TheCorporateCounsel.net

April 29, 2016

Non-GAAP Disclosures: The Gloves Are Off

Companies have been making non-GAAP disclosures for quite some time now. Perhaps spurred by recent remarks from SEC Chair White, SEC Commissioner Stein (remarks during PCAOB budget meeting) and SEC Chief Accountant Schnurr, it appears that the media is now tackling this topic. For example, the NY Times’ Gretchen Morgenson penned a column entitled “Fantasy Math Is Helping Companies Spin Losses Into Profits.”

In response, Fred Wilson blogged a rebuttal to Gretchen. Here’s an excerpt:

The truth is the the accountants who run the accounting standards have forced companies into reporting their financials in a certain way that neither the companies nor the sophisticated investors who own many of these companies’ shares believe accurately represents the financial condition of the reporting companies. Gretchen quotes this stat in her piece: “According to a recent study in The Analyst’s Accounting Observer, 90 percent of companies in the Standard & Poor’s 500-stock index reported non-GAAP results last year, up from 72 percent in 2009.”

That sure feels like the market speaking. When 90% of your customers order the scrambled eggs differently than you normally serve them that tells you something.

My pet issue is stock based compensation. When a company issues options to an employee, accounting standards require that the option be valued (usually by a formula called Black Scholes) and expensed over the vesting period. That sounds reasonable. But the truth is that that option may end up being worth nothing. Or it may end up being worth 10x the value that it was expensed at. By taking out the stock based comp expenses and reporting an “adjusted EBITDA” number that does not include it, companies are giving investors an idea of what the earnings power of the company is without this theoretical expense. And that stock based compensation expense is a non-cash expense meaning that even though it theoretically costs the company something, it is not paid in cash but in dilution of the total number of shares outstanding.

This is not a cut and dried issue. Different investors will approach it differently depending on whether they care about cash flow, long term dilution, or something else. But the accountants who control the accounting standards board require a certain way of presenting these numbers and that is that.

Check out the resources in our “Non-GAAP Disclosures” Practice Area, including these memos (love the top one with practice tips) and our new “Non-GAAP Financial Measures Handbook”…

SEC Enforcement & Non-GAAP Measures

Here’s a note from Troutman Sanders’ Brink Dickerson:

While the recent SEC’s enforcement settlement with Cabela’s involved several different accounting issues, the most interesting was its miscalculation of a measurement – “merchandising gross margin” – that it held out in its MD&As and elsewhere as an important measurement of performance. The underlying error, a failure to eliminate an intercompany account, resulted in the overstatement of this measurement as well as period-over-period improvement that really did not exist. It appears, however, that the error did not flow through to the company’s GAAP financial statements, where the eliminations were appropriate.

While the performance measurement may – or may not – be a non-GAAP measure, the enforcement action highlights the importance of calculating performance measurements, including non-GAAP measures, with accuracy and providing transparency into their calculation.

It’s Done: 2017 Edition of Romanek’s “Proxy Season Disclosure Treatise”

We have wrapped up the 2017 Edition of the definitive guidance on the proxy season – Romanek’s “Proxy Season Disclosure Treatise & Reporting Guide” – and it’s done being printed. With over 1500 pages – spanning 32 chapters – you will need this practical guidance for the challenges ahead. Here’s the Detailed Table of Contents listing the topics so you can get a sense of the Treatise’s practical nature. We are so certain that you will love this Treatise, that you can ask for your money back if unsatisfied for any reason. Order now.

Broc Romanek

April 28, 2016

Survey Results: Impact of Auditing Standard #18 on D&O Questionnaires

Here’s the survey results from this survey about how Auditing Standard #18 is impacting D&O questionnaires:

1. Did you update your D&O questionnaire in response to the PCAOB’s new Audit Standard #18 regarding related-party transactions?
– Yes – 66%
– No – 34%
– It hasn’t come up yet – 0%

2. Did your independent auditors ask for a list of immediate family members of directors and officers?
– Yes – 65%
– No – 31%
– It hasn’t come up yet – 4%

3. Did your auditors also ask for information regarding entities over which your directors, officers & their immediate family members control or have significant influence?
– Yes – 65%
– No – 30%
– It hasn’t come up yet – 6%

4. If you did update your D&O questionnaire, did your auditor ask you to do so?
– Yes – 44%
– No – 31%
– Not applicable because we didn’t update our questionnaire – 24%

5. If you did update your D&O questionnaire, will you also be seeking quarterly certifications or updates from your directors and officers?
– Yes – 16%
– No – 59%
– Not applicable because we didn’t update our questionnaire – 26%

Please take a moment to participate anonymously in this “Quick Survey on Registration Statement Due Diligence” – and this “Quick Survey on Proxy Mailing Practices.”

