

Farewell to E-Minders:

Our monthly E-Minders newsletter is going on hiatus, with this April issue being the final edition for the foreseeable future. We now offer a "weekly roundup" format for delivery of our blogs, which our readers have indicated is more useful than a monthly summary in light of today's fast-paced developments. Sign up for blog emails here - it's free! Thank you for being a loyal Eminders subscriber - we look forward to your continued readership and involvement in TheCorporateCounsel.net community!

In This Issue:

E-Minders is our monthly e-mail newsletter containing the latest developments and practical guidance for corporate & securities law practitioners.

We view TheCorporateCounsel.net as the gathering place for the community and encourage those who aren't yet members to check out what's included. All of our memberships are backed by our "100-Day Promise" - during the first 100 days as a newly activated member, you may cancel for any reason and receive a full refund! Here are "12 Good Reasons" to try us now. Email sales@ccrcorp.com or call 800-737-1271 for more information.

SEC Rulemaking Deluge: New Resource to Keep You on Track

The flurry of recent SEC proposals - including on climate change disclosure, Rule 10b5-1 plans, buybacks and cyber disclosure - suggests that the floodgates are opening for Chair Gary Gensler's regulatory agenda. And it comes on the heels of a very active conclusion to the term of prior SEC Chair Jay Clayton. The Commission has now bestowed us with 20+ rule changes and proposals over the past two years! Are you keeping up?

Some of us are having a hard time remembering what has recently changed - and what might be changing in the near future. In response to member requests, we've created this "cheat sheet" to track selected rulemaking and show where on our site you can find practical guidance on each topic. You can find the cheat sheet via the blue nav bar at the top of the home page.

We are always open to suggestions on new ways to help our members look good. Email us any time to share what would make your work life easier.

The SEC's Climate Disclosure Proposal Is Here

In mid-March, the SEC issued its long-awaited climate disclosure proposal. The Commissioners voted 3-1 in favor of issuing the proposed amendments. Here's the 3-page Fact Sheet, and here are supporting statements from SEC Chair Gary Gensler, Commissioner Lee and Commissioner Crenshaw, and the dissenting statement from Commissioner Peirce. This write-up from our very own Dave Lynn explains key things to know:

The proposed amendments to the Commission's rules would require that public companies include extensive quantitative and qualitative information about climate change in their annual reports and registration statements. The earliest that these disclosures would be required if adopted is in 2024 for the largest public companies. The rule proposals are wide ranging and would require that companies add new sections to their annual reports and registration statements that would provide details about climate change matters that are today often disclosed in separate communications outside of the SEC reporting system.

Most significantly, the SEC would require specific disclosure of a public company's direct GHG emissions (Scope 1) and indirect GHG emissions (Scope 2), as well as indirect emissions form upstream and downstream activities (Scope 3), but in the case of Scope 3 emissions only if material or if the company has set a goal that includes Scope 3 emissions. Disclosures about Scope 3 emissions would be subject to a safe harbor for liability under the federal securities laws and would not be required from smaller reporting companies. For disclosures concerning Scope 1 and Scope 2 emission, companies would be required to file an attestation report covering the disclosures and to provide certain related information about the service provider that prepared the attestation report, which need not be an independent auditor but must meet certain requirements. If these requirements were adopted, public companies would have to rapidly develop processes and procedures that will support the public disclosure of this information in SEC filings.

Among other provisions, the proposed rules would require specific information about climate-related goals or targets that have been set by public companies, including the scope of such goals or targets, data demonstrating progress in meeting such targets, the plans for meeting the goals or targets and information about the use of carbon offsets or renewable energy certificates. Such disclosures, to the extent they are forward-looking, would be protected from certain liability provisions by the safe harbor for forward-looking statements in the Private Securities Litigation Reform Act.

While the Commission did not select one set of standards regarding climate change as the basis for these proposed disclosure requirements, it did model the proposed climate-related disclosure framework in part on the TCFD's recommendations and also draws upon the GHG Protocol. In this way, certain of the proposed disclosure requirements will be familiar to those public companies that are already providing information under these pre-existing standards.

The breadth and complexity of the Commission's proposal is certain to draw a significant amount of comment from interested parties, and there will certainly be threats of potential litigation if the rules are adopted in a manner similar to the proposals. As a result, it could prove challenging for the SEC to bring these proposals to final adoption and to implement them in the time frames that have been proposed.

Cybersecurity: SEC Proposes Cyber Disclosure Rules

In early March, the SEC announced that it was proposing a series of new rules focusing on enhanced disclosure of cybersecurity issues by public companies. Here's the 129-page proposing release and here's the 2-page fact sheet. The proposed rules would require current reporting & periodic updating about material cybersecurity incidents, and periodic disclosures about policies and procedures to address cybersecurity risks. In addition, companies would be required to disclose management's role in implementing cybersecurity policies & the board's cybersecurity expertise. This excerpt from the fact sheet spells out the specifics, and notes that the SEC proposes to:

• Amend Form 8-K to require registrants to disclose information about a material cybersecurity incident within four business days after the registrant determines that it has experienced a material cybersecurity incident;
• Add new Item 106(d) of Regulation S-K and Item 16J(d) of Form 20-F to require registrants to provide updated disclosure relating to previously disclosed cybersecurity incidents and to require disclosure, to the extent known to management, when a series of previously undisclosed individually immaterial cybersecurity incidents has become material in the aggregate and amend Form 6-K to add "cybersecurity incidents" as a reporting topic;
• Add Item 106 to Regulation S-K and Item 16J of Form 20-F to require a registrant to: Describe its policies and procedures, if any, for the identification and management of risks from cybersecurity threats, including whether the registrant considers cybersecurity as part of its business strategy, financial planning, and capital allocation; and require disclosure about the board's oversight of cybersecurity risk and management's role and expertise in assessing and managing cybersecurity risk and implementing the registrant's cybersecurity policies, procedures, and strategies;
• Amend Item 407 of Regulation S-K and Form 20-F to require disclosure regarding board member cybersecurity expertise. Proposed Item 407(j) would require disclosure in annual reports and certain proxy filings if any member of the registrant's board of directors has expertise in cybersecurity, including the name(s) of any such director(s) and any detail necessary to fully describe the nature of the expertise.

