A Look Back and A Glimpse Forward: The SEC’s Agenda

Introduction

The year 2021 ushered in many new changes for the Securities and Exchange Commission (SEC). The SEC swore in a new chair, Gary Gensler, appointed a new director of the Division of Enforcement, Gurbir S. Grewal, and announced a robust 2021 rulemaking agenda that included requiring disclosures related to climate risk and human capital, including diversity, enhancing shareholder democracy, adopting changes to the 10b5-1 regime, mandating certain electronic filings and much more. This article offers a look back at how the SEC has instituted these initiatives through proposed and final rulemaking in 2021 and a glimpse forward on what to expect from the SEC in 2022.

A Look Back to 2021

• Climate Risk, Human Capital and Diversity

Due to the profound impact corporations have on social, economic and climate conditions, there has been an increasing demand for disclosures on environmental, social and governance (ESG) issues. To facilitate the ongoing work needed to improve corporate disclosures related to ESG, the SEC announced in March 2021, the creation of the Climate and ESG Task Force in the Division of Enforcement led by Kelly L. Gibson, acting deputy director of enforcement.

• Climate Change

Although the SEC had issued previous guidance on climate change disclosures such as the 2010 Interpretive Guidance on Disclosures Related to Business or Legal Developments Regarding Climate Change, in 2021, Gensler and his staff set out to address the demand for additional guidance and recommendations on addressing climate change in governance and risk assessments. In September 2021, the SEC released a sample letter to issuers identifying common questions and comments related to corporate compliance with the 2010 guidance and climate-related disclosures that may be sent by the SEC to issuers. Examples of comments include flagging potential discrepancies between a company’s sustainability report or corporate social responsibility report and its SEC filings and encouraging additional climate related disclosures in a company’s management’s discussion and analysis of financial condition and result of operations and risk factors sections. What the effect of these comments will be, only time will tell.

• Human Capital and Diversity

In 2020, the SEC amended Item 101 of Regulation S-K to require disclosures related to companies’ human capital resources. The amendment was not prescriptive at all but rather left companies to a principles-based approach when discussing how human capital is managed within an organization. In interesting note about the amendment is that it did not explicitly address diversity, equity or inclusion (DEI) or matters around DEI such as the metrics required to measure DEI. With respect to diversity, although the SEC issued rules back in 2009 regarding diversity disclosure, no further mandates have come to pass.  Of note is that there has historically been a lack of diversity and inclusion on corporate boards of directors. On June 25, 2021, the Harvard Law School Forum on Corporate Governance published a multi-year study conducted by Alliance for Board Diversity and Deloitte & Touche on diversity among Fortune 500 boards of directors which revealed that of the 974 board seats filled by new directors, 81% were filled by white directors with 54.8% filled by white men. Similarly, in 2019 a report titled Quorum: LGBT+ Board Diversity and Disclosure Guidelines was published by Out Leadership, a global network of LGTBT+ business leaders and companies, which estimated that less than 0.3% of Fortune 500 board directors are openly lesbian, gay bisexual, transgender, queer, asexual or other (LGBTQA+). To combat these disparities, many states have proposed rules regarding increasing diversity on boards and in the fall of 2021, the SEC approved a Nasdaq rule requiring each Nasdaq-listed company to have at least two diverse board members or to explain why they are unable to meet this requirement by certain deadlines. In addition, the Nasdaq diversity rule enhanced disclosures of board members voluntary self-identified information on gender, race, and LGBTQA+ status by requiring a matrix that identifies the number of directors by gender identity and demographic background.  Many corporations, even if not listed on Nasdaq are working to improve their board diversity in light of this rule as well as calls for change from investors.

• Shareholder Democracy

 The preservation of shareholder’s rights and ability to exert influence on corporate governance is often considered essential to keeping corporations and their boards of directors accountable. To enhance shareholder democracy, the SEC proposed rules and guidance on shareholder voting and shareholder proposals in the fall of 2021.

