Securities and Exchange Commission Investor Advisory Committee Meeting

Securities and Exchange Commission

Investor Advisory Committee Meeting

Monday, May 4, 2020

Welcome Remarks

Anne Sheehan, Chair of the Securities and Exchange Commission (SEC) Investor Advisory Committee (IAC), summarized the meeting agenda before welcoming the remarks of Chairman Clayton and the other Commissioners. Chairman Clayton stated that the purpose of this meeting is to focus on issuer-investor engagement, specifically regarding disclosure considerations, in the context of the challenges posed by the COVID-19 pandemic. He praised the work of SEC, specifically the SEC Division of Corporation Finance, and outlined the SEC’s continued engagement with market participants, including retail and institutional investors, investor advocates, auditors, public company executives and board members. In keeping with these conversations, Clayton emphasized that the SEC remains focused on critical issues such as keeping markets functioning and the importance of keeping investors apprised about the evolving impact of COVID-19. He concluded by encouraging all market participants to continue their dialogue with the SEC to ensure that the public disclosure of material information as well as shareholder engagement remains robust throughout these unprecedented times. Commissioners Peirce, Roisman, and Lee echoed the Chairman’s comments regarding the need for cooperation between the SEC and market participants, especially investors, in order to ensure proper functioning of the public company disclosure framework.

Discussion of Public Company Disclosure Considerations in the COVID-19 Pandemic Context

Overall, IAC members praised the SEC for their decisive action in response to the effects of the COVID-19 pandemic, specifically how the response gave the markets a combination of confidence and flexibility. Jerome Solomon, Capital Group, emphasized the importance of the SEC’s work regarding disclosure requirements, stating that a lack of information in this environment will increasingly generate problems for the financial markets. Damon Silvers, AFL-CIO, echoed these comments on the importance of proper material information disclosure in creating a fair and value-creating economy, something he posited will be a critical part of the solution in attempting to emerge from the COVID-19-induced economic downturn.

Anne Simpson, California Public Employees’ Retirement System, stated that they would like to see increased human capital management reporting and the committee, as well as the SEC, should use the experience gleaned from the response to COVID-19 to prepare for climate change standard setting in the disclosure reporting space.

Barbara Roper, Consumer Federation of America, commented that the SEC’s focus on disclosure has been timely and thoughtful. She stated that the engagement should continue in order to determine what has worked, what hasn’t worked, and where it is appropriate to make adjustments in the financial reporting system. She posed the question of whether there is more to be done to gain increased insight into possible supply chain breakdowns and external threats to the workforce.

Mina Nguyen, Jane Street Capital, said companies should examine whether their contingency plans materialized the way they intended and how they can learn from that. She added that from a capital markets perspective, it is still unclear how financial services firms can return to normal operations, how trading operations will resume, and how exchanges will return, but transparency and clarity will be important throughout the process.

Jennifer Marietta-Westberg, Cornerstone Research, said that in an analysis of various form filings from January to the beginning of May, they found about 56 percent specifically reference COVID-19, and nearly 67 percent of 8-K filings reference COVID-19. She noted that this is a good time for firms to think about their internal disclosure designs, determine what is working and what is not, and apply that knowledge going forward.

Paul Mahoney, University of Virginia School of Law, noted that the purpose of disclosure is to correct asymmetries between what is known by management and investors, and it would be useful for the SEC to highlight that companies should inform investors about things that may not have occurred to them or may not be obvious challenges for the company in this time such as the ability to work remotely, maintain safety when restarting, and supply chain issues as this would be particularly useful for investors. Rick Fleming, SEC, noted that some things that were not as important to the consumer before the pandemic are growing in importance such as paid sick leave and other aspects of human capital management, which could translate to what becomes important to investors as well. Allison Bennington, ValueAct Capital, said this could be a “wake up call” as to why environmental, social, and governance (ESG) disclosures are relevant and that the COVID-19 situation is showing that those factors are material.

John Coates, Harvard Law School, noted that if investors are receiving detailed numerical information coupled with very generic statements, it could contribute to an atmosphere where the market is less informed than it needs to be. He said there is a growing concern that more companies will go bankrupt and bankruptcies will hit investors unaware.

Clayton agreed with the statement that the asymmetry areas have changed with the pandemic and there is now a shared uncertainty and items that companies wish they knew that they cannot, especially concerning testing, vaccines and who is most at risk. He said the SEC is thinking about ways to enhance their ability to operate remotely and instill confidence in the markets. He added that human capital is a crucial area of focus that speaks to a company’s ability to operate but has proven to be a challenging issue.

Peirce said the SEC does not intend to undertake any “backdoor rulemaking,” though there may be changes made down the line. She said that while we can consider certain aspects of ESG, it is not the time to mandate that anyone do anything in particular on the subject. Roisman added that ESG has a different definition for everyone, but that it is important for investors to understand how companies are managing their human capital and protecting their employees as they restart.

Lee expressed appreciation for input on what types of human capital disclosures might be useful now for investors, especially as we work to restart the economy, adding that she hopes the SEC will consider whether it needs to supplement its guidance on “what investors really need to hear.”

Discussion of Public Company Shareholder Engagement/Virtual Shareholder Meetings in the COVID-19 Pandemic Context

Sheehan noted that most companies have pivoted to holding virtual shareholder meetings this year as a result of the pandemic, adding that the height of shareholder meeting season is coming up. She said that although this is traditionally an area governed by state law, the SEC can make statements about the importance of shareholder engagement.

Coates said that there have been different reactions to these virtual meetings, with some constituencies unhappy with how they have been run, saying this is something the SEC should consider as part of its ongoing review of the proxy system. Silvers noted the participation of beneficial owners in virtual meetings has become difficult.

Committee members agreed that the SEC can draw lessons from the experience of virtual shareholder meetings and acknowledged that as with many adjustments to normal business that have had to be made as a result of the pandemic, there will be a learning curve. Holmes said that the objective of these virtual meetings should be to replicate as closely as possible the processes of shareholder meetings and companies should not deny shareholders the rights they have at in-person meetings. Roper added that virtual engagement could increase and improve shareholder participation.

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