E-Minders May 2016

In This Issue:

E-Minders is our monthly e-mail newsletter containing the latest developments and practical guidance for corporate & securities law practitioners.

We view TheCorporateCounsel.net as the gathering place for the community and encourage those who may not yet be members to take advantage of a 2016 No-Risk Trial to see what you are missing. Here are 10 Good Reasons to try us now.

You can subscribe below to receive a complimentary E-Minders subscription - even if you don't subscribe to TheCorporateCounsel.net. Our hope is that once you get to know us, you will understand the true value of a subscription to TheCorporateCounsel.net. Note that subscribers to TheCorporateCounsel.net should sign up below for E-Minders too, as we don't have the e-mail addresses for many people in our community.

Our Executive Pay Conferences: 20% Early Bird Discount: We are excited to announce that we have just posted the registration information for our popular conferences - "Tackling Your 2017 Compensation Disclosures: Proxy Disclosure Conference" & "Say-on-Pay Workshop: 13th Annual Executive Compensation Conference" - to be held October 24-25th in Houston and via Live Nationwide Video Webcast. Here are the agendas - 20 panels over two days.

Early Bird Rates - Act by May 20th: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes - and avoid costly pitfalls - by offering a special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by May 20th to take advantage of the 20% discount.

It's Printed: 2017 Edition of Romanek's "Proxy Season Disclosure Treatise": Broc Romanek has wrapped up the 2017 Edition of the definitive guidance on the proxy season - Romanek's "Proxy Season Disclosure Treatise & Reporting Guide" - and it's been 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.

It's Done! 2016 Executive Compensation Disclosure Treatise - With a "Pay Ratio" Chapter! We just wrapped up Lynn, Borges & Romanek's "2016 Executive Compensation Disclosure Treatise & Reporting Guide" – and it's done being printed! This edition has two new key chapters – one on the new SEC's pay ratio rules, with over 60 pages of practical analysis & model disclosures – and one with over 120 pages of sample proxy disclosures and detailed analysis from the 2015 proxy season!

How to Order a Hard-Copy: Remember that a hard copy of the 2016 Treatise is not part of a CompensationStandards.com membership so it must be purchased separately. Act now as this will ensure delivery of this 1600-page comprehensive Treatise as soon as you can. Here's the Detailed Table of Contents listing the topics so you can get a sense of the Treatise's practical nature. Order Now.

Upcoming Webcasts on TheCorporateCounsel.net: Join us on May 4th for the webcast - "Legal Opinions: The Hot Issues" - to hear from the foremost authorities on legal opinions as they analyze the most difficult topics today: Goodwin Procter's Don Glazer, Mike Kendall and Ettore Santucci.

And join us on June 2nd for the webcast - "Yes, It's Time to Update Your Insider Trading Policy" - to hear Chris Agbe-Davies of Spectra Energy, Ari Lanin of Gibson Dunn, Alan Dye of Hogan Lovells and Section16.net and Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster provide practical guidance on revisiting your insider trading policy, as well as your insider trading training program for officers, employees and directors.

And join us on July 13th for the webcast - "Non-GAAP Disclosures: What Is Permissible?" - to hear Brink Dickerson of Troutman Sanders; Deb Kelley of Genesis; and Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster provide practical guidance about what to do now with your Non-GAAP disclosures given the attention paid to them by the SEC, media and investors.

And join us on September 8th for the webcast - "Current Developments in Capital Raising" - to hear Manatt Phelps' Katherine Blair, Calfee Halter's John Jenkins and Davis Polk's Michael Kaplan explore the latest developments in the capital markets, including alternatives such as PIPEs, registered direct offerings, "at-the-market" offerings, equity line financing and rights offers.

There is no cost for these webcasts if you are a member of TheCorporateCounsel.net. If you are not a member, take advantage of our no-risk trial to access the programs. You can sign up for this no-risk trial online, send us an email at info@thecorporatecounsel.net - or call us at 925.685.5111.