Class Actions: Accounting-Related Suits Increase

As noted in this Cornerstone Research study, the number of securities class action lawsuit filings raising accounting-related allegations rose in 2015, as did the number and value of accounting-related securities suit settlements. In addition to the increase in the number of accounted-related lawsuit filings, the market capitalization losses associated with those new filings increased as well.

Governance 360 Evaluations

In this podcast, Dave Bobker of Rivel Research Group discusses research into how your shareholders are receiving your engagement messaging:

– Where did you grow-up?
– How did you get into the proxy solicitation business?
– What was it like at Georgeson back in the early days?
– You are now with Rivel Research, what do they do?
– What is a “perception study”?
– What is the “Corporate Governance Intelligence Council”?
– How can shareholders – both portfolio managers & proxy voters – provide anonymous input to companies about their governance engagement efforts?

Broc Romanek

April 27, 2016

5 Reasons Why I Love the Proxy Season

From Susan Reilly: As a follow-up to last week’s blog about hating the proxy season, here are the top 5 reasons why I love the proxy season (I must admit, it was a lot harder to put together this list!):

1. The camaraderie with colleagues. It’s amazing how much shared misery can actually benefit your working relationships.

2. Seeing proxy statements get better. Working on the same proxy statements year after year and seeing the improvement – often because of your feedback – can be very rewarding.

3. That optimistic feeling at the beginning of each season that this year, things will be different – the process will be smoother, shareholders will submit fewer proposals, deadlines will be met. That feeling is usually squashed about halfway through, but it’s really nice while it lasts.

4. Client contact. Even as a junior attorney, working on shareholder proposals and proxy statements provided opportunities to interact directly with clients that I otherwise wouldn’t have had as a newbie lawyer.

5. Doing important work that matters. Unlike a lot of legal work that goes on behind the scenes, preparing a document that actually gets seen by shareholders – and influences their voting decisions – feels like you’re providing a tangible benefit to the company.

5 More Reasons Why I Love the Proxy Season

From Julie Kim: I also have five reasons why I love the proxy season. Apparently, I am not supposed to use the word “love” in an ironic or sarcastic way, which means my task will not be easy. It’s like being forced to shake hands with the neighborhood bully and say something nice about him. “Umm, I like your mustache?”

As the theme song for one of my favorite 80’s sitcoms said: “You take the good, you take the bad, you take them both and there you have the facts of life … the facts of life.”

In the spirit of this great bit of 80’s wisdom, I give you my 5 reasons why I [cough] love [cough] proxy season:

1. Thanks to Dodd-Frank and shareholder activism, there’s always something new to learn. Even if it is something that you really, really don’t want to learn.

2. It keeps people employed – lawyers, activist funds and organizations, proxy advisory services, consultants, proxy solicitors, printers, design firms, mailing agents, etc. Arguably a whole industry depends on the proxy machinery.

3. There’s a sense of community among those who are involved in the proxy statement and annual meeting cycle, fostered by a “I know what you’re going through” mentality. Kind of like a support group for hostage survivors.

4. It exposes you to people whom you may not otherwise meet – for example, that quiet guy in the Compensation Department whose job is to keep track of corporate aircraft usage. Also, how else would you get to meet Evelyn Y. Davis and John Chevedden?

5. Compared to the 10-K and registration statements, proxies are far prettier to look at.

Wow, that was harder than expected. If you can think of more reasons, let us know!

Poll: Why Do You Love the Proxy Season?

Please participate in this anonymous poll:

bike trails

Broc Romanek

April 26, 2016

S-K Concept Release: 12 Most Surprising (or Scary) Things

Based on feedback from the community, here’s a mix of a dozen things that are either surprising or scary about the SEC’s recent concept release on Regulation S-K:

1. How slow law firms were to write memos about it. For something this big, there normally is a rush to write. Perhaps it’s the daunting size of the thing – 341 pages. We’re posting memos in our “Regulation S-K” Practice Area (and our “Disclosure Effectiveness” Practice Area).

2. The sheer number of questions – with only a 90 day comment period. As Ning Chiu blogged, it appears there are 340 questions at first glance. But since each usually embeds at least two – and as many as five or six additional questions – there are more than 800 questions.

