Last week, the SEC Division of Examinations issued a risk alert describing observations from recent examinations of investment advisers that manage and offer ESG investment options.  The Risk Alert highlights observed deficiencies in several key areas that we expected the Staff to scrutinize using its traditional regulatory arsenal:  advisers’ practices inconsistent with ESG disclosures, unsubstantiated or potentially misleading ESG claims, proxy voting practices inconsistent with ESG disclosures, and inadequate compliance programs or policies in the ESG area.  Notably, the Risk Alert also identifies three observed “effective practices”:  disclosures that were clear, precise and tailored to advisers’ specific ESG approaches; detailed compliance policies addressing advisers’ ESG investing approaches and practices; and compliance personnel knowledgeable about advisers’ ESG practices.

The Risk Alert provides the clearest roadmap to date of the areas the staff will focus on when reviewing ESG investing and the ways the staff will use current regulatory tools and requirements to remind advisers of the SEC’s expectations and shape their behavior.  It also appears to raise the bar for advisers’ compliance personnel, whom the staff expects to be knowledgeable about advisers’ ESG investment analyses, practices, approaches and disclosures, as well as to be integrated and play an active role in overseeing advisers’ ESG-related processes.

Please click here to read the full alert memorandum.

Last week, John Coates, the Acting Director of the SEC’s Division of Corporation Finance (“Corp Fin”), released a statement discussing liability risks in de-SPAC transactions.

The statement focused in particular on the concern that companies may be providing overly optimistic projections in their de-SPAC disclosures, in part based on the assumption that such disclosures are protected by a statutory safe harbor for forward-looking statements (which is not available for traditional IPOs).  Director Coates’s statement questions whether that assumption is correct, arguing that de-SPAC transactions may be considered IPOs for the purposes of the statute (and thus fall outside the protection offered by the statutory safe harbor).  He therefore encourages SPACs to exercise caution in disclosing projections, including by not withholding unfavorable projections while disclosing more favorable projections. Continue Reading Acting Director of SEC’s Corp Fin Issues Statement on Disclosure Risks Arising from De-SPAC Transactions

On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021 (the “ARPA”), the much-debated $1.9 trillion COVID-19 stimulus legislation. The ARPA includes a provision, added by Senate amendment on March 6, 2021, which will further limit the deductibility of amounts deemed to be “excessive employee remuneration” under Section 162(m) of the Internal Revenue Code of 1986, as amended (“Section 162(m)”) for tax years starting after December 31, 2026. This change comes on the heels of other recent expansions of Section 162(m).

Section 162(m) generally limits the amount of compensation expense that a public company may deduct each tax year, disallowing deductions for compensation over $1 million with respect to each of the company’s “covered employees.” Under current law, the covered employees are generally the company’s CEO, CFO and its three other most highly compensated officers, along with individuals who have been previously deemed to be covered employees of the company. Under the ARPA, covered employees will expand to include the next five highest compensated employees of the company; however this new group of employees will not retain the perpetual covered employee status and will be determined annually.  This provision is projected to generate $7.8 billion in revenue by 2031.

This memorandum discusses the implications of this ARPA provision, particularly in light of other recent changes to Section 162(m).

On Wednesday, March 10, after engaging in conversations with stakeholders, the U.S. Department of Labor’s Employee Benefits Security Administration issued an enforcement policy statement in which it declined to enforce two DOL rules put in place by the Trump administration in 2020.

The first of these rules placed limitations on the ability of plans subject to ERISA to invest in environmental, social and governance (“ESG”) funds. In particular, it provided that a fiduciary’s duty of loyalty and prudence under ERISA would only be satisfied if investments were selected solely on the basis of pecuniary factors (defined as factors that have a material effect on the risk and return of an investment), and that ESG factors could only be considered to the extent they created economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories. The ESG rule, which many regarded as making ERISA plan investments in ESG-oriented funds prohibitively difficult, received overwhelmingly negative comments from both financial institutions and the public at large. This latest development is not surprising, as the Biden administration had previously signaled that it would be reexamining this rule. Continue Reading DOL Declines to Enforce Trump Administration Rules on ERISA Plan Investments, Proxy Voting

On March 3, 2021, the U.S. Securities and Exchange Commission (“SEC”) Division of Examinations (the “Division”)—formerly the Office of Compliance Inspections and Examinations—released its 2021 Examination Priorities (“2021 Priorities”).  The 2021 Priorities generally retain perennial risk areas as the Division’s core focus, but do include several new and emerging risk areas reflecting broader policy shifts under new SEC leadership.