Commissioner Peirce dissented from the proposal. In her dissenting statement, she argues that "the governance disclosure requirements embody an unprecedented micromanagement by the Commission of the composition and functioning of both the boards of directors and management of public companies," and that the granular nature of the proposed disclosure requirements makes them "look more like a list of expectations about what issuers' cybersecurity programs should look like and how they should operate."

The criticism of the rule as "micromanagement" of governance may be a fair comment, but if Commissioner Peirce thinks that kind of thing is unprecedented, she may want to take another look at what governance disclosures are already required by Item 407 of S-K. In any event, the comment period will end 60 days following publication of the proposing release on the SEC's website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.

Restatements: Chief Accountant's Statement on Materiality Assessments

In mid-March, the SEC's Acting Chief Accountant, Paul Munter, issued a statement addressing the assessment of materiality in the context of errors in financial statements. The statement reviews the applicable requirements and addresses some of the Staff's concerns about how issuers approach correcting errors based on recent interactions.

In particular, the statement notes that the Staff has observed that "some materiality analyses appear to be biased toward supporting an outcome that an error is not material to previously-issued financial statements, resulting in "little r" revision restatements." One of the areas that the statement specifically calls out is the need for greater objectivity in assessing qualitative materiality:

One area where the staff in OCA have observed an increased need for objectivity is in the assessment of qualitative factors. The interpretive guidance on materiality in SAB No. 99 speaks to circumstances where a quantitatively small error could, nevertheless, be material because of qualitative factors. However, we are often involved in discussions where the reverse is argued—that is, a quantitatively significant error is nevertheless immaterial because of qualitative considerations. We believe, however, that as the quantitative magnitude of the error increases, it becomes increasingly difficult for qualitative factors to overcome the quantitative significance of the error.

We also note that the qualitative factors that may be relevant in the assessment of materiality of a quantitatively significant error would not necessarily be the same qualitative factors noted in SAB No. 99 when considering whether a quantitatively small error is material. So it might be inappropriate for a registrant to simply assess those qualitative factors in reverse when evaluating the materiality of a quantitatively significant error. Such a scenario highlights the importance of a holistic and objective assessment from a reasonable investor's perspective.

There's a lot to digest in this statement, but one takeaway is that it's yet another indication that the Staff has cast a gimlet eye on the growth in "little r" restatements over the past decade. Along those lines, the statement points out that while some attribute the trend toward little r restatements primarily to improvements in ICFR & audit quality, the Staff continues to monitor this trend in order to understand "the nature and prevalence of accounting errors and how they are corrected." In other words, if you conclude that a little r restatement is sufficient to correct an error, you can expect a lot of questions from the Staff if your filings are pulled for review.

SEC Proposes Monthly Disclosures About "Big Shorts"

Recently, the SEC announced a proposal that would increase public info of short sale data. Even though we've been mainlining news alerts for about 8 hours/day lately, it has mostly been about war, sanctions, heroism & tragedy. The SEC didn't share its usual series of emails when it was issued (maybe our friends at the Commission were also focused on other things). Here's the gist of it:

New Exchange Act Rule 13f-2 and the corresponding Form SHO would require certain institutional investment managers to report short sale related information to the Commission on a monthly basis. The Commission then would make aggregate data about large short positions, including daily short sale activity data, available to the public for each individual security.

The fact sheet explains that proposed Rule 13f-2 and the related proposed Form SHO are designed to fulfill the SEC's Dodd-Frank mandate to make short sale data publicly available. It gives this additional detail on what would be required:

The proposed rule would require institutional money managers to file confidential Proposed Form SHO with the Commission via EDGAR, within 14 calendar days after the end of each calendar month, with regard to each equity security and all accounts over which the manager meets or exceeds either of the following thresholds:

• For any equity security of an issuer that is registered pursuant to Section 12 of the Exchange Act or for which the issuer is required to file reports pursuant to section 15(d) of the Exchange Act in which the manager meets or exceeds either (1) a gross short position in the equity security with a US dollar value of $10 million or more at the close of any settlement date during the calendar month, or (2) a monthly average gross short position as a percentage of shares outstanding in the equity security of 2.5 percent or more; or
• For any equity security of an issuer that is not a reporting company issuer as described above in which the manager meets or exceeds a gross short position in the equity security with a US dollar value of $500,000 or more at the close of any settlement date during the calendar month.

The information a manager would report includes:

• The name of the eligible security;
• End of month gross short position information;
• Daily trading activity that affects a manager's reported gross short position for each settlement date during the calendar month reporting period.

The Commission would publish, based on information reported in Proposed Form SHO:

• The issuer's name and other identifying information related to the issuer;
• The aggregated gross short position across all reporting managers in the reported security at the close of the last settlement date of the calendar month of the reporting period, as well as the corresponding dollar value of this reported gross short position;
• The percentage of the reported aggregate gross short position that is reported as being fully hedged, partially hedged, or not hedged; and
• For each reported settlement date during the calendar month reporting period, the "net" activity in the reported security, as aggregated across all reporting managers, within 14 business days of the calendar-month-end reporting deadline.

To supplement the short sale data, the release also proposes a new Rule 205 under Regulation SHO - which would require brokers to include new "buy to cover" marking on purchase orders if they have any short position in the same security at the time the order is entered. This amendment would expand on the markings currently required on the sales side for "long," "short," or "short-exempt" orders. The Commission also issued related proposed amendments to the consolidated audit trail under Rule 613 of the Exchange Act that would require CAT reporting firms to report the "buy to cover" info to CAT and to indicate where it's asserting the "bona fide market making exception" under Regulation SHO. The idea with this fine-tuning to the order process is that it would help the Commission identify short squeezes and other abusive trading practices that may contribute to market volatility.

As this MarketWatch article explains, this proposal fits in nicely with SEC Chair Gary Gensler's overall goal of market transparency. His supporting statement reinforces the goal of public visibility into short sale activity and the ongoing effort of the Commission to understand market volatility & stress - specifically, the role that short selling might play in market events. Commissioner Hester Peirce also issued a statement in support of the proposal. She's interested in hearing from commenters whether these disclosure obligations are appropriate in light of the transparency objectives of Section 929X and the proposed rule and how they may affect trading strategies and market making activity in our markets.

