December 31, 2012

Is the FBI Keeping Tabs on Shareholder Proponents?

I've had the flu so I've been doing a bit of reading, including David Halberstam's excellent book "The Fifties." Reading about McCarthyism is always so shocking - yet it feels like the same type of unsubstantiated witch hunts could easily take place today. For example, I was surprised to find out - as noted in this Huffington Post piece - that the FBI was tracking the Occupy movement even before it got off the ground. That's where our tax dollars are going? So I guess it's not too far-fetched to ask if the FBI is checking on shareholder proponents too? Love to see the dossier on Evelyn Y. Davis...

EU Commission Proposes '13 Action Plan for Company Law and Corporate Governance

In mid-December, as noted in this memo, the European Commission published an Action Plan with initiatives it intends to undertake in 2013 in the fields of EU company law and corporate governance. These initiatives are primarily inspired by the responses to the Commission's 2011 Green Paper on the EU corporate governance framework and an on-line consultation on the future of European company law. They are aimed at enhancing transparency, engaging shareholders and simplifying cross-border operations of EU companies. The Commission further plans to codify a number of major EU company law directives.

Subodh Mishra of ISS's Governance Exchange notes:

The action plan comes in response to a 2010 "green paper" on corporate governance that in turn stemmed from concerns over governance failing evidenced during the recent financial crisis. The plan effectively details initiatives regulators will take to "modernize" corporate governance with a focus on enhancing corporate transparency and empowering investors to be better stewards.

Key plans to implement E.U.-level changes include:

- A proposal in 2013 to "strengthen" corporate disclosure requirements with regard to board diversity policies and risk management through amendment of the E.U. directive on accounting;
- Improving the visibility of shareholdings in listed companies whereby beneficial owners could be identified would be addressed in 2013 through securities legislation;
- Improving the quality of corporate governance reports and in particular the quality of explanations which should be provided by listed companies that depart from the corporate governance code provisions could be addressed through a non-legislative initiative in 2013; and
- Disclosure of voting and engagement policies as well as voting records by institutional investors, improving transparency on remuneration policies and individual remuneration of directors, granting shareholders the right to vote on the remuneration policy, and improving shareholder control over related-party transactions could be addressed in 2013 through the shareholder rights' directive.

Reaction to proposed initiates has largely been muted as interested parties wait on further details. The proposals, moreover, are largely in line with best practice guidance in the U.K. while elements of the action plan - such as mandatory say-on-pay voting - are prevalent in other European capital markets.

Mailed: November-December Issue of "The Corporate Executive"

We have mailed the November-December Issue of The Corporate Executive and it includes pieces on:

- Defining "Pay" in "Pay-for-Performance:" The Rise of Alternative Pay Measures for 2013
- Update: Proposed Regs Under Section 162(m)
- Rev. Rul. Clarifies Treatment of Dividends Under Section 162(m)
- Deferred Tax Accounting for Companies in the Red

Act Now: Get this issue for free when you try a 2013 No-Risk Trial today.

- Broc Romanek

December 28, 2012

What If ISS Was Owned By An Activist Hedge Fund?

Comic book aficionados love the "what if" scenarios. For example, what if Conan battled Thor? Anyways, as noted in this Financial Times article, ValueAct Capital, an activist hedge fund, disclosed last month a 5% stake in MSCI, which owns ISS. What do you think the potential consequences could be if they increased their holdings to a controlling position? Is this different than Glass Lewis being owned by the Ontario Teachers' Pension Plan?

Another Day, Another Judge Challenges a SEC Enforcement Settlement

The courts continue to pose one of the biggest threats to the SEC's ability to do its job. As noted in this DealBook piece, Judge Richard Leon of the Federal District Court in DC has held up a FCPA settlement for nearly two years because of his demands for greater disclosure.

Escheatment: SEC Approves New Rules Regarding Lost Holders of Securities

As noted in this "Dodd-Frank Blog" by Ethan Mark of Leonard Street, the SEC has adopted rules applying the same type of escheatment procedures to brokers as it does to transfer agents.

- Broc Romanek

December 27, 2012

ISS Updates Its FAQs

Last Thursday, ISS updated its Compensation FAQs and Non-Compensation FAQs relating to its proxy voting policies issued last month. ISS separately had issued Peer Group FAQs a few weeks ago. We are posting memos regarding these FAQs in our "ISS" Practice Area.

Paul Beswick Becomes SEC's Chief Accountant

Last Friday, the SEC shed Paul Beswick's "Acting" status as he was tapped to become Chief Accountant. Paul was named Acting Chief Accountant when Jim Kroeker left the position in the summer.

- Broc Romanek

December 26, 2012

Dave & Marty: The Holiday Show

In this podcast, Dave Lynn and Marty Dunn engage in a lively discussion of the latest developments in securities laws, corporate governance, and pop culture. Topics include:

- Analysis of Form S-3 and Form S-8 eligibility
- Alternative pay measures for the 2013 proxy season
- Favorite holiday gifts

December 21, 2012

SEC Enforcement Chief Khuzami to Leave?