• Shareholder Proposals

On Nov. 3, 2021, the SEC rescinded previous guidance on shareholder proposals and issued Staff Legal Bulletin No. 14L (Bulletin No. 14L). Bulletin No.14L refined the standards for the ordinary business exception in Rule 14a-8(i)(7) and the economic relevance section of Rule 14a-8(i)(5) to reduce the ability to exclude ESG proposals by shareholders. According to Gensler, shareholders right to put proposals in front of other shareholders is fundamental to securities laws. Bulletin No. 14L also provided clarity around procedural bases for exclusion of shareholder proposals including the 500 word limit, proof of ownership letters, and email submissions of proposals.

• Universal Proxy Cards

The SEC adopted a final rule requiring the implementation of universal proxy cards that include all dissident and registrant director nominees in contested elections. The final rule was aimed at eliminating the discrepancy in voting between shareholders voting by proxy and those voting in person by allowing shareholders voting by proxy to vote for a combination of dissident and registrant nominees. The universal proxy card improves the uniformity and efficiency of the shareholder voting process.

• Rule 10b5-1

Insider trading laws restrict persons from trading if they have access to or possess material nonpublic information. Rule 10b5-1 provides an affirmative defense to insider trading prohibitions. To establish a valid affirmative defense, an insider must meet certain

requirements, including adopting a selling or purchasing plan in good faith prior to receiving the material nonpublic information; specifying the amounts, price and date of securities and providing written instructions as to transacting in such securities; and purchasing or selling the securities only pursuant to such plan through a broker in a nondiscretionary form.

On Dec. 15, 2021, the SEC proposed to amend Rule 10b5-1 that generally restrict by adding parameters around the use of 10b5-1 plans. For example, the amendment requires a minimum cooling-off period of four months between the time of putting the plan in place and the first time the plan can be triggered; the amendment prohibits the overlapping of Rule 10b5-1 plans; and finally, the amendment requires disclosures related to Rule 10b5-1 plans in securities filings. The proposed amendment comes after two decades of the SEC hearing concerns around, and seeing gaps in Rule 10b5-1. Gensler suggests that if implemented, the proposed rule will increase investor confidence and improve capital formation.

• Mandating Electronic Filings

The changes brought by the coronavirus (Covid-19) pandemic heightened the need for businesses to adapt their infrastructure to meet the growing digitalization of the world. The SEC has historically allowed and at times required submission of paper filings. To promote efficiency and embrace modernity, the SEC proposed rule and form amendments to the EDGAR filing requirements to mandate electronic filings for submissions under Rule 101(b) of regulation S-T, for glossy annual reports, for certifications under 15 U.S.C. 78l(d), and for foreign language documents.

• A Look Forward to 2022

The year 2022 is likely to bring many more changes in the securities world. In addition to the adoption of the proposed rules discussed above, we expect the SEC to pursue a far more aggressive enforcement agenda without necessarily increasing the number of actions. In 2021, the SEC saw a 3% decline in the number of enforcement actions from the previous fiscal year. Additionally, the SEC pursued the lowest amount of enforcement actions against public companies in the last several years. However, at the Securities Enforcement Forum on Nov. 4, 2021, Gensler emphasized the importance of pursuing high impact cases to “send a message to the rest of the market, to participants of various sizes, that certain misconduct will not be permitted.” It has been predicted that 2022 enforcement actions will focus on the following areas—insider trading; ESG; cryptocurrency and other digital assets; “first-of-its-kind” novel legal issues; and individual “gatekeepers” such as accountants, auditors, attorneys and compliance officers.

As corporations seek to provide disclosures on current and novel topics such as ESG and human capital, it is imperative that their leaders and advisers study the SEC’s guidance, including proposed rules, and prepare themselves by thinking about what regulators and all stakeholders including shareholders, employees and members of the community are expecting in regards to corporate disclosures and more importantly corporate action.

Katayun I. Jaffari is chair of the corporate governance group and co-chair of the capital markets &securities and ESG groups at Cozen O’Connor. She counsels public and private companies in the areas of corporate governance and securities law and compliance, including capital-raising transactions and reporting requirements under SEC, NYSE and Nasdaq regulations, as well as providing general corporate advice and execution with respect to executive compensation, mergers and acquisitions transactions and board and business counseling, including with respect to ESG and DEI matters. She can be reached at [email protected]  or 215-665-4622.

Rikisha Collins is an associate in the firm’s corporate department. She assists clients with general corporate, securities, capital markets and governance matters. She can be reached at [email protected] or 215-366-4464.