Upcoming Webcasts on DealLawyers.com: Join us on May 3rd for the webcast - "M&A Research: Nuts & Bolts" - to hear Cooley's Mutya Harsch; Wachtell Lipton's Susan Hesse; White & Case's Dan Kessler; Foley & Lardner's Ben Rikkers and Fredrikson & Byron's Jamie Snelson explain how to quickly analyze potential deals and their related documents, which can be more of an art than a science.

And join us on July 19th for the webcast - "How to Apply Legal Project Management to Deals" - to hear the experts who are on the ABA M&A Task Force for Legal Project Management - Haynes and Boone's Bill Kleinman, QLex Consulting's Aileen Leventon and Verrill Dana's Dennis White - that created a new Legal Project Management Guidebook which contains a variety of new tools for deal lawyers - including the "Deal Issues Negotiating Tool" that you can use to identify key deal points.

And join us on September 28th for the webcast - "Middle Market Deals: If I Had Only Known" - to hear Joe Feldman of Joseph Feldman Associates about how to best avoid post-closing deal surprises for a mid-market deal.

No registration is necessary - and there is no cost - for these webcasts for DealLawyers.com members. If you are not a member, take advantage of our no-risk trial to access the programs. You can sign up online, send us an email at info@deallawyers.com - or call us at 925.685.5111.

Upcoming Webcasts on CompensationStandards.com: Join us on May 17th for the webcast - "The Top Compensation Consultants Speak" - to hear Mike Kesner of Deloitte Consulting, Blair Jones of Semler Brossy and Ira Kay of Pay Governance "tell it like it is. . . and like it should be."

And join us on June 14th for the webcast - "Proxy Season Post-Mortem: The Latest Compensation Disclosures" - to hear Mark Borges of Compensia, Dave Lynn of CompensationStandards.com and Morrison & Foerster, Ron Mueller of Gibson Dunn analyze what was (and what was not) disclosed this proxy season.

No registration is necessary - and there is no cost - for these webcasts for CompensationStandards.com members. If you are not a member, take advantage of our no-risk trial to access the programs. You can sign up online, send us an email at info@compensationstandards.com - or call us at 925.685.5111.

The Reg S-K Reboot Begins!!!

No!!! No!!! No!!! Broc doesn't want the SEC to modernize Regulation S-K! That means he'll have to update 1500 pages of our "Handbooks"! At least the SEC is not touching Item 402 - at least not yet.

Anyways, the SEC voted in mid-May to issue this 341-page concept release on a big slice of Regulation S-K - the Item 100-300 series. 341 pages! We're posting the related memos in our "Regulation S-K" Practice Area (and our "Disclosure Effectiveness" Practice Area).

Here's an excerpt of this blog by Cooley's Cydney Posner with notes from the open Commission meeting (also see this WSJ article):

The release addresses three basic topics: framework, line items and presentation and delivery.

Framework. The staff observed that, although there are some prescriptive and structured elements, the current requirements are largely principles-based, with disclosure determined on the basis of "materiality" as defined in TSC Industries, Inc. v. Northway, Inc., specifically, whether there is a substantial likelihood that a reasonable investor would consider the information important in decision-making and whether a reasonable investor would view the information to significantly alter the "total mix" of information available. However, Chair White also recognized the importance of not burying material information in an avalanche of trivia. Considering the costs and benefits, including the expressed interests of shareholders in receiving more information and the expressed interests of companies in efficiencies, how should the disclosure requirements be structured? Should some level of investor sophistication be assumed? As Commissioner Stein suggested, should the system be re-imagined? for example, she questioned why the release did not address concepts as basic as the form-based system.

Line items. The discussion indicated that the release addresses six items: core company disclosure, company performance (primarily financial), risk, securities, industry guides and exhibits. The release also considers whether the categories for scaled disclosure are appropriate and whether recent topics of interest and shareholder engagement should be added to the requirements, for example, stock buybacks and sustainability. In addition, the release hints at the prospect of semi-annual, instead of quarterly, reporting.

Presentation and delivery. Here, the release will consider various approaches to presenting and accessing the disclosure and ways to reduce repetition, including cross-references, incorporation by reference, hyperlinks, company websites and standardization versus flexibility. Stein expressed the concern that, in considering whether the quantity of information is excessive, the SEC needs to balance that with concerns about the quality of information. In addition, she observed that a re-imagined delivery system should take into account that different generations may prefer to have their information delivered in different ways, for example, a younger audience may prefer to receive information through tweets.