Saw the first mentions of a rumor that Enforcement Director Rob Khuzami would soon be leaving the SEC last night. And now most of the major media outlets are reporting the same - including the WSJ and Bloomberg. If he does indeed leave, that would mean three Director departures out of the four major Divisions within a few short weeks (and remember that the SEC is working with an "Acting" Chief Accountant - and the IM Director turned over just six months ago)! Here is the ten cents that I recently blogged about whether all these senior Staff departures are normal after an election...

The Fiscal Cliff: How Many at the SEC Will Be Furloughed?

Hopefully this will be my last blog of this year - trying a blog vacation next week - and with the fiscal cliff looming, the federal agencies are gearing up for the consequences. Furloughs galore. See this Washington Post article and this Government Executive piece.

- Broc Romanek

December 20, 2012

SEC vs. S.E.C.

Last Sunday, the New York Times Magazine included this comparison of the Securities & Exchange Commission and the Southeastern Conference, one of the major collegiate sports conferences:


Hat tip to Dan Pliskin for reminding me about it!

First Attempt to Kill the Shareholder Proposal Rule? Early 1943

In the wake of my blog wishing a happy 70th birthday to Rule 14a-8, a member sent this fascinating New York Times article dated January 24, 1943, providing details of a Senate bill designed to kill the new shareholder proposal rule - the one that had just been adopted the month before! It seeks to revoke the SEC's power to regulate proxies during wartime - with an amendment sought that all regulations prescribed by the SEC after November 1, 1942 be wiped out. Things were more radical back then that I thought...

ISS' ExecComp Analytics

In this podcast, Mark Brockway of ISS Corporate Services discusses the latest developments related to ISS' executive compensation analytic services, ExecComp Analytics, including:

- What is ExecComp Analytics?
- What was your goal in creating it?
- Any surprises so far since it went live?

- Broc Romanek

December 19, 2012

The World's Largest Holiday Disclaimer: 2012 Version

It's starting to become an annual tradition - blogging about the world's largest holiday disclaimer (here is the one from last year). Cary Klafter of Intel again shares what I imagine has to be the world's largest holiday disclaimer, running for 15 pages, nearly double last year's beast. And don't forget Manatt's funny holiday card with disclaimers...

PCAOB's New Staff Audit Practice Alert: Professional Skepticism in Audits

A few weeks ago, the PCAOB published a Staff Audit Practice Alert #10 to remind auditors of their requirement to exercise professional skepticism throughout their audits. On its face, the fact that the PCAOB published an alert to tell auditors to do their job speaks volumes. It begs the question - why aren't auditors already skeptical? I'm not convinced issuing an alert will do much by itself...

Meanwhile, the SEC issued this order on Monday approving the PCAOB's Auditing Standard No. 16, Communications with Audit Committees (see this Gibson Dunn blog and Morrison & Foerster blog on impact on EGCs). And the SEC posted this report to Congress on assigned credit ratings yesterday.

PCAOB Brings Case on Audit Documentation

David Smyth notes this interesting enforcement case from the PCAOB that focused on process, not substance...

Note this interesting speech from the SEC's Chief Economist, Craig Lewis, entitled "Risk Modeling at the SEC: The Accounting Quality Model."

- Broc Romanek

December 18, 2012

Nasdaq Amends Proposal Regarding Compensation Committee Independence and Consultants

Cooley's Cydney Posner gives us this news brief (and here's a Davis Polk blog on this):

Nasdaq has just filed an amendment to its proposed rules relating to compensation committee independence and consultants. The change addresses a troublesome timing problem with the original proposal.

Proposed Rule 5605(d)(3) states that a compensation committee must have the specific responsibilities and authority necessary to comply with Rule 10C-1(b)(2), (3) and (4)(i)-(vi) under the Exchange Act relating to the retention, compensation, oversight and funding of compensation consultants, legal counsel and other compensation advisers, and is required to consider the six independence factors enumerated in Rule 10C-1(b)(4) before selecting, or receiving advice from, these advisers. Originally, these provisions - that is, requiring that the committee be granted the specific authority and responsibility referenced in Rule 5605(d)(3) -- were to have become immediately effective upon approval of the Nasdaq proposal by the SEC, creating some implementation and coordination problems. Under the amended proposal, Rule 5605(d)(3) will become effective on July 1, 2013; by that date, the committee's authority and responsibility under Rule 5605(d)(3) must be reflected in the committee charter, resolutions or other board action, as permitted by state law. (Ultimately, the authority and responsibility under Rule 5605(d)(3) must be included in the charter in accordance with the regular transition schedule for these rules.) In addition, under the amendment, Nasdaq proposes that companies comply with the remaining provisions of the amended listing rules by the earlier of (1) their first annual meeting after January 15, 2014 or (2) October 31, 2014. This revision is consistent with the NYSE proposal.

