SEC Brings Charges for Failure to Disclose Pledges of Securities

On August 19, 2024, the SEC announced charges against Carl C. Icahn and his publicly traded company, Icahn Enterprises L.P. (“IEP”), for failing to disclose information relating to Mr. Icahn’s pledges of IEP securities as collateral to secure personal margin loans. Specifically, the SEC’s orders found that Mr. Icahn violated Section 13(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 13d-2(a) thereunder, and that IEP violated Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. The orders require IEP and Icahn to pay $1.5 million and $500,000 in penalties, respectively, and evidence the SEC’s continued focus on beneficial ownership disclosures by institutional investors, as well as the need for issuers to establish and maintain robust disclosure controls and procedures.

This most recent SEC enforcement action on repeat Section 13(d) and Section 16(a) offenders is similar to enforcement sweeps conducted in 2014 and 2015. In those cases, both issuers and insiders were cited for various failures to file or update beneficial ownership reports under Section 13 and Section 16, with the 2015 cases focusing on Schedule 13D updates in the context of take-private transactions. More recently, in 2020, the SEC announced the settlement of charges against an investment adviser for failing to amend a Schedule 13D relating to a change in investment intent and disposal of shares.

As was the case following the 2014 and 2015 enforcement sweeps, public companies and their insiders should consider these enforcement actions as a warning that the SEC continues to closely monitor compliance with Sections 13 and 16 of the Exchange Act. In addition, these actions reaffirm the SEC’s long-established stance that reporting persons cannot discharge their filing responsibilities by tasking the issuer, broker or outside counsel to handle the filings, while issuers that assume such responsibility may also be held accountable for negligently contributing to the insiders’ reporting violations.

For more information, see Debevoise Insights.

2024 Proxy Season Review

The 2024 proxy season was characterized by a high volume of shareholder proposals submitted to companies, including proposals relating to issues such as artificial intelligence (“AI”) and political lobbying and spending. In addition, the number of no-action requests submitted to the SEC increased compared to 2023.

Exclusion of Shareholder Proposals

In response to the record number of Rule 14a-8 shareholder proposals submitted in 2024, companies increasingly turned to the SEC no-action relief process to seek approval for exclusion. As of June 30, 2024, 224 requests for no-action relief, or approximately one request for every three shareholder proposals, were submitted as compared to 171 requests, or one request for every four shareholder proposals, as of June 30, 2023. The SEC granted relief to 94, or 42%, of these requests, as compared to 77, or 45%, of these requests in 2023. The most successful bases for the exclusion of shareholder proposals in 2024 were that: (i) the proponent failed to follow correct procedures in submitting the proposal, including untimely submissions; (ii) the proposal related to the company’s ordinary business operations; and (iii) the proposal would, if implemented, cause the company to violate the law.

Investor Activism Continues to Increase

2024 was the second full proxy season following the effectiveness of Rule 14a-19 under the Exchange Act, which requires management and dissident shareholders to use universal proxy cards in contested elections. The number of board seat contests increased in 2024. However, the universal proxy rules do not appear to have tipped the scale markedly in favor of activists: of the 455 board seats sought by activists as of June 30, 2024, approximately 10% were obtained by activists, either through a vote or settlement, as compared to 349 seats sought in the comparable period in 2023, of which 12.5% were won by activists.

Shareholder Proposals

Over 730 Rule 14a-8 shareholder proposals had been submitted to companies as of June 30, 2024, slightly more than the 723 and 688 proposals submitted in the comparable period in 2023 and 2022, respectively. As of June 30, 2024, shareholders have voted on 582 ESG-related proposals, including proposals critical of a company’s stance on “traditional” ESG policies (sometimes referred to as “anti-ESG” proposals), a decrease from 623 ESG-related proposals voted on in 2023. Investor focus on AI increased in 2024, commensurate with increased disclosures by companies regarding their use of or plans to use AI in their business operations. Twelve proposals relating to AI were submitted as of June 30, 2024, as compared to four in 2023. Generally, AI-related proposals received low shareholder support, and none of the proposals passed.

Say on Pay

Investor support for say-on-pay proposals continued to be strong, with an average of 97.7% of votes cast in favor of such proposals, a slight increase from 97.4% in 2023.

For more information, see Debevoise Insights.

SEC Charges Former Finance Director with Accounting Fraud

On September 5, 2024, the SEC announced fraud charges against a former finance director of a publicly traded manufacturer. The SEC alleges that the finance director’s fraudulent actions led to the company making materially misleading statements about its financial performance from 2019 through 2021. The SEC also announced related settled internal accounting charges against the company.

According to the SEC’s order, the company’s material financial reporting errors largely stem from its failure to devise and maintain sufficient internal accounting controls. These control failures principally arose from the company’s: (1) failure to ensure adequate segregation of duties concerning the preparation and reconciliation of business unit financial statements and accounting systems access; and (2) inadequate monitoring of bank accounts and related activity.