Technical question: So why is this a "concept release" - but the S-X counterpart was just a "request for comment"? Maybe to satisfy the FAST Act's requirement for an S-K study? No idea. Here's the opening statements from the various Commissioners about the concept release...

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.

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.

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

In late April, the banking regulators began 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).

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.

More on "10-K/10-Q Comment Letters: Cut in Half Over 5 Years?"

A while back, we blogged about a study showing a five-year decline in the number of Form 10-K & 10-Q comment letters issued by Corp Fin. We ran a poll as to why the number of comment letters has declined - and most folks thought it was due to companies doing a better job with their disclosures (34%); followed by Corp Fin being too busy reviewing deals (31%) and the fact that there are fewer public companies these days (9%; there's been a 30% reduction in the number of public companies since 2000).

But here's a response from Reid Hooper of Covington & Burling about a possible reason that we didn't poll on:

The reason why the number of Form 10-K/10-Q comment letters has been falling for the past few years is relatively straight-forward. The Corp Fin Staff has a much higher materiality threshold. One reason could be a shift in Staff focus from commenting on '34 Act reports to a "fuller" review of repeat issuer registration statements. Another reason for the possible change in the staff's materiality threshold could be due to the change from a rules-based exam report to a more principles-based approach when reviewing Form 10-K/10-Qs.

Comment letters on a Form 10-K are now just 1-2 comments (depending on the reviewer & group) - and the comments will now almost always be "futures" comments. In those instances where the Staff may seek an amendment to a Form 10-K/10-Q, the comments generally relate to a material disclosure matter rather than a mere matter of technical compliance.

After hearing Corp Fin Director Keith Higgins at the ABA conference, it appears that Reid is indeed correct. Keith talked about how Corp Fin has raised its materiality threshold in issuing comments - and how the Office of Disclosure Standards has assisted the Division in being more consistent about the type of comments issued. Corp Fin's comments are more likely to impact the significance of disclosure these days - rather than ensure mere compliance with a regulation that doesn't necessarily elicit disclosure that has real meaning.

Keith also noted that the Staff tends to issue more industry-specific comments these days. And he felt we were doing a better job in drafting - so that we can take some credit for the reduction in comments...

EDGAR: The SEC's New "Announcement" Service

On Broc's "wish list" from the SEC, he's had a wish that the SEC would inform us when EDGAR is experiencing problems - or problems are resolved - through a blog or other sort of channel. Good news! The SEC's Filer Support team recently implemented an "announcement" functionality on the "Information for Filers" page. It's a RSS news/announcement feed that folks can sign-up to receive an email every time that Filer Support has something important to note (i.e. EDGAR closings, change in support hours, etc.).

Each announcement will be posted on both the "Information for Filers" page - and this "Announcements" page.

Deferred Prosecution Agreements: DC Circuit Limits District Court Review

Here's a summary of this Cleary Gottlieb memo (see more memos in our "White Collar Crime" Practice Area):

In a case with significant implications for the power of district judges to review the terms of deferred prosecution agreements ("DPAs") between the Department of Justice ("DOJ") and corporations to resolve criminal investigations, on April 5, 2016, the United States Court of Appeals for the District of Columbia Circuit took the extraordinary step of granting a writ of mandamus and vacated a lower court decision that had the practical effect of rejecting a DPA between the DOJ and an aerospace services company, Fokker Services, B.V. The case has significant implications in light of a judiciary that has been increasingly questioning the terms (and in some instances, the wisdom) of the DOJ's decisions to enter into DPAs.

Conflict Minerals: SEC Not Appealing to SCOTUS

As noted in this letter from Attorney General Loretta Lynch to House Speaker Paul Ryan, the SEC has decided not to appeal the result in SEC v. NAM to the US Supreme Court. As noted in this alert, this doesn't impact the Form SDs being prepared now and Corp Fin's April '14 guidance remains as the last word...