The comment period runs until 30 days after the date the proposal is published in the Federal Register or April 26th - whichever is later.

Note, this is different than the rulemaking petition about short reports that we blogged about in February. We're posting memos about this proposal in our "Short Sales" Practice Area, where members can get all the info about what it means to companies.

Securities Lending Transparency: Re-Opened Comment Period

In late February, the Commission issued this 4-page release to reopen the comment period on proposed Exchange Act Rule 10c-1. That rule was proposed just before Thanksgiving last year. It wouldn't directly impose obligations on issuers, but the info could be of interest. Here's the original 184-page proposing release and the 2-page fact sheet. Here's more detail:

Proposed Rule 10c-1 is designed to increase the transparency and efficiency of the securities lending market by requiring any person that loans a security on behalf of itself or another person to report the material terms of those securities lending transactions and related information regarding the securities the person has on loan and available to loan to a registered national securities association.

Although the original comment period just expired in early January, the Commission is formally re-opening it in light of the implications of proposed Rule 13f-2. The new comment period expires 30 days after the date the re-opening proposal is published in the Federal Register.

Third Time's the Charm? SEC Re-Proposes Removing Credit-Rating References from Reg M

In mid-March the SEC announced this 98-page release to re-propose amendments to Reg M that would remove the references to credit rating agencies from existing exceptions provided in Rule 101 and Rule 102. Section 939A of the Dodd-Frank Act directed the Commission to remove references to credit ratings included in certain rules, and this is the SEC's third attempt for these particular amendments: they were initially proposed in 2008, and then re-proposed in 2011. The Fact Sheet explains what the proposal aims to do:

Proposed Amendments to Regulation M

The Commission proposed to remove the requirement that nonconvertible debt securities, nonconvertible preferred securities, and asset-backed securities be rated investment grade by at least one nationally recognized statistical rating organization. In place of that requirement, under Rule 101, the Commission proposed to except (1) nonconvertible debt securities and nonconvertible preferred securities of issuers having a probability of default of less than 0.055%, as measured over certain period of time and as determined and documented using a "structural credit risk model," as defined in the rule, and (2) asset-backed securities that are offered pursuant to an effective shelf registration statement filed on the Commission's Form SF-3. The Commission proposed to eliminate from Rule 102 the existing exception for investment grade nonconvertible debt securities, nonconvertible preferred securities, and asset-backed securities.

Recordkeeping Requirement

To aid the Commission in its examination and oversight of broker-dealers who are distribution participants or affiliated purchasers and rely on the proposed exception in Rule 101 for certain nonconvertible debt securities and nonconvertible preferred securities, new paragraph (b)(17) of Rule 17a-4 would require those broker-dealers to retain the written probability of default determination supporting their reliance on the exception. Rule 17a-4(b)(17) would require broker-dealers relying on Rule 101's exception for certain nonconvertible debt securities and nonconvertible preferred securities to preserve, for a period of not less than three years, the first two years in an easily accessible place, the written probability of default determination.

The comment period will remain open for 60 days following publication of the proposing release on the SEC's website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer. We'll be posting memos in our "Credit Ratings" Practice Area.

Digital Assets in the Spotlight: The Biden Administration's Executive Order

In early March, President Biden signed an Executive Order titled "Executive Order on Ensuring Responsible Development of Digital Assets." The Executive Order outlines a whole-of-government approach to ensure responsible innovation in digital assets. As this Cleary alert notes:

The Order emphasizes the link between federal action and national security - both in terms of ensuring appropriate regulation and in staking out a U.S. leadership role in developing digital asset technology. Notably, in an area where some federal agencies have been criticized for moving slowly or failing to coordinate with each other, the Order mandates interagency cooperation on a series of reports, with most to be finished during 2022. The Order sets the stage for an active and potentially transformative year for U.S. regulation of digital assets.

The Order also sets out six principal policy objectives:

1. protect U.S. consumers, investors, and businesses by ensuring safeguards are in place for digital asset exchanges and trading platforms to protect sensitive financial data and maintain privacy;
2. protect U.S. and global financial stability and mitigate systemic risk by ensuring compliance with regulatory and supervisory standards that govern traditional market infrastructures and financial firms, while adopting a regulatory evolution necessitated by the new and unique uses and functions of digital assets;
3. mitigate the illicit finance and national security risks posed by the illicit use of digital assets by ensuring appropriate controls and accountability to promote high standards for transparency, privacy, and security;
4. promote U.S. leadership in technology and economic competitiveness, including through the responsible development of payment innovations and digital assets;
5. promote equitable access to safe and affordable financial services by promoting responsible innovation that expands equitable access to financial services, particularly for Americans who are underserved by the traditional banking system, including by making cross-border transfers cheaper, faster, and safer; and
6. support technological advances and ensure responsible development and use of digital assets in a manner that includes privacy and security in their architecture, integrates features and controls that defend against illicit exploitation, and reduces negative climate impacts and environmental pollution.

Check out more coverage of the Executive Order in our "Initial Coin Offerings/Crypto Financings" Practice Area.

Climate Change: Biggest Single Topic For Shareholder Proposals

While big institutional investors push the SEC for climate disclosure rules that would make it easier to compare corporate info, the grassroots effort among smaller shareholder proponents also shows no signs of stopping. Climate proposals are proliferating in both number & type, according to the 112-page "Proxy Preview" issued in early March by As You Sow, Si2 and Proxy Impact. Here's an excerpt (also see the resources in our "Proxy Season" and "Shareholder Proposals" Practice Areas):

Climate change has jumped to the top of the proxy season agenda this year and is the biggest single topic. Climate-related concerns undergird a growing number of proposals that seek consistency between corporate policy and political influence, too. Resolutions about environmental management also implicitly address the climate, but so do new human rights resolutions about environmental justice. In all, there are 145 proposals about the environment, up substantially from 91 last year.