Also notable in the amendment is the express deletion of the word "independent" prior to "legal counsel" to make clear that only in-house counsel are excluded from the requirement to consider independence. In addition, the original proposal discussed the committee's need to consider the six independence factors in "making an independence determination" regarding compensation consultants, legal counsel and other advisers. In the amendment, the concept of an "independence determination" has been deleted, with the reference now only to the need to consider the six factors before selecting, or receiving advice from, these advisers. The deletion may have been intended to emphasize that the committee "is not required to retain an independent compensation adviser." The addition of the phrase "receiving advice from" makes clear that the analysis cannot be avoided simply by not "selecting" an advisor.

The amendment also proposes changes to the phase-in schedule for companies ceasing to be Smaller Reporting Companies, allowing these companies six months, in lieu of the originally proposed 30 days, to certify that they have adopted a formal compensation committee charter. These companies will also be permitted, under the amendment, to phase in fully compliant compensation committees.

The proposed form of compensation committee certification is now attached to the amendment to the proposal. The certification will be due 30 days after the final implementation deadline applicable to the company.

Meanwhile, Ning Chiu of Davis Polk analyzes the 15 comment letters submitted on the Nasdaq's and NYSE's proposals in this blog...

Lona Nallengara Tapped as Acting Corp Fin Director

Yesterday, the SEC announced that Lona Nallengara has been named as Corp Fin's Acting Director, replacing Meredith Cross until a permanent Director is found. In addition, John Ramsay was named Acting Director of the Division of Trading and Markets.

Happy Birthday to the SEC's Shareholder Proposal Rule!

The precursor to today's Rule 14a-8 was adopted 70 years ago today...

Board Oversight of Compliance

In this podcast, Jeff Kaplan of Kaplan & Walker explains the latest developments in how boards oversee compliance programs, including:

- What are the important legal drivers for board oversight of compliance programs?
- Can you provide an overview of board oversight of compliance programs - meaning what sort of information they should receive?
- Can you describe more about what you called the operational type of information?
- Is there the same type of variation in what you called the case-specific type of information that a board gets?
- How does a company make all this happen? Is the starting point with governance documentation?

- Broc Romanek

December 17, 2012

SEC & Hacking: What Happens at the Black Hat Convention, Doesn't Stay There...

Here's how this article entitled "How the SEC Almost Shut Down Wall Street" begins:

Sensitive, confidential information belonging to major U.S. stock exchanges was at risk of being hacked, according to a new Reuters report. Securities and Exchange Commission Interim Inspector General Jon Rymer wrote in a 43-page report that some SEC staffers had used unprotected government computers at a Black Hat convention this year. This convention attracts hundreds of hacking experts who bring seemingly impenetrable devices with them to see if they can be cracked, says Adam Levin, chairman and cofounder of The SEC said the government-issued computers were not hacked and no unauthorized breach of data occured. According to Reuters, the SEC employees attending the conference had logged into the unencrypted computers through public wireless networks.

The Inspector General said the employees, who had worked in the SEC's Trading and Markets division, were no longer at the federal agency. The SEC has been warning Wall Street firms and and market exchanges to beef up their cyber security efforts. But the government computers brought to the Black Hat convention did not have basic virus protection programs installed and the employees had neglected to encrypt the devices, Reuters reports.

And this Reuters article notes that the NYSE has hired former Homeland Security Secretary Michael Chertoff to make sure sensitive exchange data was not breached after securities regulators left their computers unencrypted.

Here's an interesting op-ed from Covington & Burling's David Kornblau entitled "Regulate U.S. Markets Like the Nuclear Industry."

Building FCPA Compliance Programs

In this podcast, Greg Dickinson of Hiperos discusses the latest developments in FCPA compliance, including:

- What does Hiperos do?
- How does your platform allow companies to facilitate forming their FCPA compliance programs?
- Any surprises in creating that platform?
- What do you see in 2013 as far as DOJ enforcement of the FCPA is concerned?
- What about the regulatory environment in general?

Heard Peter Coyote talk about the plight of wrongly imprisoned Leonard Peltier and it's sad that this country still can't get it right when it comes to freedom. Please sign this petition for clemency as he is in poor health and already served 37 years for something he didn't do...

FCPA Regulators Speak on Newly Released FCPA Guidance

Here are notes from Morrison & Foerster from a recent conference where SEC and DOJ Staffers spoke about the new joint FCPA guidance (and here is Morgan Lewis' memo on the same topic)...

- Broc Romanek

December 14, 2012

More on "Chaos in the SEC's Inspector General's Office: 'He Said, They Said'"

Back in May, I blogged about the madness in the SEC's Inspector General's Office. The David Kotz and David Weber show. A soap opera at the SEC like this comes along only once every few generations!

The latest is that former Assistant Inspector General Weber has filed a $20 million lawsuit alleging he was fired for being a whistleblower. And the complaint is full of juicy details (which may - or may not - be true). Here are some articles on this development:

- Rolling Stone's "SEC Rocked By Lurid Sex-and-Corruption Lawsuit"

- Business Insider's "SEC Whistleblower Suit: Sex, Lies, Stupidity, Oh My!!"