PCAOB: "Auditor Supervision of Other Auditors" Proposal

In mid-May, the PCAOB proposed changes to a slew of existing auditing standards that would strengthen existing requirements and impose a more uniform approach to a lead auditor's supervision of other auditors. Here's the proposing release.

PCAOB Staff Observations: Audit Committee Communications

In early April, the PCAOB issued this 9-page "Staff Observations Report" describing inspection observations related to auditor communications with audit committees, finding that 93% of the audits inspected in 2014 passed muster. Here's an excerpt from the related press release:

Inspections staff identified deficiencies in complying with the new standard in 7 percent of the relevant audits inspected. Those deficiencies did not by themselves result in an insufficiently supported audit opinion, but nevertheless constituted departures from the requirements of the standard and indicated a potential defect in firms' systems of quality control. Inspections staff also identified deficiencies related to other PCAOB rules and standards requiring communications with audit committees, such as communications concerning independence.

During interviews with inspections staff, audit committee chairs generally indicated that effective two-way communication with their auditors had occurred. Some audit committee chairs noted that after the effective date of the standard, there had been improvements in the robustness and formality of communications with their auditors, including more in-depth discussions with the auditor about audit progress, significant risk areas, and audit findings. Other audit committee chairs noted that their auditors had been communicating the matters required under the standard even before the standard came into effect and, accordingly, they had not observed a significant change in their communications with their auditors in 2013.

Auditor Engagement: PCAOB Requests Comment on How AS #7 Is Faring

In early April, the PCAOB issued this "request for comment" to check how the implementation of AS #7, "Engagement Quality Review" has been faring since its adoption in 2009.

Shareholder Engagement: How the DOJ's ValueAct Lawsuit Poses Problems

In early April, the DOJ brought an enforcement action against ValueAct for failing to comply with the HSR waiting period requirements. Here's an excerpt from this great memo by Davis Polk's Arthur Golden, Tom Reid and Laura Turano (& other memos are being posted in our "Shareholder Engagement" Practice Area):

We believe that this case will be important to watch because of the types of statements and actions by ValueAct that are cited by the DOJ as evidence of an intent to influence the business decisions of both companies. For example, the complaint identifies internal discussions at ValueAct regarding proposing changes to Halliburton's executive compensation plan, and a meeting between ValueAct and Halliburton's CEO during which ValueAct detailed its preferred approach to executive compensation, commented on Halliburton's current compensation plan and proposed specific changes to the plan, as evidence of an intent to influence the business decisions of Halliburton. While this may have been part of a broader demonstration of lack of investment intent, it does seem to be (by itself) a typical subject of discussion with investors who do not seek to influence management or major corporate actions.

Although the ValueAct complaint will cause those shareholder activists who buy shares with an intention to engage with management and other shareholders to consider more carefully whether they are required to file for HSR clearance rather than rely upon the protection of the "passive investment" exemption, the practical impact of this may be limited. Some shareholder activists do not rely on the investment intent exemption but instead structure their investments so as to not be made by a special purpose entity that would exceed the "size of person" threshold (thus enabling the entity to buy up to $312.6 million of shares before a filing would be required) and split their investments across multiple special purpose entities to avoid an HSR filing while they acquire large stakes in the target company.

But, the ValueAct complaint should serve as a reminder to institutional investors that have traditionally considered themselves to be passive investors for HSR purposes. In the past, we have noted how institutional investors, which have typically engaged in quiet outreach, are taking an increasingly active and public role on corporate governance matters, and we have observed that the line between shareholder activists and institutional investors is blurring. Once an institutional or similar traditionally passive investor crosses the line–either by cooperating with shareholder activists in certain situations or by taking an increasingly assertive role with its portfolio companies–such an institution will have to examine whether it can claim to have a truly "passive" intent at the time of any future share purchases. It is important to note that this determination is often not a "one time" consideration given the frequent portfolio rebalancing and other holding changes of traditional institutional investors. For example, if the investor loses its "investment intent," the subsequent acquisition of any additional shares may require a filing if the investor's total holdings will exceed the applicable HSR threshold. Although an HSR filing, in the absence of substantive antitrust issues, is unlikely to significantly delay the strategy of a shareholder activist or a traditional institutional investor, it does involve notification of the target company, could chill cooperation among shareholder activists and institutional investors somewhat and certainly adds an important compliance component to their planning.