3. How many times the SEC indicates that additional disclosure might be necessary on a topic – so this reform project might result in more disclosure; not less. This is something that Corp Fin Director Keith Higgins has warned before – reducing volume of disclosure is not the sole end game of the disclosure effectiveness project, particularly given that many investors have expressed an appetite for more information.

4. Some of the risk factor questions are scary. This blog by Ning Chiu notes that the notion of requiring companies to discuss the probability of occurrence & the effect on performance for each risk factor is raised.

Another scary aspect would be imposing a numerical limit on the length or number of risk factors. That would be akin to Plain English Reform redux. Risk factors are included to mitigate liability. An issuer should have maximum flexibility to present risk factors as it deems appropriate.

5. Reconsidering the concept of quarterly reporting. The SEC inquires into the value of quarterly reporting & whether semi-annual reporting should be the standard, at least for some companies.

6. Importance of sustainability & public policy matters – including possibly requiring line-item specific environmental & social policy disclosures in periodic reports.

7. Stock buyback disclosures! Surprising because didn’t seem to fit in a S-K concept release is the brief mention on page 193 about whether disclosure about share repurchases should be required more frequently (FN 625 notes that Australia requires next-day disclosure). The possibility of a Section 13D/G-type reporting regime for issuer repurchases would probably be scary to whoever would have to deal with it. [Speaking of buybacks, don’t forget our webcast today: “Company Buybacks: Best Practices“]

8. One surprising thing is if the SEC actually allowed “external” hyperlinks in Edgar filings. Hyperlinking to other Edgar filings is one thing. But to allow external hyperlinks to website outside of Edgar would open a Pandora’s box. Particularly the prospect of a hacker using a external hyperlink to create a data security breach in the Edgar system.

9. Ways to enhance “readability.” Excellent! Usability makes it into the concept release! There’s also talk of increased use of summaries – aka as “layered disclosure.” See more in this blog.

10. Rather than asking about eliminating XBRL, the SEC asks whether other disclosures should be tagged in ways similar to XBRL (the SEC calls this “structured disclosure”). This article notes how the SEC – and investors – are using XBRL more these days.

11. The possibility of a “sunset” provision for a disclosure rule. The thought of having to revisit these disclosure standards (in another 341 page release?!?) every few years is frightening. In the disclosure community, the saying is that “sunshine is the best disinfectant.” To inject a “sunset” would create uncertainty.

12. Lack of a pervasive “re-imagining” of the disclosure system as a whole, such as the “company profile” approach that the SEC has floated before (see Cydney Posner’s blog). The concept release is more granular – and incredibly comprehensive.

How You Can Implement Disclosure Effectiveness Now

As Corp Fin Director Keith Higgins has repeatedly reminded us when he speaks, you can implement disclosure effectiveness now. You don’t need to wait for the multi-year process of getting this concept release to the proposal & adoption stages. By applying usability principles, you can reap the benefits of a shorter disclosure document today. When speaking, Keith gives the example of a company that came to talk to the SEC about making voluntary changes to it’s 10-K – which resulted in a document that was shorter by a third. But you don’t need to visit Corp Fin to accomplish this.

There are plenty of other examples. If you look at the proxy statements of major companies, many are pretty short. Amazon comes to mind – remember my short video about its proxy statement that was only 25 pages long! – but there are others. Some smaller companies are doing great jobs with their proxy too – see the summary for this proxy just filed by Consol Energy…

Poll: Will You Ever Read the S-K Concept Release?

Please participate in this anonymous poll:

surveys & polls

Broc Romanek

April 25, 2016

Buybacks: Buyside & Sellside Disagree

As I blogged before, buybacks continue to be a source of controversy. Here’s the intro from this IR Magazine article:

More buy-siders than sell-siders believe companies are sacrificing too much to fund expensive share buybacks, according to IR Magazine research into what the investment community thinks about the best way to spend excess cash.

As part of the research for the Investor Perception Study – US 2016, buy-side and sell-side respondents were asked some general questions of interest to the IR community, including: do you think companies are sacrificing long-term organic growth and increasing wages to do buybacks? Forty-one percent of US buy-siders agree with the statement, compared with just 25 percent of those on the sell side. Correspondingly, the sell side is far more likely to disagree with the sentiment (65 percent) than respondents on the buy side (41 percent).