The report also shares these stats:

• The number of proposals specifically on climate change has nearly doubled to 110, up from 79 last year.
• A striking change is the near-total focus on greenhouse gas (GHG) emissions targets, with most proposals asking for a transition to net-zero status by 2050. Only eight ask about deforestation and water. Sixty-eight of the 101 resolutions about carbon asset risk address emissions (up from 29 at this point last year).
• Proponents are starting from a position of strength established last year when average support for climate proposals topped 50 percent for the first time.
• New proposals are targeting use of carbon offsets, accounting & reporting controls for emissions, cryptocurrency carbon footprint, financing of fossil fuels, and social inequities relating to a "just transition"
• After gradually diminishing from a high of nearly 50 proposals 10 years ago, the number of environmental management proposals has risen again, to 35, with more likely. These include proposals about plastics, repairing products to reduce waste, chemical footprints, agricultural practices, and mining.

These trends don't just create headaches for management and securities lawyers - they're affecting director support. That's one reason why creating, maintaining & disclosing a viable net-zero transition plan is becoming so important.

BlackRock's Letter to Shareholders: Global Crisis No Match For Capitalism

You can imagine that Larry Fink, the co-founder, Chair & CEO of the world's largest asset manager, sat down 6 weeks ago to start outlining his letter to shareholders and vetting everything through the appropriate channels. There were plenty of important issues to cover - the net zero transition, human capital, inflation. Then Russia invaded Ukraine. Governments and private companies are cutting ties, the world order has been upended, we're witnessing a massive humanitarian crisis, and BlackRock had to make some key recalculations & decisions in a very uncertain regulatory environment - including how to handle portfolios with Russian securities. BlackRock's success & shareholder returns are very much tied to macroeconomic conditions.

The letter to shareholders that was posted in mid-March (and filed in multiple formats on Edgar as additional soliciting material) is remarkably responsive to these recent developments, in line with the speed at which many companies took action. Larry Fink says that the way things are playing out reinforces BlackRock's approach to using capitalism for good:

These actions taken by the private sector demonstrate the power of the capital markets: how the markets can provide capital to those who constructively work within the system and how quickly they can deny it to those who operate outside of it. Russia has been essentially cut off from global capital markets, demonstrating the commitment of major companies to operate consistent with core values. This "economic war" shows what we can achieve when companies, supported by their stakeholders, come together in the face of violence and aggression.

He goes on to say that supply chains and the inflationary impact will become even more important:

Russia's aggression in Ukraine and its subsequent decoupling from the global economy is going to prompt companies and governments worldwide to re-evaluate their dependencies and re-analyze their manufacturing and assembly footprints - something that Covid had already spurred many to start doing.

And while dependence on Russian energy is in the spotlight, companies and governments will also be looking more broadly at their dependencies on other nations. This may lead companies to onshore or nearshore more of their operations, resulting in a faster pull back from some countries. Others - like Mexico, Brazil, the United States, or manufacturing hubs in Southeast Asia - could stand to benefit. This decoupling will inevitably create challenges for companies, including higher costs and margin pressures. While companies' and consumers' balance sheets are strong today, giving them more of a cushion to weather these difficulties, a large-scale reorientation of supply chains will inherently be inflationary.

We admit we were surprised to not find anything in this letter about cybersecurity or disinformation, or any specific references to China. But those topics aside, it does have something for almost everyone - which makes sense, given the wide-ranging fallout of this war and the many issues that BlackRock and its portfolio companies are dealing with. On crypto:

Finally, a less discussed aspect of the war is its potential impact on accelerating digital currencies. … As we see increasing interest from our clients, BlackRock is studying digital currencies, stablecoins and the underlying technologies to understand how they can help us serve our clients.

On the net-zero transition:

Longer-term, I believe that recent events will actually accelerate the shift toward greener sources of energy in many parts of the world. During the pandemic, we saw how a crisis can act as a catalyst for innovation. Businesses, governments, and scientists came together to develop and deploy vaccines at scale in record time.

To ensure the continuity of affordable energy prices during the transition, fossil fuels like natural gas will be important as a transition fuel. BlackRock's investments - including one late last year - on behalf of our clients in natural gas pipelines in the Middle East are a great example of helping countries go from dark brown to lighter brown as these Gulf nations use less oil for power production and substitute it with a cleaner base fuel like natural gas.

On client-directed voting:

Much like asset allocation and portfolio construction, where some clients take an active role while others outsource these decisions to us, different clients are interested in different levels of involvement when it comes to casting proxy votes. After talking with our clients, we used new technology and other innovations to offer proxy voting choice. This is now available to institutional clients representing just over $2 trillion of index equity assets, including public pension funds serving over 60 million people. We see this as just a first step. Our ambition over time is to continue developing new technologies and working with industry partners to expand voting choice for even more clients.

On board oversight of strategy and recent downturns in performance, slotted in to the mid-section of the letter:

Our strategy, which we regularly review with our Board of Directors, remains rooted in our commitment to serving clients over the long term. We will: keep alpha at the heart of BlackRock; accelerate growth in iShares, private markets, and Aladdin; deliver whole portfolio advice and solutions to our clients and be the global leader in sustainable investing. Successful execution of this strategy will enable us to continue delivering industry-leading organic growth and generate value for our shareholders over the long term.

On BlackRock's attention to internal human capital issues:

At the same time, we recognize the pandemic has redefined the relationship between employers and employees. To retain and attract best-in-class diverse talent, we need to maintain the flexibility of working from home at least part of the time. And our Aladdin technology has given us the flexibility to quickly pivot our operating model over these past two years, which will continue to be important given the uncertainty of the pandemic and the threat of new variants emerging.

We also remain focused on investing in our employees' experience with BlackRock in other important ways: improving training and development, expanding mental health services and other benefits, and continuing to advance diversity, equity and inclusion (DEI) to make sure we're broadening representation across the firm and cultivating an inclusive culture.

On Board composition:

We also give careful consideration to the composition of our Board to ensure it is positioned to be successful over the long term. We are committed to evolving our Board over time to reflect the breadth of our global business and look for directors with a diverse mix of experience and qualifications. We will continue to introduce fresh perspectives and make diversity in gender, race, ethnicity, nationality, age, career experience and expertise, as well as diversity of mind, a priority when considering director candidates.