- Courthouse News Service's "Former Top Official Files Scorching Complaint Against SEC"

- Huffington Post's "David Weber Lawsuit: Ex-SEC Investigator Accused Of Wanting To Carry A Gun At Work, Suing For $20 Million"

- Bloomberg's "SEC Sued by Fired Investigator Who Alleged Ethical Lapses"

- ThomsonReuter's "A cautionary tale for whistle-blowers, from the SEC's own ranks"

As a U. of Michigan grad, I'm very excited about their hoops team this year - particularly our Canadian freshman Nik Stauskas. Here is a video of what he did for Thanksgiving. Unbelievable talent and dedication...

PCAOB Issues Report on the State of Internal Controls

A few days ago, the PCAOB released a report summarizing observations from its inspections of audits performed by the 8 largest public accounting firms of their clients' internal control over financial reporting in 2010. As noted in this blog by the FEI, there is a concern over the increasing rate of deficiencies - up to 22% in '11 from 15% in '10.

Looking for something different for the new year? Learn about the "Lowell Milken Institute Law Teaching Fellowship" opportunity at UCLA School of Law.

Iran Sanction Related Disclosures

In this podcast, Abram Ellis of Simpson Thacher & Bartlett explains the latest developments relating to Iran sanctions and disclosure, including

- How do the recent changes to the U.S.'s economic sanctions related to Iran implicates disclosures?
- What does it mean when you say an issuer must report the activities of affiliates? What's included in that?
- What types of activities need to be disclosed?
- How detailed do the disclosures need to be?
- Anything else we should know about the disclosure requirements?

- Broc Romanek

December 13, 2012

Dave & Marty on SEC Changes, Business Days, SEC HQs and Elvis

In this podcast, Dave Lynn and Marty Dunn engage in a lively discussion of the latest developments in securities laws, corporate governance, and pop culture. Topics include:

- Changes at the SEC
- Reflections on a "business day"
- Which is better: 450 5th Street versus 100 F Street?
- Which is better: Original Elvis or Comeback Elvis?

Congressional Committee Changes & the Impact on the SEC

This Reuters article discusses changes in the leadership of the Senate Banking Committee and House Financial Services Committee, the top oversight committees for the SEC. Senator Michael Crapo will now be the ranking Republican on the Senate Banking Committee, with Senator Tim Johnson (D-SD) remaining at the Chair. Newly elected Elizabeth Warren (D-Mass) will join that committee (here is a recent interview with her).

Representative Jeb Hensarling (R-Texas) will take over as Chair of the House Financial Services Committee (taking over for Spencer Bachus) with Maxine Waters (D-Cal) who will be the ranking Democrat on that committee...

The Legacy of SEC Chair Mary Schapiro

Tomorrow is SEC Chair Mary Schapiro's last day and much has been - and will be - written about her legacy. There are a collection of articles about this linked from this Cooley new brief. And here is a brief interview conducted with Mary.

Personally, I will always be amazed at how long a career she has had in public service at the very top. Don't forget she first became a SEC Commissioner at age 33! And she was the first woman to serve as the SEC Chair. In between, she served a variety of high-ranking roles at other agencies (including the head of FINRA) - all under the administrations of different political parties. I would be surprised if someone else ever matched Mary's leadership record of public service in the securities law field...

- Broc Romanek

December 12, 2012

Naval Ravikant: "How I Changed the Jobs Act"

Pretty interesting video featuring Naval Ravikant, co-maintainer of AngelList, describing his efforts to come to DC and change how the JOBS Act was put together. According to Naval, all it takes is calling in a hundred favors - and approach the task like a start-up. There was an online petition with 5000 signatories from the VC world that was used to influence Congress - "using technology as a weapon in this cause." Fascinating background. He does laugh about the misnomer "Jobs" Act, which was not his doing...

Here are two interesting items: - Gus Schmidt's "Did the JOBS Act unintentionally change the statutory private offering exemption?" - Reuter's "Investor advocates press SEC to finish "bad actor" rule"

Whole Lotta JOBS Act Activity...

With Led Zeppelin being in DC recently to be honored at the Kennedy Center, I have to throw in some reference. Anyways, here are recent JOBS Act items:

1. As noted in this Cooley news brief, two SEC commissioners, Luis Aguilar and Elisse Walter, have advocated that "more safeguards for investors should be considered before a rule lifting the ban on general advertising for private offerings is adopted. Here is Commissioner Walter's speech on the topic. Here is a Gibson Dunn blog about what Elisse's promotion might mean for the future of this rulemaking - and here's a summary of the comment letters from McGuireWoods.

2. This article claims that Chair Schapiro dragged her feet on the general solicitation rule so it wasn't adopted on her watch. But the reality is that the interim proposed rule did not meet the test the courts have prescribed for an interim final rule and would likely not have stood up in court. As is often the case in the bizarro world we live in, the people pushing for its quick adoption are the same people who have criticized the SEC for not doing enough cost-benefit analysis on rules viewed as being investor friendly.

3. Some IPOs appear to be avoiding the JOBS Act stigma as noted in this WSJ article entitled "Some Firms Shun Looser IPO Rules."

