April 2023 in Brief: Securities Law

Internal Control Organization Issues Guidance on Sustainability Controls

By Thomas W. White, Retired Partner, WilmerHale

“COSO,” an organization sponsored by several major associations of accountants, financial executives, and internal auditors, promulgates the leading framework for designing, implementing, and assessing internal control over a company’s operations, reporting, and compliance. COSO’s Internal Control—Integrated Framework (2013) is used by most US public companies to perform the management assessments and external audits of internal control over financial reporting required by section 404 of the Sarbanes-Oxley Act. (Notably, the COSO Framework is broader than just financial reporting, covering also operational controls and legal and regulatory compliance controls.) The COSO Framework consists of five components of internal control, each of which contains three to five principles, for a total of seventeen principles.

In late March, COSO released a report providing supplementary guidance on the application of the COSO Framework to sustainability (or ESG [environment, social, and governance]) reporting. Using the term “internal control over sustainability reporting,” or ICSR, the new guidance responds to the increased emphasis on disclosure of sustainability/ESG information among companies, regulators, investors, and other stakeholders. According to COSO, “there is a need among all stakeholder groups for effective controls and oversight so that this information is high-quality and fit for purpose: decision making in this changing world.” COSO presents the existing internal control Framework as a “good starting point” for implementing ICSR, with the addition of “the concept of organizational commitment to integrity and purpose, which is an important aspect of sustainability.” The ICSR guidance explains and interprets each of the seventeen principles and related “points of focus” in the COSO Framework as it may apply to sustainability.

In a press release, COSO says that it believes use of the COSO Framework for ICSR “will build trust and confidence in ESG/sustainability reporting, public disclosures, and enterprise decision-making.” The report emphasizes, however, that the report is a “nonauthoritative, interpretative publication” representing only the views of its authors. 

SEC Reopens Comment Period for Beneficial Ownership Reporting Rule Changes

By Alan J. Wilson, WilmerHale

On April 28, 2023, the Securities and Exchange Commission (SEC) reopened the comment period for its proposed amendments to modernize the rules around beneficial ownership reporting. The staff of the SEC Division of Economic and Risk Analysis issued a memorandum, providing supplemental data and analysis with regard to the proposed amendments’ economic effects. More specifically, the memorandum provides additional baseline data on Schedule 13D and 13G filings and contains analysis of the potential effects of the proposed rule change on activism and analysis of potential harms to certain selling shareholders that may result under the existing filing deadline

See this February 2022 post regarding the proposed amendments to Schedules 13D and 13G relating to beneficial ownership reports.

The comment period will remain open until the later of June 27, 2023, or thirty days from the date of publication of the reopening release in the Federal Register.

SEC Extends Period to Act on Clawback Listing Standards

By Alan J. Wilson, WilmerHale

On April 24, 2023, the SEC posted notice that it would designate a longer period for taking action on the listing standards proposed by Nasdaq (link to proposed listing standard) and NYSE (link to proposed listing standard) to implement Rule 10D-1, the Dodd-Frank rule regarding recovery of erroneously awarded incentive-based compensation. In each instance, the SEC designated June 11, 2023, as the date by when the SEC will either approve or disapprove, or institute proceedings to determine whether to disapprove, of the proposed rule changes. If the SEC approves the rules on June 11, 2023, and the rules remain unmodified from their current proposed form, issuers will be required to have a compliant clawback policy in place by August 2023 (within sixty days of the effective date).