In times of crisis, many companies take the very reasonable approach of saying that they're monitoring events and will respond accordingly. What's impressive about this particular letter, even though it's still just words on a page, is that it "shows" rather than "tells." The level of detail puts to rest any doubts that the board & management are thinking through the evolving situation from all angles, while not losing sight of the core business strategy and commitments. Larry Fink and team didn't gain $10 trillion in assets under management without being master communicators.

BlackRock's 2022 Engagement Priorities: Director Accountability For Long-Term Value

In a sign that the height of shareholder engagement season is approaching, BlackRock Investment Stewardship has released its 2022 Engagement Priorities. The asset manager's priorities are broadly the same as last year - which mapped to the UN Sustainable Development Goals - and signal a continued focus on board processes and accountability for long-term value creation.

The 10-page summary document identifies "Key Performance Indicators" for each of the main priorities. On top of the summary, BIS issued updated versions of its very detailed commentary on its engagement approach to:

1. Board Quality & Effectiveness - For companies with which BlackRock wishes to engage to understand the board's role, it wants dialogue with a non-executive director. BlackRock assesses boards based on independence, tenure limits, time commitments, election cycles and diversity. BlackRock also wants companies to disclose their approach to ensuring meaningful board diversity and wants to see self-identified demographics on an aggregate basis, and understand how board composition aligns with the company's strategy & business model.
2. Strategy, Purpose & Financial Resilience - BlackRock wants companies to set out how they've integrated business-relevant sustainability risks & opportunities. BIS encourages companies to disclose industry- or company-specific metrics to support their narrative on how they have considered key stakeholders' interests in their business decision-making.
3. Incentives Aligned with Value Creation - BIS looks to companies to disclose incentives that are aligned with long-term value creation and sustained financial performance, underpinned by material and rigorous metrics that align with the company's long-term strategic goals.
4. Climate Risk & Energy Transition - BlackRock encourages companies to discuss in their reporting how their business model is aligned to a scenario in which global warming is limited to well below 2°C, moving towards global net zero emissions by 2050. BIS encourages disclosures aligned with the four pillars of the TCFD—including scope 1 and 2 emissions, along with short-, medium-, and long-term science-based reduction targets, where available for the company's sector. BlackRock won't consider Scope 3 emissions disclosures & commitments "essential" for supporting directors.
5. Natural Capital - BlackRock wants info on how companies are managing material business risks & opportunities relating to natural resources such as air, water, land, minerals and forests.
6. Human Capital Management - BIS wants companies to provide info that shows how their approach to human capital management aligns with their stated strategy and business model, and to disclose actions they're taking to support a diverse & engaged workforce.
7. Human Rights Impacts - BlackRock wants companies to discuss in their disclosures how the board oversees management's approach to due diligence & remediation of adverse impacts to people arising from their business practices.

Each of these commentaries walks through BlackRock's specific expectations and lists typical questions that they ask in engagement meetings. In total, the Investment Stewardship team published 53 pages of comprehensive guidance - on top of the 23-page voting guidelines and 20-page investment stewardship principles already issued. Hopefully that means that companies will be able to avoid any "gotchas" or surprises during engagements - and even more importantly, when it comes time to vote.

We're posting this guidance in our "Shareholder Engagement" Practice Area along with other useful commentaries - so members can visit that library of info along with our collection of investor voting policies throughout proxy season.

State Street's Voting & Engagement Guidelines: Annual Update is Here

After releasing a bunch of guidance earlier this year on its priorities & expectations, State Street Global Advisors has now also recently updated the following documents to reflect its positions:

1. North American Proxy Voting & Engagement Guidelines
2. Global Proxy Voting & Engagement Principles
3. Global Proxy Voting & Engagement Guidelines for E&S Issues
4. Frameworks for Voting E&S Shareholder Proposals
5. Issuer Engagement Protocol

This 6-page summary of material changes outlines the most significant changes, which include:

• Climate-Related Disclosure: SSGA may vote against the independent board leader at companies in the S&P 500, S&P/TSX Composite, FTSE 350, STOXX 600 and ASX 100 if companies fail to provide sufficient disclosure in accordance with the TCFD framework. SSGA views this as a "natural escalation" of previously stated expectations and expects to continue to expand this policy in coming years.
• Enhancing Racial & Ethnic Diversity: SSGA may vote against the Chair of the Nominating Committee at companies in the S&P 500 and FTSE 100 that do not have at least one director from an underrepresented racial and/or ethnic community on their boards; and may vote against the Chair of the Compensation Committee at companies in the S&P 500 that do not disclose their EEO-1 reports.
• Board Diversity: SSGA is maintaining its policy to possibly vote against the Chair of the Nominating Committee at companies in the S&P 500 and FTSE 100 that do not disclose, at minimum, the gender, racial and ethnic composition of their boards. In 2022, it will expect boards of listed companies in all markets & indices to have at least one woman director.
  In 2023, it will expect companies in the Russell 3000, TSX, FTSE 350, STOXX 600, and ASX 300 indices to have boards composed of at least 30 percent women directors. It may waive the policy if a company engages with State Street Global Advisors and provides a specific, timebound plan for reaching the 30 percent representation of women directors.
  SSGA may vote against the chair of the nominating and governance committee if a company fails to meet expectations. If that continues for 3 consecutive years, it may vote against all incumbent members of the nominating committee.
• R-Factor: Again this year, State Street Global Advisors may take voting action against the independent board leaders at companies in the S&P 500, FTSE 350, ASX 100, TOPIX 100, DAX 301 and CAC 40 indices that are R-FactorTM 'laggards' and 'momentum underperformers' unless it sees meaningful change. In 2024, it will be expanding the voting screen to include all R-FactorTM 'laggards' and 'underperformers' (i.e. not only 'momentum underperformers').
• Overboarding: As previously announced, starting in 2022, for non-executive board chairs/lead independent directors and director nominees who hold excessive commitments, as defined above, we may consider waiving our policy and vote in support of a director if a company discloses its director commitment policy in a publicly available manner (e.g., corporate governance guidelines, proxy statement, company website).

These updated policies & guidelines are posted along with other institutional investor policies in our "Investor Voting Policies" Practice Area, so that members can have easy access to policies of various investors in one place. If you aren't yet a member and want access, email sales@ccrcorp.com.