Also see this NY Times’ Gretchen Morgenson’s column

Webcast: “Company Buybacks – Best Practices”

Tune in tomorrow for the webcast – “Company Buybacks: Best Practices” – to hear Skadden’s Kady Ashley, Hunton & Williams’ Scott Kimpel, Simpson Thacher’s Lee Meyerson and Foley & Lardner’s Pat Quick discuss what you should now be considering as you conduct stock repurchase programs. The agenda includes:

1. What is the debate over whether buybacks are the best use of a company’s funds
2. What are the “best practices” for an issuer repurchase program
3. When implementing a buyback, should a Rule 10b5-1 plan be part of it? And if so, what level of control should a company give up? What are the risks?
4. Should a Rule 10b5-1 plan only apply during blackout periods? Should a company just rely on 10b-18 during open windows?
5. How can, and should, a company use multiple 10b5-1 plans/brokers during a certain period
6. How might a stock repurchase stack up against paying cash dividends? Or other alternatives?
7. How to conduct buybacks when engaging in M&A

Cap’n Cashbags: Out-of-Control!

In this 20-second video, Cap’n Cashbags receives $100 million in stock options for the year:

Broc Romanek

April 22, 2016

Excessive Incentive Pay: Financial Firm Proposal – 60% at Risk for Up to 11 Years

As I blogged yesterday on CompensationStandards.com, the banking regulators are finally rolling out a permanent proposal under Dodd-Frank’s Section 956 regarding excessive incentive pay. The NCUA kicked the proposing off. Here’s the summary from this Sullivan & Cromwell memo (also see this WSJ article – and this blog):

Earlier today, the National Credit Union Administration issued a notice of proposed rulemaking for a new interagency rule on incentive-based compensation that applies to financial institutions with consolidated assets of at least $1 billion. Today’s new proposal replaces one originally issued 5 years ago in the first half of 2011. The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency and the Securities and Exchange Commission are all expected to propose the same new rule.

The new proposed rule establishes general qualitative requirements applicable to all covered companies, additional specific requirements for institutions with total consolidated assets of at least $50 billion and further, more stringent requirements for those with total consolidated assets of at least $250 billion. The general qualitative requirements applicable to all covered institutions include (1) prohibiting incentive arrangements that encourage inappropriate risks by providing excessive compensation, (2) prohibiting incentive arrangements that encourage inappropriate risks that could lead to a material financial loss, (3) establishing requirements for performance measures to appropriately balance risk and reward, (4) requiring board of director oversight of incentive arrangements and (5) mandating appropriate recordkeeping (which replaces the annual reporting contemplated by the 2011 proposal).

As noted in this MarketWatch article – and this WSJ article – Senator Warren is once again taking aim at the SEC, saying it has let down investors by allowing Steven Cohen back into the hedge-fund business…

FINRA: Proposes Delay for New Debt Research Rule

As noted in this MoFo blog, FINRA has proposed delaying further the implementation date of its new debt research rule (Rule 2422) until July 16, 2016. Rule 2422 was set to take effect today, after the implementation date was extended from the initial February 22nd deadline.

The Challenges of Landing a Board Seat

The topic of landing a board seat is hot. We have our own checklist about how to use a recruiter to become a director nominee – and these other materials from the “Director Recruitment” Practice Area. And here’s a useful excerpt from Jill Griffin’s “Earn Your Seat on a Corporate Board: 7 Actions to Build Your Career, Elevate Your Leadership, and Expand Your Influence“:


The Board Seat Audit – Gauge Your Fit

To help you access your suitability, I’ve developed what I call the “Board Seat Readiness Audit.” Over many years, I’ve designed for clients a ton of research audits and surveys that used some fancy measurement metrics. (Likert Scale, anyone?) But my goal was brevity, and so I’ve kept this audit simple! I envision someone completing this on a flight from Houston to New York, for instance.

I’ve worked hard to reduce your responses to the good ole “Yes, No, or Maybe,” with the following values: Yes = 3 points; No = 0 points; Maybe = 1 point. Before you begin, take a moment to reflect on your work style and employment history. Above all, be truthful and candid with yourself. (You can find the online version at BoardSeatReadinessAudit.com.)

1. Do you truly have the time to serve?

Saying “yes” to a seat can carry a commitment of five to ten years. In fact, it’s not unusual to serve for ten years or more. This includes attending, on average, six to eight meetings a year (and the travel time to and from those meetings), serving on at least one committee, and being “on call” when unexpected issues arise.

2. Is compensation a secondary motive for you in seeking corporate board service?

If to any degree you are driven by money to seek a seat on a corporate board, think again. There are probably far easier ways to earn it. Board service should ideally happen when you are financially stable and do not “need” the fees or stock.