The SEC charged the company with violations of Section 13(a) of the Exchange Act and Rules 13a-1, 13a-11 and 13a-13 thereunder, which require issuers of securities registered pursuant to Section 12 of the Exchange Act to file periodic reports; Section 13(b)(2)(A) of the Exchange Act, which requires reporting companies to make and keep books, records and accounts that, in reasonable detail, accurately and fairly reflect their transactions and dispositions of their assets; and Section 13(b)(2)(B) of the Exchange Act, which requires reporting companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances. The SEC did not impose a penalty on the company in light of the company’s self-reporting of accounting errors to the SEC as well as the cooperation provided, and remedial measures taken, by the company throughout the SEC’s investigation.

For more information, see the SEC’s press release.

Reminder: Compliance with Amendments to Beneficial Ownership Reporting Rules Starts on September 30

The new accelerated Schedule 13G filing deadlines will become effective on Sept. 30, 2024. The new filing deadlines are part of the beneficial ownership “modernizing” rule amendments adopted by the SEC on October 10, 2023. The changed Schedule 13G deadlines apply to both initial filings and amendments and affect all types of investors that use Schedule 13G to report greater than 5 percent beneficial ownership of public company securities. See below for details about new Schedule 13G deadlines:

• For qualified institutional investors, the amendments require a Schedule 13G amendment within either (i) 45 business days after the calendar quarter-end in which a material change occurred or (ii) five business days after the month-end in which beneficial ownership of a class of equity securities exceeds 10% or, thereafter, a 5% increase or decrease in beneficial ownership of a class of equity securities occurred.

• For passive investors, the amendments require a Schedule 13G amendment within either (i) 45 days after the calendar quarter-end in which a material change occurred or (ii) two business days after beneficial ownership of a class of equity securities exceeds 10% or a 5% increase or decrease in beneficial ownership occurs.

• For exempt investors, the amendments require a Schedule 13G amendment within 45 days after the calendar quarter-end in which a material change occurred.

For more information, see Debevoise Insights.

SEC Bring Charges for Inaccurate Statements Regarding Recyclability of Plastic Products

On September 10, 2024, the SEC announced settled charges against a beverages and consumer products company for making inaccurate statements regarding the recyclability of its single-use beverage products. The company agreed to pay a $1.5 million civil penalty to settle the SEC’s charges. The company had stated in annual reports for fiscal years 2019 and 2020 that its testing with recycling facilities “validate[d] that [single-use beverage products] can be effectively recycled.” The company failed to disclose, however, that two of the largest recycling companies in the United States expressed significant concerns to the company regarding the commercial feasibility of curbside recycling of single-use beverage products beginning in 2016. In fiscal year 2019, sales of single-use beverage products comprised a significant percentage of net sales of the company’s coffee systems business segment, and research earlier conducted by a subsidiary indicated that environmental concerns were a significant factor that certain consumers considered, among others, when deciding whether to purchase a brewing system from the company.

For more information, see the SEC’s press release.

SEC Defends Climate Disclosure Rule in the Eighth Circuit

On August 6, 2024, the SEC filed its defense of its climate rule in the U.S. Court of Appeals for the Eighth Circuit and responded to arguments laid out in consolidated challenges to the rule. The SEC argued that the rule would provide “information directly relevant” to investment decisions, that climate-related risks can significantly impact a company’s financial performance and that current reporting on these risks is inconsistent, making it difficult for investors to make informed decisions.

The rule, adopted in March after two years of development in response to the extensive comments the SEC received on the rule proposal, requires public companies to disclose climate risks, strategies to address them, the financial impact of severe weather events and, in some cases, greenhouse gas emissions. The rule faced immediate legal challenges, including lawsuits from 25 Republican state attorneys general and the U.S. Chamber of Commerce, who argued, among other things, that the requirements are overly burdensome and beyond the SEC’s delegated authority.

For more information, see Debevoise Insights.

European Commission Releases FAQs on Corporate Sustainability Reporting Directive

On August 7, 2024, the European Commission published frequently asked questions (the “FAQs”) to guide compliance with the Corporate Sustainability Reporting Directive (the “CSRD”). The FAQs cover, among other things, the scope of the CSRD, which sets of European Sustainability Reporting Standards companies should use, exemptions from the CSRD and formatting requirements for CSRD reporting. The FAQs clarify that, in terms of supervision and penalties, the “CSRD does not introduce any changes to the pre-existing European Union supervisory regime.” CSRD reports will therefore be subject to the existing national regulatory regimes in place for the management reports of in-scope companies.

The FAQs also cover the assurance requirement for CSRD reporting, providing guidance on the approval and training requirements for auditors and the accreditation requirements for independent assurance service providers. The FAQs are not intended to introduce additional requirements.

For more information, see Debevoise Insights.

SEC Rule-Making Agenda

The SEC’s Spring 2023 Regulatory Agenda was posted earlier this year. A summary of key rule changes is included below. We expect the Fall 2024 Regulatory Agenda to be released by January 2025. For more information, see the full regulatory agenda here.

This publication is for general information purposes only. It is not intended to provide, nor is it to be used as, a substitute for legal advice. In some jurisdictions, it may be considered attorney advertising.