The 2021 Priorities include:  retail investors; information security and operational resilience; financial technology (“Fintech”), including digital assets; anti-money laundering; transition from the London Inter‑Bank Offered Rate (“LIBOR”); several areas covering registered investment advisers and investment companies; market infrastructure; and oversight of the Financial Industry Regulatory Authority and Municipal Securities Rulemaking Board programs and policies.  Although not formal priorities, the Division will also focus on climate-related risks and environmental, social and governance (“ESG”) matters in light of recent market developments and broader attention in these areas. Continue Reading Turning the Page: Highlights of the SEC’s Division of Examination’s 2021 Priorities

On February 26, 2021, the Delaware Court of Chancery (McCormick, V.C.) issued a memorandum opinion in The Williams Companies Stockholder Litigation enjoining a “poison pill” stockholder rights plan adopted by The Williams Companies, Inc. (“Williams”) in the wake of extreme stock price volatility driven by the double whammy of COVID-19 and the Russia-Saudi Arabia oil price war.  While the pill adopted by the board in this case had unusual features (such as a 5% trigger and a broad “acting in concert” provision), the Court’s decision provides important reminders for boards in considering whether (and when) to adopt a poison pill in the face of a threat to the corporation.  This includes the types of “threats” that will justify the adoption of a pill, and the scope of protections that will be considered a “proportionate” response to those legitimate threats.  Although the Court struck down the pill in this case, that should not prevent boards from considering adoption of a pill in a situation where they are facing an identifiable threat, whether from a potential takeover or activist shareholder, and tailoring the terms of such a pill to the threat posed.

Please click here to read the full alert memorandum.

Corporate investigations under the Biden Administration’s Department of Justice (“DOJ”) are expected to increase in the coming months.  Navigating such investigations can be complex, distracting, and costly, and comes with the risk of prosecution and significant collateral consequences for the company.  Recently, Cleary Gottlieb partners and former DOJ prosecutors, Lev Dassin, Jonathan Kolodner, and Rahul Mukhi, published a chapter on “Representing Corporations in United States Attorney’s Office and DOJ Investigations,” which can serve as a useful guide for in-house counsel to prepare for an investigation or manage an ongoing matter.  The chapter, available here, covers topics including DOJ’s organizational structure, the typical path of a corporate criminal investigation, recent policy initiatives at DOJ that reflect an effort to provide greater transparency with respect to corporate investigations, the process by which federal prosecutors make critical decisions about filing charges and resolving investigations, and the opportunities for counsel to advocate for their clients along the way.

Cleary Gottlieb’s “2020 Developments in Securities and M&A Litigation” discusses major developments from 2020 and highlights significant decisions and trends ahead.

In Liu v. SEC, the most notable securities decision of 2020, the Supreme Court cemented but limited the SEC’s authority to seek disgorgement as “equitable relief” for a securities law violation.

The Circuit courts also issued opinions that impact shareholder suits alleging violations of the securities laws, addressing both the standards district courts must use in considering defendants’ efforts to rebut the fraud-on-the-market presumption of reliance by showing a lack of price impact, as well as the validity of the “price maintenance” theory of inflation. A decision from the Second Circuit also provided helpful guidance concerning the requirements for pleading scienter in securities actions and the Supreme Court granted certiorari in the matter. The Ninth Circuit also weighed in on whether unproven allegations in whistleblower lawsuits and short-seller reports may constitute corrective disclosures in fraud-on-the-market securities cases.

Please click here for a PDF version of 2020 Developments in Securities and M&A Litigation.