CII Updates Recommended Corporate Governance Policies

In early March, the Council of Institutional Investors announced that it had approved revisions to CII's recommended Corporate Governance Policies on shareowner meetings and poison pills.

The updated policy on shareowner meetings expresses a preference for in-person meetings but gives companies flexibility to choose the format that best reflects their shareowner base and current circumstances. The policy also encourages companies to disclose the circumstances under which virtual-only meetings would be held. It also recommends giving shareholders who are participating electronically rights and opportunities comparable to those participating in person. The revised policy on poison pills asks companies to hold a shareowner vote on a poison pill no later than a year after the pill's adoption by the board. It also asks companies to refrain from adopting pills that contain certain provisions, such as extremely low triggers.

Climate Change Proposal: What Will the Legal Challenges Look Like?

One thing about the SEC's climate change rule proposal seems pretty certain - if the rules are adopted in their current form, they are going to face legal challenges. On what grounds might the validity of the SEC's climate change rules be subject to attack? This excerpt from Davis Polk's recent blog on the rule proposal provides some insights:

Challenges to the SEC's statutory authority. Nothing in the federal securities laws expressly authorizes the SEC to require the disclosures contemplated by the proposal. Instead, these laws generally permit the SEC to require disclosure that is "necessary or appropriate in the public interest or for the protection of investors."

One of the SEC's central arguments in support of its authority is that many investors—including certain large institutional investors—have expressed a desire to receive climate-related disclosure. However, public interest alone may not be enough to meet the statutory threshold, if a hypothetical "reasonable investor" would not find the required disclosure necessary for investment or voting purposes. This may also make it more difficult for the SEC to demonstrate that it has met its obligation to show that the benefits of the new requirements outweigh their costs.

This challenge is likely to be bolstered by the "major questions" doctrine, which provides that agency rules of major significance be the subject of a clear delegation of Congressional authority (and was relied on by the Supreme Court to nix the Biden Administration's COVID-19 vaccine and eviction moratorium policies).

First Amendment challenges. The proposal is also likely to be challenged as violating the First Amendment, by compelling speech. This topic has received close scrutiny by the Supreme Court in recent years in other cases involving corporate speech.

If you're looking for more information on the "major questions" doctrine, check out this Arent Fox Schiff memo. As to the First Amendment issues, Liz blogged last year about a letter from West Virginia's AG threatening to bring an action on that basis against any ESG-related rulemaking by the SEC and you can check that out for more details on the First Amendment argument. Meanwhile, this post on the Business Law Prof Blog lays out an argument supporting the validity of the proposed rules.

Russia Sanctions: What Questions Should the Board be Asking?

The war in Ukraine has prompted the United States and other Western nations to impose unprecedented sanctions on Russia, Belarus and certain of their financial institutions, companies and individuals. The breadth of these sanctions is like nothing we have seen in our lifetimes, and the impact of these sanctions can be far-reaching given the integration of Russia into the global economy prior to the invasion of Ukraine.

Dave recently spoke with his colleague John Smith on MoFo's Above Board podcast to better understand the sanctions landscape and to find out what issues companies and board of directors should be focused on when trying to understand how sanctions could impact their operations. Prior to joining MoFo as co-head of the firm's National Security practice, John was the Director of the U.S. Treasury Department's Office of Foreign Assets Control, often referred to as OFAC, which administers and enforces economic and trade sanctions based on U.S foreign policy and national security goals.

As noted in the podcast, the extraordinary sanctions should prompt companies and boards to assess their legal exposure to Russia and Belarus, as well as their reputational exposure arising from ongoing business with the sanctioned regimes, entities or individuals. Banking sanctions could have significant implications for ongoing and future financial transactions beginning this week, as some Russian banks are banned from participation in the SWIFT network, which is the backbone of the global payment network. Companies also need to be particularly cognizant of individuals or entities who are subject to "blocking" sanctions, which make those parties off-limits for any transactions, as well as "correspondent account" sanctions (which impact the ability of banks subject to sanctions to conduct transactions with U.S. banks) and debt and equity restrictions (which limit investment in and financing of sanctioned entities).

The Invasion of Ukraine & Corporate ESG

We are resharing a blog that Lawrence wrote in early March for PracticalESG.com. Since then, several more companies have announced that they are suspending operations in Russia - including Boeing, Disney, Exxon and Ford. For more on these complicated issues, also see Matt Levine's Bloomberg column about writing down Russian assets and whether weapons funding is now an ESG investment:

The human and global security costs of the Ukraine situation are hard to think about. Without a doubt, people and families living in the country are affected in ways words can't adequately reflect. That words are inadequate may be good - because it shows the meaning of actions. Actions undertaken by companies in the next days can have meaningful lasting impacts.

Some companies (such as BP and Equinor) have already announced steps they are taking to reduce or eliminate business interests in Russia. The White House issued new sanctions on the largest Russian financial institutions and a number of "Russian elites." The OECD announced it terminated discussions with Russia and is reviewing the country's involvement in various aspects of the organization. Dave Lynn recently wrote that U.S. companies are starting to consider how to manage and disclose bans, sanctions and prohibitions that could impact them. Each new action taken by governmental and quasi-governmental organizations will have domino effects.

ESG as a corporate initiative faces an unprecedented and acute challenge. The magnitude and speed of Russia's actions did not allow companies to conduct advance analysis and preparation, yet companies need to respond sooner rather than later. A few things we expect to see with regard to ESG activity for the foreseeable future include:

• Ending business relationships with Russian entities and divesting holdings of Russian businesses. Keep in mind that for a divestiture to be successful, that means a buyer is on the other end. Perhaps it is worth asking who would be a buyer of Russian interests in this moment? This Reuters article on BP points out that the company hasn't made clear just "how it plans to extricate itself" from its Rosneft stake.
• Stepping up due diligence on business partners, who they deal with and where their business interests are.
• Sanctions issued by individual countries and the EU, along with industry and company responsible sourcing commitments, will likely disrupt certain supply chains as Dave mentioned. One precious metals industry pundit pointed to gold from Russian refineries in this context. Banks Credit Suisse and Societe Generale SA announced they are halting Russian commodity financing. Companies will need to identify and screen alternate suppliers.
• Increased direct humanitarian aid and more emphasis on planning to assist in future similar crises. For example, we've seen posts on LinkedIn from companies offering Ukrainians temporary jobs and living arrangements - even offering to pay transportation costs.
• Managing near term carbon reduction planning, especially for those involved in providing energy in Europe. Russian forces have reportedly destroyed a gas pipeline in Kharkiv and an oil terminal near Kyiv.
• Every country's view of energy independence, or at least reducing reliance on imported fossil fuel, is now likely being reprioritized. That may or may not align with current sovereign and corporate plans for alternative energy development.