4. Check out this blog entitled "Crunching the numbers on EGC shells."

5. The Treasury Department has been participating in JOBS Act roundtables around the country - but there has been zero press about them as they are closed to journalists. Why the need for secrecy?

In this recent speech, SEC Commissioner Aguilar bemoans the recent finding that only 17% of Americans trust the market. This is a much bigger problem for Corporate American than they realize and ties into the numerous accounting scandals, pay-for-no-performance stories and other governance bombshells that occur on a daily basis. No buyers mean that sooner or later, stock prices start going down...

Our New "Voting Requirements & Results Disclosure Handbook"

Spanking brand new. Posted in our "Form 8-K" Practice Area, this comprehensive "Voting Requirements & Results Disclosure Handbook" provides a heap of practical guidance about how to navigate Items 6 & 21 of Schedule 14A and Item 5.07 of Form 8-K. This one is a real gem - 33 pages of practical guidance...

- Broc Romanek

December 11, 2012

Checklist: "How to Draft More Usable Disclosure"

One of my favorite topics is "usability" when drafting disclosure, whether it be for a paper document or for something posted online. I first wrote about the topic of usability for online documents in this article a dozen years ago. For many of us, drafting disclosure is our profession. We are the experts. And understanding how our disclosure is best consumed is something we should know a lot about.

Now I have written a checklist to help you get a better grasp on the process of writing more usable documents, with some great input from Jared Brandman of Coca-Cola (Coke has done some great things lately, from its online proxy statement to a revamped IR web page).

Proxy Drafting & Usability

In this podcast, Iain Poole of Labrador discusses how to best draft a proxy statement, including:

- How do you determine the ideal type of disclosure layout for a proxy statement?
- What trends are you seeing in proxy presentation?
- What about the ideal format for usability online?

FINRA's New Rule 5123 FAQs & User Guide

From this blog by Blank Rome's Melissa Murawsky:

FINRA recently released FAQs and a user guide related to Rule 5123 filings. As discussed in more detail in the June/July issue of Up To Date, Rule 5123 requires, subject to certain exceptions, FINRA member firms that sell securities in certain private placements to submit a notice filing with FINRA. Such notice filing shall include a copy of any private placement memorandum, term sheet or other offering document, including any materially amended versions thereof, used in connection with such sale. Members that do not employ offering documents must indicate to FINRA that no such documents were used in connection with the applicable offering. Submissions must be made within 15 calendar days of the first sale.

The FAQs answer practical questions regarding filing requirements, such as: how members file a notice with FINRA, whether third parties can file offering documents on behalf of a member, and when does the 15-day period commence for filing with FINRA. In addition, the FAQs address matters relating to exemptions form Rule 5123. The FAQs also provide contact information at FINRA for members who have general inquiries and questions regarding Rule 5123. The user guide gives members step by step instructions regarding how to access the private placement filing system and how to make a Rule 5123 filing.

- Broc Romanek

December 10, 2012

RIP? Social Media Use for Corporate Disclosures

Oh boy. This is a hard one for me to swallow. I've been eagerly waiting for the SEC to modernize its guidance about how social media can be leveraged to enhance disclosures to investors. The latest guidance is from '08, well before the golden age of social media. I know the SEC purposely didn't mention the terms "Twitter" or "Facebook" in the '08 guidance in an effort to accommodate new technologies - but it sorely needs to be updated (the guidance also didn't mention "search engine optimization" but that's another story). Since the guidance was issued, the SEC has had its hands full with a financial crisis and two major Acts of Congress. So I can understand why there has been no progress in this area.

Anyways, we now have this - news that the SEC's Enforcement Staff has issued a Wells notice to Netflix and its CEO Reed Hastings over a Facebook post about the aggregate number of hours people were viewing content from the company. This has the potential to set back the use of social media to give investors more information about investment opportunities by a factor of five. And since more disclosure is better for the marketplace, it's truly a sad thing. Getting more information available via social media already was an uphill battle, as legions of lawyers have been telling clients "no" without bothering to figure out what "Twitter" and other social media channels really are. Many of the lawyers I have talked to about this also blame a lack of clarity in the SEC's guidance.

I'm not a fan of the SEC using enforcement for policy-making purposes by going after high profile companies or executives to make a point in the disclosure area. And here is the kicker: Netflix is one of the only high profile companies that is friendly to retail investors. They accept retail investor questions on their conference calls via email and make the analysts wait on the call until all the emailed questions are dealt with.

Should the SEC Chase Netflix for an Alleged Regulation FD Violation Over a Facebook Post?

Of course not. And not just for the reasons set forth above about the big picture of what this means for the world of disclosure. When I asked for folks to email me their thoughts on this Bloomberg article entitled "Netflix CEO Hastings Faces SEC Action Over Facebook Post," the overwhelming response was that the SEC was out of bounds. Many reactions were along the lines of this blog by Darrick Mix of Duane Morris regarding questions of materiality and sufficient public disclosure.