3. Are you well-informed about board of directors’ liability?

Action 1: testing your readiness – Officers and directors of public companies always face the possibility that investors, regulators, and even criminal prosecutors might challenge their decisions. This increased scrutiny makes it more important than ever that you understand the obligations and potential liabilities inherent in public board service. Beginning in 2001, major corporate accounting scandals at Enron, WorldCom, and other large-cap companies cost investors billions of dollars when their share prices collapsed. This shook public confidence in the US securities markets. Soon thereafter, on July 30, 2002, the Sarbanes-Oxley Act was enacted, which covers the responsibilities of a public corporation’s board of directors, adds criminal penalties for certain misconduct, and addresses issues such as auditor independence, corporate governance, internal control assessment, and enhanced financial disclosure. Bottom line: Public board service comes with serious obligations. Proceed with caution.

4. Do you think like an entrepreneur?

The very best and the most successful companies in America (3M, for instance) have always managed to maintain an entrepreneurial spirit no matter how big they’ve become. A culture that encourages creativity and inventiveness instills in its people passion and an urgency to create, and in its leaders openness to entirely new ideas—many of which come from outside the firm’s respective industry.

5. Are you financially literate?

Financial acuity is an essential proficiency in a board director. While you don’t have to be a CFO or an accountant, you must have the know-how to analyze financial statements. Enron’s and other corporations’ scandals drove legislation to ensure this.

6. Are you a natural mentor?

The role of a director differs greatly from that of an operating executive who is accustomed to “running the show.” Most director time is spent reviewing and assessing strategy, risk, financial reporting, and management performance. Aspiring board members should be comfortable in the role of mentoring. On the Luby’s board on which I serve, we have used a “board buddy” system in which a board director and a senior executive are matched. In my case, I was paired with Scott Gray, the firm’s CFO. He and I meet periodically and exchange ideas. He’s taught me how to dig deeper into financial statements, and I’ve helped him build on his already savvy marketing acumen.

7. Can you bring valuable contacts to the table?

Board directors are expected to make their network of problem solvers available to the corporation’s management team. Do you have a wide network, especially in your field of expertise, and are you generously willing to share their names? For instance, I live in Austin, a city known for its software start-ups. Through networking, I came across a leading-edge technology. It allowed Luby’s to survey customers via a touch-point screen strategically located at the entrance of each restaurant. This information has helped us serve our patrons better. But even more gratifying for me was that, after a year of relentless system testing, Luby’s signed a contract with this deserving start-up, which moved it into profitability.

8. Do you naturally bring humor to stressful situations?

Great board members, like great leaders, have a sense of humor and know how to have fun. But they intuitively understand the rules of humor and don’t have fun at someone else’s expense. Instead, they make light of themselves.
Many stories told by President John F. Kennedy show the power of humor and the art of self deprecation.
The website The Hill shares a few great examples in the article, “Kennedy’s wit and humor: A legacy for political leadership” (November 20, 2013). Dan Glickman wrote, “During the 1960 campaign when pundits and opponents complained about his wealth, he simply replied ‘I just received the following wire from my generous Daddy. “Dear Jack, Don’t buy a single vote more than is necessary. I’ll be damned if I am going to pay for a landslide.”’. . . Or when a young boy asked him how he became a war hero, he gracefully responded that ‘it was absolutely involuntary; they sunk my boat.’ That’s one of my favorite examples.

9. Do you like to dig deep for insight?

Men and women with this gift have a natural curiosity that drives in-depth analysis. This innate talent is prized in the boardroom. James S. Turley, retired chairman and CEO of Ernst & Young, advises: “You are empowered to ask any question as a director. You are not management. Your job is to provide governance and oversight. Outside of board meetings, there is often a lot of homework to be done with managers and understanding how they see the business and how they think. These are serious roles. You don’t just hang out.”

10. Are you a team player?

A team player is generally described as one who communicates constructively, demonstrates reliability, works as a problem-solver, treats others in a respectful and supportive manner, shows commitment to the team, and is skilled at building on the ideas of others. Are these your strong suits?

11. Are you optimistic?

An optimistic mindset enables a board director to view a conflict as a problem to be solved. Rather than focus on blame, he or she will focus on solutions. Boards need men and women with this mindset to avoid gridlock and to move the firm forward. Ask yourself: Would your colleagues describe you as seeing the glass half-full rather than half-empty? Make no mistake: Boards want what Seth Godin calls “a generous skeptic.” That’s the director who can take the opposing position and help shed light on its merits. But, at the end of the day, the best boards work as a team and move ahead with an optimistic, can-do attitude.