Lawrence's book - "Killing Sustainability" - also gets into the practical aspects of defining ESG and making decisions in an evolving ESG framework. A brand new, updated edition of that resource is available in the "guidebooks" section of PracticalESG.com.

IPOs: Board Diversity Planning Isn't Optional

Companies that decide to defer their IPO plans in light of current market conditions would be wise to spend some time on efforts to improve the diversity of their boards. This WilmerHale memo (p. 13) addresses SEC & Nasdaq rules, proxy advisor & institutional investor policies, state law requirements and other drivers of increased board diversity that need to be considered in the IPO planning process. Here's an excerpt on the growing number of state law initiatives addressing board diversity:

States are playing an increasingly active role in promoting board diversity among companies that are incorporated under their laws or satisfy other criteria. For example, California and Washington mandate specified levels and types of board diversity, while Illinois, Maryland and New York mandate disclosure regarding board diversity. Other states are considering mandatory board diversity legislation, or have adopted (or are considering) non-binding resolutions urging public companies to increase board diversity. This is a quickly evolving area; companies need to monitor developments in applicable states to remain in compliance.

The memo also points out Goldman Sachs' decision not to underwrite deals for companies that don't satisfy board diversity standards. While it says that other bulge-bracket banks haven't as yet followed suit, it also emphasizes that the momentum created by various other stakeholders' efforts to promote diversity is something that needs to be taken into account by IPO candidates.

Financial Reporting: Going Concern Qualifications Hit a Record Low in 2020

According to this Audit Analytics report reviewing 21 years of "going concern" qualifications in public company audit reports, 2020 was a bit of a milestone year. Here's an excerpt from the report's intro:

The number of companies that received a going concern opinion during fiscal year (FY) 2020 declined to a record low of just 1,261. The percentage of companies that received a going concern opinion during FY2020 also declined to a record low of 17.9%. Going concern opinions have been declining since they peaked during FY2008 with 2,851 - during the height of the financial crisis. FY2008 also saw a high of 28.2% of companies receive a going concern opinion.

The gradual decline in going concern opinions since FY2008 had brought the percentage of companies that received a going concern opinion in line with pre-financial crisis figures. But the steepness of the FY2020 decline has brought all new lows. The decline was led by improvements from smaller and mid-size companies. Non-accelerated filers saw a 10.5 percentage point decline, and accelerated filers saw a 5.5 percentage point decline in the percentage of companies that received a going concern opinion during FY2020.

The report also addressed the reasons for going concern qualifications. Many reports listed multiple factors, but leading the pack was "recurring losses," which was cited in 71% of all 2020 going concern opinions. While that's down from its peak of 85% in 2018, the recurring losses issue was still cited twice as much as cash constraints, which were the second most frequently cited issue. The report notes that despite the SPAC boom, the percentage of reports citing no or limited operations as a reason for a going concern qualification declined over the past decade from 48% to 21%.

Latest Issue: "The Corporate Executive"

The January-February issue of The Corporate Executive has been sent to the printer (email sales@ccrcorp.com to subscribe to this essential resource). It's also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format - an option that many people are taking advantage of in the "remote work" environment. The issue includes articles on:

• Key Trends in the Usage of Equity Awards
• SEC Reopens Comment Period for Pay Versus Performance Rules
• Proxy Plumbing Progress: A Look at Vote Confirmation this Proxy Season

Latest Issue: "Deal Lawyers" Newsletter

The March - April issue of the Deal Lawyers print newsletter is now available. Topics include:

• Delaware Chancery Court Issues Highly Anticipated SPAC-Related Decision
• Rule 145: 10 Frequently Asked Questions
• Regulation M: Reminders for Public Company M&A

Remember that - as a "thank you" to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter - we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called "Back Issues" near the top of DealLawyers.com - 4th from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.

And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com - and only one person subscribes to the print newsletter - everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.

These newsletters are also viewable online by members of TheCorporateCounsel.net who subscribe to the electronic format - an option that many people are taking advantage of in the "remote work" environment.

Conference Calendar

• PracticalESG.com's webcast - "Parsing the SEC's New 'Climate Disclosure' Proposal" (4/12)
• PracticalESG.com's DEI Workshop Series - "Collecting Diversity, Equity & Inclusion Data: What to Measure & Why" (4/13)
• TheCorporateCounsel.net's webcast - "The (Former) Corp Fin Staff Forum" (4/19)
• PracticalESG.com's DEI Workshop Series - "Understanding & Using Equity Audits & Civil Rights Audits" (5/4)
• PracticalESG.com's webcast - "Putting the 'G' First: Oversight of 'E' & 'S' in ESG" (5/10)
• PracticalESG.com's DEI Workshop Series - "Using Diversity, Equity & Inclusion Data: Goal-Setting & Reporting" (5/25)
• SkyTop Strategies' "Shareholder Activism ESG Super Summit" (6/16 - 6/17) - featuring our own John Jenkins and Lawrence Heim

What's New on Our Websites

Among other new additions, we have posted:

• An "Inside Track with Liz" podcast featuring J.W. Verret, who is an Associate Professor of Law at George Mason University Antonin Scalia Law School, and has been a member of the SEC's Investor Advisory Committee from 2018 - 2022, discussing:


• What the SEC's Investor Advisory Committee does, and how he got involved
• Specific initiatives that he's looking forward to seeing the IAC tackle in the upcoming year
• His open call for comment on digital asset regulation - based on the IAC's recent hearing on crypto
• How the SEC uses the input that the Investor Advisory Committee provides
• Suggestions for those who are interested in being appointed to the IAC, in response to the SEC's call for candidates