On the materiality issue, one member noted: "It is debatable that hours viewed is remotely material because you can't draw a line between how many hours people watch Netflix to how much money Netflix brings in. The Netflix subscription fee is fixed regardless of how much subscribers use the service. Hours viewed is a measure of customer engagement in the service. If anything, more hours viewed increases Netflix's costs slightly. Netflix explained this in their Q4 '11 conference call in January 2012."

Another member mused whether the old ubiquitous McDonald's signs - "over 99 billion served" - would have been actionable for the SEC if Reg FD had existed then, noting that catch-phrase arguably contained more material information. More hamburgers means more revenue and more profit, unlike Netflix's flat fee structure.

Steps Netflix Could Have Taken to Possibly Fix This...

Let me start this analysis by asking if you were surprised to see that 8% of respondents to NIRI's latest "use of corporate websites" survey planned to use their site as a recognized channel of distribution? NIRI's press release characterized this result as "just 8%" - but I was shocked it was that high. I am only aware of Google and Microsoft having announced that they use their sites as recognized channels. Is anyone aware of other companies already doing so?

Netflix has never taken that crucial step of issuing a short press release telling investors to look to Hastings' Facebook account for important investor information. If I correctly understand what Netflix is saying in the wake of the SEC's action, they still say that they don't use Facebook for that purpose - even though they also seem to say that they could if they wanted to because Hastings' Facebook posts provide broad, non-exclusionary distribution (ie. his FB account is well followed by the media and they report what he posts quickly). I'd agree that Hastings generates more media coverage with his Facebook posts than the average company does with their news releases - but that it's still unclear under the SEC's '08 guidance what that means for the company.

Anyways, here is more food for thought:

1. Hastings is using the "subscription" option that Facebook offers. That allows anyone on Facebook to subscribe to his public status updates and receive them in real time - in theory. In practice, his updates don't come through in real time to public subscribers who are not also his friends, which is something Facebook can fix.

2. You don't need a Facebook account to view Hastings' public Facebook updates, but this is not handled as well as it could be by Facebook. If you go to his Facebook page without being logged into Facebook, you won't see the previous post.

3. Netflix has done a poor job of making investors aware of its CEO's Facebook account. There should be a link to it in his bio and on the IR homepage (this kind of thing is true for almost all companies). Ironically, the Wells Notice has now made the account very public through an SEC filing.

4. Hastings' Facebook posts generate a lot of media publicity. There are many journalists and bloggers who are both friends and subscribers. He has 240k subscribers, more than I'm sure subscribe to the SEC's NFLX feed on Edgar or that view the NFLX Yahoo Finance page on a daily basis. He has a pattern of posting things like hours viewed, commenting on competitors like HBO and even noting subscriber number milestones. Many investors subscribe to his public updates because they're interesting and help them understand the company.

The Bottom Line: The SEC Needs to Regulate IR Web Pages (And More)

The state of affairs for IR web pages for many companies is atrocious. And I argue that this is where the SEC should spend its resources rather than chase a CEO who likes to inform investors. For starters, there needs to be bare minimums about how companies display information - and what they post.

When I interviewed a number of in-house folks to put together this checklist about making the social media business case for investor & analyst engagement, it was shocking how little they knew about what was happening on their IR web pages. One Fortune 100 company had Facebook and Twitter links on the bottom of their IR web page - but when you clicked on them, they were dead. What does that tell investors?

Too many companies still blindly outsource their IR web pages to third-party providers - without realizing what those third-parties are doing. Did you know that one of these major providers use robots so that the Wayback Machine can't archive what the IR web pages look like over time? This could be problematic if a company wanted to prove it made a disclosure on its IR web page on a certain date. Conversely, it could hurt the SEC if it wanted to prove that the disclosure wasn't there. Given that the Wayback Machine is essentially the "Edgar" of online disclosures, should companies be permitted to "shred" their records like this?

This is just one of many examples illustrating how it's still the Wild West on the Internet - and the fix isn't to pretend that things on the Internet should be the same as it was before. It's simply not and there are grand opportunities to better educate investors about a company's prospects. The SEC needs to evolve and regulate more broadly. Get away from the hyperfocus on the disclosures it forces to be filed on Edgar. Focus more on what investors actually bother to read. Don't punish the companies that want to reach investors in the manner that today's investors consume information. Rather, lead the way so that companies can get on the social media bandwagon and stop hiding behind the excuse of Reg FD.

- Broc Romanek

December 7, 2012

Dave & Marty on Dividends, Ozzy and Rule 10b5-1 Plans

In this podcast, Dave Lynn and Marty Dunn engage in a lively discussion of the latest developments in securities laws, corporate governance, and pop culture. Topics include:

- Special/Accelerated Dividends in Light of the Fiscal Cliff
- Ozzy: With or Without Black Sabbath
- Rule 10b5-1 Plans Under Scrutiny

Email me your thoughts on this Bloomberg article entitled "Netflix CEO Hastings Faces SEC Action Over Facebook Post." I'll be blogging next week but won't mention you unless you give me permission.