12. Are you willing to speak up about sensitive topics?

Boards depend on directors who not only speak up about sensitive topics but also are skilled in framing their points in an honest, confident, respectful, and positive manner. Sensitive topics can range from nepotism and outward signs of prejudice to unanswered telephone calls and queries. In making such probing yet diplomatic remarks, it’s especially important to show respect for the work of the team. Does this kind of diplomacy come naturally to you?

13. Can you cast the lone vote?

Are you capable of casting the lone “no” vote? Can you do so even when your vote is clearly out of step with valued colleagues? My friend and valued colleague Ralph Hasson contributed this question and remembers the so- bering experience well. On a critical vote, he stood alone and voted “no” when the majority of his fellow directors voted “yes” and one abstained. Ralph recalls that afterward, the director who abstained turned to Ralph and said, “I wish I had voted ‘no.’” Like Ralph, I have cast the lone vote. You may be uncomfortable when you do it, but you eventually experience a satisfied feeling of knowing you have looked inside your heart and stood for your values.

What do your colleagues think? After reflecting on your own, have some close friends and colleagues take the same audit on your behalf, imagining you in the boardroom. How do their impressions of you compare with your own? What can their impressions teach you about your true fit for corporate board service?

Broc Romanek

April 21, 2016

More on “SEC Commissioner Nominees: Political Spending Disclosure Throws a Wrench”

I received a flurry of questions in reaction to my blog last week about how the two SEC Commissioner nominees faced trouble during the Senate Banking Committee approval process. I turned to Jack Katz – former long-time Secretary of the SEC – to help me sift through these questions:

1. In the recent past (meaning the last 40 years), have any SEC nominees failed to be confirmed?

I can’t remember any nominees who were not confirmed. The closest comparison to this situation was the joint nomination of Norm Johnson and Ike Hunt. They were tied up in holds. Commissioner Johnson was a close friend & former law partner of Senator Orrin Hatch. Hatch ultimately broke the hold on Norm’s nomination and he was confirmed. Commissioner Hunt was not. During the confirmation hearing, Johnson and Hunt had gotten to know each other well. When Johnson learned that Hunt’s nomination was still in limbo, Norm called Hatch and asked him to do what he could to clear Hunt. Hatch did so – and Hunt was confirmed shortly after Johnson.

2. With two Commissioners not sitting, does it take a majority of the three to get something passed?

The quorum rules provide that three Commissioners is a quorum – and a majority of a quorum is sufficient to act.

3. I blogged a while back about needing three Commissioners for a quorum – how did things get done when there were just two Commissioners – Chair Levitt & Commissioner Wallman – back in the ’90s?

Simon Lorne, the General Counsel at the time, anticipated that there was a good chance that we would be functioning with only two Commissioners before it happened. So before it happened, we amended the Commission’s Rules of Practice on quorum and duty officer to provide that if there were only two Commissioners, then two would be a quorum (Rule 200.41 establishes a quorum rule for meetings of the Commissioners). This was an aggressive position that was buttressed by the duty officer authority. Since one Commissioner can act when necessary on behalf of the Commissioner, we felt comfortable that two Commissioners could act when necessary.

The limitation in this position is that the duty officer can’t act on rulemakings – only the full Commission can. So we were very reluctant about a two-person Commission engaging in adoption or amendment of final rules. To the best of my memory, the “Levitt-Wallman Commission” didn’t adopt any final rules – but it did approve enforcement actions. The “two-person quorum rule” was challenged and upheld by the D.C. Circuit (see In Falcon Trading Group Ltd. v. SEC, No. 96-1052 (D.C.Cir.)).

By the way, the duty officer rule requires the full Commission to ratify all duty officer actions. For years, we used to wait for additional Commissioners to come on board to ratify actions for which a quorum didn’t exist at the time of the action – for example, if Commissioners were recused.

Whistleblowers: The Latest Stats

Here’s the highlights from this whistleblowers report by NAVEX Global:

1. Companies now taking longer than ever to address issues identified by employees:
– 2015 companies took an average of 46 calendar days to close whistleblower cases, up from 39 in 2014, and 32 in 2011.
– Best practice case closure time is an average of 30 days.
– This trend is especially significant for organizations overseen by the SEC. They have limited time to complete internal investigations under that agency’s whistleblower provisions.
– Outside of this, the trend threatens to undermine employee confidence in their company.