• An "Inside Track with Liz" podcast featuring Cas Sydorowitz, Global Head of Georgeson and Hannah Orowitz, Senior Managing Director and Head of US ESG for Georgeson


• Expectations for the 2022 AGM season in the US, particularly considering the surprises we saw during the 2021 proxy and annual meeting season
• Early trends for shareholder proposals
• Changes in voting behaviour of traditional investors - and what they are most likely to focus on
• Whether the record-breaking level of negotiated proposals in the 2021 season is the 'new normal'
• How the new SEC guidance on Rule 14a-8 will impact shareholder proposals during the 2022 proxy season and beyond
• What impact COP26 and the formation of the International Sustainability Standards Board may have on companies in 2022
• Following COP26, there was a rapid uptake of asset managers signing The Net Zero Asset Managers Initiative, which includes BlackRock, Vanguard, States Street and at least 220 others. What might that mean for 2022?
• Predictions for activism in 2022, in light of environmental issues playing a role in a successful proxy contest, and activists' cooperation with NGO proponents (e.g., Ceres and As You Sow).
• Other parting thoughts and advice.


• "Deep Dive with Dave" podcasts in which Dave Lynn takes a deep dive with his special guests as they explore the latest developments in securities laws and corporate governance. Check out these episodes:

  – In a 19-minute episode, Dave Lynn and our own John Jenkins of TheCorporateCounsel.net discuss the topics covered in the January-February 2022 issue of The Corporate Counsel - topics include:

  • SEC Looks to Amend Rules On Issuer and Insider Securities Transactions
  • Is Your Insider Trading Policy Ready for Prime Time?

  – In a 22-minute episode, Dave Lynn and Keir Gumbs discuss the Operations Subcommittee of the End-to-End Vote Confirmation Working Group's announcement that it has agreed to provide vote confirmation this proxy season for Fortune 500 annual meetings that are tabulated by members of the Operations Subcommittee and to pilot an early stage vote entitlement reconciliation process for 20 Fortune 500 meetings - topics include:

  • The end-to-end vote confirmation process
  • The vote entitlement reconciliation process
  • The work of the End-to-End Vote Confirmation Working Group this proxy season
  • The significance of this 2022 proxy season project for issuers and investors
  • The next steps beyond the 2022 proxy season
     

  – In a 24-minute episode, Dave Lynn and our own John Jenkins of TheCorporateCounsel.net discuss the topics covered in the November-December 2021 issue of The Corporate Counsel - topics include:

  • Annual Season Items
  • SEC Adopts Mandatory Use of Universal Proxy in Contested Elections
  • Staff Legal Bulletin 14L: Corp Fin Lays Out the Welcome Mat for ESG-Related Shareholder Proposals
     

  – In a 19-minute episode, Dave discusses the SEC's Capital Raising Navigator with Sebastian Gomez Abero from The SEC's Office of the Advocate for Small Business Capital Formation - topics include:

  • The work of the Office of the Advocate for Small Business Capital Formation
  • Challenges that small businesses face today when seeking to raise capital
  • The SEC's capital raising Navigator tool
  • Interacting with the SEC on small business capital formation issues
     
• A podcast series - "Women Governance Trailblazers" - that Liz has been hosting with Courtney Kamlet of Vontier. Many illustrious guests have joined Liz & Courtney to talk about their careers in the corporate governance field - and what they see on the horizon. Recent episodes include:
  • Sarah Fortt - Co-Chair of Latham & Watkin's Environmental, Social and Governance Practice
  • Laura Wanlass - Head of Global Corporate Governance & ESG Advisory Consulting at Aon
  • Alicia Syrett - Founder and CEO of Pantegrion Capital
  • Beverly Behan - Founder of Board Advisor, and Author
  • Patricia Lenkov - Founder and President, Agility Executive Search
  • Rhonda Brauer - ESG Strategist and Founder, RLB Governance

The following memos & insights:

- "IPOs, SPACs & Direct Listings - 2021 Milestones and 2022 Outlook" - Fenwick & West (3/22)
- "Top 10 Securities Law Issues for De-SPAC Companies" - Goodwin Procter (3/22)
- "SPAC-Related Enforcement and Litigation: What to Expect in 2022" - Latham & Watkins (3/22)
- Memos: SEC's Climate Disclosure Proposal
- "SV 150 Governance Report" - Wilson Sonsini (3/22)
- "Global IPO Guide" - Latham & Watkins (3/22)
- Memos: Executive Order on Digital Assets
- Memos: SEC's Cyber Disclosure Proposal
- "Takeaways for In-House Counsel from SEC's 'Shadow Insider Trading' Action" - Morrison Foerster (3/22)
- "ESG Disclosure Practices of the Silicon Valley 150" - Fenwick & West (3/22)
- "Antitrust Division Announces Intent to Pursue Monopolization Cases Criminally" - BakerHostetler (3/22)
- "Annual Meeting Filing & Disclosure Reminders" - Skadden (3/22)

People: Who's Doing What & Where

Commissioner Allison Herren Lee Stepping Down: Commissioner Allison Herren Lee announced that she had notified President Biden that she intends to step down from the Commission once her successor has been confirmed. Lee's term as a Commissioner expires in June. As SEC Chair Gary Gensler pointed out in a statement, Commissioner Lee first joined the SEC's Division of Enforcement in the Denver Regional Office in 2005, and served as Counselor to former Commissioner Kara Stein and Senior Counsel in the Complex Financial Instruments Unit. Commissioner Lee served as Acting Chair in early 2021, taking an unusually active role in jumpstarting the SEC's efforts on climate change.

Yumi Narita Elected to CII Board of Directors: CII announced that Yumi Narita, executive director of corporate governance for the New York City Retirement System, was elected on March 7th as the newest member of CII's Board of Directors for 2022-2023. Narita takes the seat formerly held by Mansco Perry, who is retiring this year from his position as executive director and CIO of the Minnesota State Board of Investment.

Martha Legg Miller to Depart SEC: The SEC announced that Martha Legg Miller, the Director of its Office of the Advocate for Small Business Capital Formation (OASB), will leave the agency at the end of April. She's served as the OASB's Director since it was first established in 2018. The OASB's current Deputy Director, Sebastian Gomez Abero, will serve as Acting Director after Martha Legg Miller's departure.

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