SEC Approves Nasdaq's Revised Deficiency Disclosure Listing Standard

As I blogged before, Nasdaq-listed companies will now have to disclose details when they don't comply with a listing standard - and Nasdaq will have the authority to make that disclosure for you if you don't make the disclosure. Here is the SEC's order approving the revised Nasdaq rule a few days ago.

NYSE Proposes That Companies Provide Notices Through Web-Based System

As noted in this Sullivan & Cromwell memo, the NYSE has proposed changes to the Listed Company Manual that would require most notices to the NYSE by listed companies to be made electronically through, the NYSE's web portal, or by email, rather than by telephone, fax, telegram or otherwise. Notice of material corporate events or statements regarding rumors during or shortly before market hours would still require telephone notice to the NYSE at least ten minutes prior to release.

- Broc Romanek

December 6, 2012

ISS's New FAQs on Peer Groups: Companies Need to Provide Input By December 21st on Changes Since '12 Disclosures

Ning Chiu of Davis Polk provides this news from her blog:

ISS has released a detailed set of FAQs on how it will select a company's peer group for purposes of conducting its pay-for-performance analysis. ISS uses this peer group to measure a company's total shareholder return and CEO pay in deciding how to recommend for the say-on-pay vote.

The FAQs provide information on how ISS will select 14-24 peers from the company's own GICS code, as well as the GICS code of the peers named in the subject company's proxy statement. Subject to size constraints based on revenues or assets and market value, ISS describes the order in which peers will be selected from the potential universe of companies that will come up based on those GICS codes. Other questions address the use of size parameters, which are clearly key to the selection process, the GICS industry groups (financial services) where assets will be used instead of revenue, and what happens if a company discloses using more than one peer group.

In addition, by December 21st a company can inform ISS of any changes to its peer group since the 2012 disclosures, as a source of input into the ISS peer group selection.

While more information is always useful, this is unlikely to mean that companies will be able to proactively figure out the ISS peer group themselves given the complexity of GICS, the number of potential companies that ISS can choose from under this method and the use of what they term "manual judgment" in the selection process. It appears that again companies will not know who they are being measured against until they receive the ISS report.

For those companies that may have faced a say-on-pay issue last year because of perceived faulty peer groups used by ISS, note that in back-testing this new method against their analysis applied in 2012, ISS indicates that more than 95% of companies would have received the same pay-for-performance analysis.

Everybody Into the Pool! SEC's General Counsel and Trading & Markets Director to Leave

On the heels that Corp Fin Meredith Cross is leaving to return to the private sector, the SEC announced yesterday that General Counsel Mark Cahn and Trading & Markets Director Robert Cook will soon be doing the same.

How Common Are All These SEC Departures After an Election?

I got crushed in the wake of this news by queries from members about whether this mass exodus is typical (guess I should be tapped for the director of the SEC Historical Society someday). For starters, I can't recall three senior Staffers announcing departures within a 48 hour span. That certainly is unique (although it's not unusual for turnover among Division Directors under a new SEC Chair). This tweet of mine was quite popular yesterday:

If the SEC's remaining Division Directors quit tomorrow (eg. Enforcement, IM), can we hold our class outside?

So why are people leaving before the new SEC Chair settles in? It's just a guess - but the change in the nature of working at the SEC might well be a part of it. The SEC is constantly blasted in the press, harassed by Congress and treated like dirt by the courts. And compared to private practice, the pay is a fraction. What would you do?

The other question I fielded was whether it was unusual for a SEC Chair to step down after a Presidential election. The answer is certainly not.

Here is the math: Elisse will be the 30th SEC Chair. Backing out the first Chair - Joe Kennedy - because his appointment was tied to the statute creating the SEC, there are 29 Chairs that have been appointed and 16 of those have been confirmed within 12 months of a Presidential election. That's 55% of the time (and I didn't even account for new Chairs because someone stepped down due to death, illness or controversy). And it's even more pronounced of a trend if you just analyze the last 50 years - 12 out of 17 Chairs during that period were confirmed within 12 months of an election - for a whopping 71%. Here's a list of the SEC Chairs if you want to do the math yourself.

Learn more about the intricacies of the SEC during our webcast today: "How the SEC Really Works."

- Broc Romanek

December 5, 2012

Corp Fin Director Meredith Cross to Leave the SEC

Yesterday, the SEC announced that Meredith Cross would be leaving as Corp Fin Director at the end of the year. During her three and a half year tenure, Meredith accomplished an amazing array of rulemaking - having had to navigate both Dodd-Frank and the JOBS Act. I worked under Meredith during her earlier stint in Corp Fin and can attest to her remarkable acumen and practical approach to solving problems. As gleaned from our list, Meredith served at the 16th Director of the Division - and is only the second woman in that position. So who's next? That is a tough one to guess...

Iran & Syria Sanctions: Corp Fin Issues 7 CDIs

Yesterday, Corp Fin issued 7 Compliance & Disclosure Interpretations relating to Section 13(r) of the '34 Act, which was created by the Iran Threat Reduction and Syria Human Rights Act of 2012.