2. Companies are not getting warnings of retaliation:
– Last year’s report found that the substantiation rate of retaliation reports more than doubled over the prior year.
– This higher rate was sustained in 2015 with 26 percent of all reports of retaliation substantiated.
– However, the total number of reports of retaliation that organizations are capturing is still very low – less than one percent of all reports.
– When we look at external whistleblowing – taking an issue to an outside entity – retaliation is still the Equal Employment Opportunity Commission’s most frequently filed charge of discrimination, making up 45 percent of all private sector charges filed.

3. More reports being substantiated:
– Overall 41 percent of all reports received were substantiated in 2015, up from 30 percent in 2010.
– The anonymous report substantiation rate remained at 36 percent in 2015, the same rate as in 2014 and 2013.

4. Report volume remains at an all-time high:
– Between 2010 and 2014 a significant rise in the reporting rate occurred, a 44 percent increase since 2010, where the median was 0.9 reports per 100 employees, to 1.3 reports per 100 employees.
– In 2015, the reporting rate remained at the elevated level of 1.3 reports per 100 employees.

More on our “Proxy Season Blog”

We continue to post new items regularly on our “Proxy Season Blog” for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– CalPERS & AFL-CIO Announce Proxy Season Priorities
– Proxy Access: Vanguard Reduces Preference to 3%
– Annual Meeting Preparation: Considerations & Tips
– Audit Committee Considerations for Enhanced Disclosure
– SEC Comment Letters: Trend Towards Reviews Resulting in No Comments
– Webcast Archive: “Challenges in Compliance & Corporate Governance”

Broc Romanek

April 20, 2016

The SEC’s New “Registration Fee Estimator”

As noted in this press release, the SEC has a new filing fee estimator for companies. This tool is designed to assist registrants in preparing filing fee-related information for EDGAR filings – it’s optional to use & isn’t a substitute for doing your own calculations (as noted in our “SEC Filings Handbook,” there can be some tricky scenarios). The SEC will be building it out to include more forms & scenarios over time…

XBRL: Watch The Errors

As a reminder that making mistakes in your XBRL filings can happen, see this blog. However, the blog incorrectly insinuates that Corp Fin issued a comment to Goldman Sachs that resulted in the company having to amend its Form 10-K. The reality is that the error was self-caught and a reported printer error – and while not material, the company told the SEC about it as a matter of course when correcting….

Understanding the SEC Research Industry

Check out this 40-minute podcast with Phil Brown, who is the Chief Strategy Officer of Intelligize – & the former Co-Founder & CEO of GSI Online. Phil addresses these topics:

– How did you get into this business?
– What were things like in the beginning for your business?
– What was Edgar like in the beginning?
– How did all this work out for you personally?
– How crazy was it to FOIA all those Corp Fin comment letters?
– Can you tell us about the “great water heater incident”?
– What is the “conflicts authority” failure?
– What is Intelligize?

Broc Romanek

April 19, 2016

5 Reasons Why I Hate the Proxy Season

Hi there! This is Julie Kim, the newest member of TheCorporateCounsel.net team. As noted in my bio, I spent 9 years in-house – and six years in a law firm – in NYC before relocating to sunny Southern California. Broc asked Susan & I to think of five reasons why we hate the proxy season to kick us off on this blog.

Now, you probably have one of three reactions:

– “Only 5 reasons? Are you kidding? I can think of 20!”

– “Thank goodness somebody else at my company/firm deals with the proxy statement. Those poor suckers.”

– “This looks like a Huffington Post article. Is this website now resorting to click bait?”

For those of you still reading – whether out of misery or schadenfreude – please know I don’t think my 5 reasons have caused me to feel an emotion as intense as hatred. They did, however, make me have some existential moments where I questioned the very meaning and value of my profession.

I don’t know. Maybe it was hatred after all.

1. Scheduling – and participating in – an endless number of meetings involving a cast of thousands (the company’s in-house working group, outside counsel, shareholder proponents, etc.) regarding various parts of the proxy statement during a very busy time for all.

2. Once December comes rolling around, not being able to attend weekday holiday parties because you have to make the board mailing deadline – or the courier delivery deadline for procedural deficiency letters. Essentially, you’re saying goodbye to your friends until March or April.

3. Those other companies with their beautifully designed proxy statements in eye-catching colors, making the rest of us look bad.

4. Surprise NEO perquisite issues, leading to stressful discussions about the SEC’s perks guidance and proxy disclosure rules.

5. Post-10-K fatigue so that everyone then forced to turn to the proxy statement – other lawyers, the controller’s group, outside auditors, etc. – are grumpy and impatient.

For those of you in the home stretch of proxy season, good luck and know that you are not alone!

And 5 More Reasons Why I Hate the Proxy Season

Hi everyone. Susan Reilly here, excited to start blogging after spending a year quietly lurking on the team! Here’s my bio – and here’s my list:

1. Clients who ask for hand-marked comments on a PDF version of the proxy statement. This was the bane of my existence when I was a junior lawyer.

2. Having to draft shareholder proposal statements in opposition before hearing from the Corp Fin Staff that you have to include the proposal. This is especially frustrating when you’re confident the proposal will be excluded – but you still have to send the statement in opposition to the proponent by the 30-day deadline.

3. Waiting until the last minute (compliance/rule check) to make outside counsel aware of related party transactions/independence issues. Since these relationships have a huge impact on ISS & Glass Lewis voting recommendations, knowing what to disclose and how to disclose it is critical – and it’s easy to miss some of the nuances.

4. Proxy statements that repeat the same information in multiple places. Of course, it makes sense to highlight certain important information in the executive summary and also later in the proxy statement, but nobody needs to read about the voting standard four times!

5. Five months of non-stop craziness. Moving straight from shareholder proposals, to preparing the 10-K, then the proxy statement and first quarter 10-Q . . . all without coming up for air in between.

Why Do You Hate the Proxy Season?

Send reasons why you hate the proxy season to Broc – and he’ll compile them anonymously and blog them. Tis the season to hate!

Broc Romanek

April 18, 2016

Equity Compensation Plans: ISS Issues 7 New FAQs

Last month, ISS issued seven new FAQs to its “US Equity Compensation Plan FAQs” (for a new total of 55 FAQs) as follows:

– FAQ #2: Which equity compensation proposals are evaluated under the EPSC policy?

– FAQ #17: If a company assumes an acquired company’s equity awards in connection with a merger, will ISS exclude these awards in the three-year average burn rate calculation?

– FAQ #28: How does ISS evaluate an equity plan proposal seeking approval of one or more plan amendments?

– FAQ #29: How are plan proposals that are only seeking approval in order to qualify grants as “performance-based” for purposes of IRC Section 162(m) treated?

– FAQ #30: How are proposals that include 162(m) reapproval along with additional amendments evaluated?

– FAQ #31: How does ISS evaluate amendments by companies listed in France that are made in response to that market’s adoption of the Loi Macron (Macron Law)?

– FAQ #47: How does ISS determine the treatment of performance-based awards that may vest upon a change in control?

Director Viewpoints: Desired Director Attributes & More

According to Corporate Board Member’s annual “What Directors Think” survey, directors continue to rank industry expertise as the most important new director attribute (83%), followed by financial experience (78%), gender diversity (59%), and CEO experience (55%) – other results include:

– Long-term strategic planning is the primary issue directors wish to spend more time on – followed by innovation/disruption and cyber risk.
– Most respondents say they are satisfied with the level of information and in-person reporting they receive from their CFO (94%), CEO (93%), GC (90%), internal audit (88%), CCO (84%), and CIO/CISO (65%).
– At least 1/3 of respondents believe information flow between their board and management could be improved through a higher frequency of updates (36%), more concise reporting (31%), or in the time allotted to review materials prior to a meeting (34%). Other communication components directors believe could be of benefit include additional onsite visits with managers (44%) and more time allotted to discussing critical agenda items (47%).
– Nearly 1/3 of respondents worry that direct shareholder engagement carries undue risk of board and individual director liability; 28% say it elevates the risk of violating Reg. FD; 21% think it creates a wedge between the CEO and the board: and 14% believe direct engagement creates undue influence on the board.
– While half of the directors believe the recent wave of hedge fund activism has created more awareness for the need for good governance, 62% believe it has reinforced and rewarded short-termism.

SEC Enforcement: Document Why Significant Deficiency Isn’t a Material Weakness

Here’s more on this recent blog entitled “Internal Controls: A Consultant Can’t Do Your Job” – the intro to this Morgan Lewis blog:

The SEC recently announced settled administrative proceedings against Magnum Hunter Resources Corporation (MHR), the former chief financial officer and chief accounting officer of MHR, the engagement partner on MHR’s external audit, and the lead consultant responsible for documenting and testing MHR’s internal control over financial reporting (ICFR). The SEC states in the five orders issued on March 10 that registrants must fully document why a significant deficiency in ICFR is not a material weakness. Adequate documentation to provide reasonable support for the assessment of the effectiveness of ICFR is required by Instruction 2 to Item 308 of Regulation S-K and the SEC’s guidance relating to management’s report on ICFR in Financial Reporting Release No. 77.

Broc Romanek