Webcast: "How the SEC Really Works"

Tune in tomorrow for the webcast - "How the SEC Really Works" - to navigate the lore - and detect the myths - of how the SEC works. There are many more Offices and Divisions than most realize. Join SEC Secretary Betsy Murphy and a group of experts that have worked at high levels within the SEC - Latham & Watkin's Alex Cohen (former Deputy Chief of Staff for SEC Chair Chris Cox) and Hunton & Williams Scott Kimpel (former Counsel to Commissioner Troy Paredes).

Among the topics of this program are:

- What the SEC Commissioners actually do and how they fit into the SEC's org chart
- Overview of the Sunshine Act, which bears on how the Commission meets - and how to communicate with SEC Commissioners
- How Enforcement cases are deliberated
- How rulemakings come together, from kernel of an idea to proposal to adoption
- What are the Offices of General Counsel, Secretary, Legislative Affairs, Public Affairs, etc.

- Broc Romanek

December 4, 2012

SEC Sues Big 4 Over China Audits

As noted in this WSJ article, the SEC brought administrative proceedings against the foreign affiliates of five auditors yesterday - the five biggest firms - alleging they refused to hand over documents sought in investigations of alleged accounting frauds at 9 Chinese companies.

This issue is not new. Auditor have refused to turn over the work papers of their foreign affiliates to the SEC for decades. Meanwhile, the markets have become much more global with many foreign companies now seeking cash and capital from the US capital markets, based upon audited financial statements audited by foreign affiliates of the Big 4. Yet the auditors have steadfastly refused to grant access to foreign work papers when questions about a lack of proper auditing have been raised. As a result, Sarbanes-Oxley included a Section 106 to remedy this problem. And now Section 106 is being used...

Meanwhile, in what is by far the largest settlement in the current wave of securities litigation involving Chinese companies, Ernst &Young, which served as the auditor for Sino-Forest, has agreed to pay $117 million to settle the securities suit that investors filed in Ontario against the accounting firm, as noted in the "D&O Diary Blog."

Europe Seems to Be Moving Forward with Audit Firm Rotation

As noted in Jim Hamilton's blog, a European Commission Official recently told a PCAOB Roundtable that the EU is moving forward with legislation mandating auditor rotation.

HP, Autonomy and IFRS vs US GAAP

Here's some insight from Lynn Turner: "There has been much discussion of HP's Autonomy transaction since the HP announcement of last week. The former Autonomy management has said the disagreement is apparently due to HP, and its experts, not adequately considering the differences in International and US Accounting standards. That seems to be unlikely as HP said their information was being supplied to both the US's SEC and UK regulators who will be reviewing it.

Here is an article that discusses the two different accounting standards. As the article notes, IFRS is very, very general with little - if any - guidance. It has in essence been such a poor standard, that it may result in companies not following its basic principles as written and intended. If adopted for US reporting by the SEC, this is a prime example of what US investors can expect in financial statements using International Accounting Standards - unreliable information."

As noted in this WSJ article, roughly half of the 1000 foreign companies listed on a US exchange still submit filings using U.S. standards. The SEC allows US-listed foreign companies to use IFRS standards for 5 years.

PCAOB Approves Its 2013 Budget

Last week, the PCAOB approved its '13 budget - with a 8% hike from the prior year. The SEC now must approve it. Here is a '13 budget summary - and the '12-16 strategic plan.

- Broc Romanek

December 3, 2012

Our New "SEC Comment Letter Process Handbook"

Spanking brand new. Posted in our "SEC Comment Process & Analysis" Practice Area, this comprehensive "SEC Comment Letter Process Handbook" provides a heap of practical guidance about how to deal with the Corp Fin Staff during the comment letter process, etc. This one is a real gem - 24 pages of practical guidance.

The Battle Over Access to Pre-IPO Correspondence: Are Response Letters Part of Your Disclosure Stream?

Recently, this Market Watch article concluded it was unlikely the SEC would release its pre-IPO correspondence with issuers prior to an offering's effective date. Some investors have argued that Corp Fin comment letters would assist them in their investment analysis - perhaps misunderstanding the nature of the comment letter process.

That said, companies may need to start considering their responses to comments as part of their public disclosure record - and thus be more careful about what they say in response to a comment...

More Examples of How "Journalism" Has Fallen Off a Cliff

Recently, I decried the state of reporting by the mass media. A while back, I got a chuckle out of this Businessweek article entitled "Facebook Fought SEC to Keep Mobile Risks Hidden Before IPO" because the reporters read so much more into the Corp Fin comment process than might really be there. And this Cooley news brief and Bloomberg article about Manchester U's IPO comments provide more in the way of a cautionary tale about how you respond to comments...

But this crappy Business Insider article really takes the cake, even going so far to claim that long-time Corp Fin Assistant Director Barbara Jacobs is a Professor for PLI. Just because you speak on a panel doesn't make you a "Professor"...

Recently, the International Center for Journalists & International Finance Corporation's Global Corporate Governance Forum put out this guidebook, "Who's Running the Company: A Guide to Reporting on Corporate Governance."

Our December Eminders is Posted!

We have posted the December issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!

- Broc Romanek