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.

Trump & Sausages!

This blog was not hacked. Broc is trying a little social experiment. Here is a poll about whether you only bothered to read Broc's blog because it said "Trump & Sausages." But don't fear, this really is about those two topics - and in the context of our community!

Annual Meeting Disturbed By (Thrown) Sausages!

As noted in this article from "The Guardian," a fight between shareholders over free sausages at Daimler's annual meeting broke out. The company served 12,500 sausages to the 5500 shareholders who attended. That's a lot of meat! Brings back memories of Animal House's "food fight" scene. "That boy is a P-I-G, pig"...

A Real Trump Deal Cube!

If you're relatively new to our blog, you missed Broc's year of running a March Madness-style contest pitting the hundreds of toys in my "Deal Cube Museum." He was showing off the museum to a friend recently & was reminded that it does indeed include a Trump deal cube!

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?

DOJ Kicks Off FCPA Enforcement Pilot Program

In early April, the DOJ's Fraud Section released this "guidance memorandum" containing three initiatives, including an FCPA Pilot Program that will reduce fine beyond what is now available under the US Sentencing Guidelines for companies that voluntarily disclose possible FCPA violations, fully cooperate and implement timely and appropriate remediation. We're posting related memos in our "FCPA" Practice Area.

Audit Response Letters: Confirmation.com's Centralization

Here's something that Locke Lord's Stan Keller & Broc recently wrote:

Confirmation.com is an electronic centralized service available to audit firms to outsource the audit confirmation process. This service is now being offered to process audit response letters. Under it, audit firms send audit letter requests to - and receive audit letter responses from - law firms of an auditor's clients using the Conformation.com portal.

There are several issues that law firms have identified with this process (some real, some perhaps imagined) - and it's a work in progress. A threshold concern for a law firm is the "terms of use" that the site purports to impose on users of the system. In its most recent form, several aspects of the "terms of use" present issues. It's possible for law firms to individually negotiate these - but a more practical approach is for the bar as a whole to work with Confirmation.com to come up with acceptable standard terms.

Another concern is getting comfortable that the request for confidential information is coming from - or is authorized - by the client. This can be addressed by an actual signed (albeit electronic) request from the client on the portal - or by a confirmatory email from the client (which might be done as a standing authorization). Also of concern is the confidentiality of the audit response letter on a third-party system (particularly when the letter describes loss contingency matters).

Confirmation.com considers its portal to be a mere conduit for transmission of information to the auditor - but unlike the mails or a delivery service, the information remains on the portal. The site also indicates that the security of its portal has been approved by a third-party rating service - and one might suspect it is no less secure than a law firm's own servers. Finally, the question has been asked whether supplying the information to a third-party portal might affect the attorney-client privilege. However, most commenters believe that since the portal is not an intended recipient, this should not be a problem.

There are two aspects of the new system: one is for receipt of requests and the other is for transmission of law firm responses. The issues identified don't necessarily relate to both aspects. Thus, if there is concern over confidentiality of responses, a request could be received through the portal - and the response could be handled the old-fashioned way. Some audit firms and companies appear to prefer the convenience of a centralized request system - and law firms may face pressure to accommodate those preferences. Indeed, for law firms that use a centralized approach for handling audit response requests, there can be advantages participating in the new electronic system because requests can more easily be directed to a designated person or group within the law firm.

For now, however, until the issues have been resolved, particularly concerns with the "terms of use," many law firms are declining to participate for both requests and responses - instead, they are asking for requests directly from clients and responding with letters sent directly to the auditors. This may change over time.

New "Non-GAAP Financial Measures Handbook"

Spanking brand new. By popular demand, this comprehensive "Non-GAAP Financial Measures Handbook" covers a challenging topic, from the basics to everything you want to know about Regulation G, Item 10(e) of Regulation S-K & Form 8-K's Item 2.02. This one is a real gem - 89 pages of practical guidance - and its posted in our "Non-GAAP Disclosures" Practice Area. Big HUGE hat tip to Joe Alley of Arnall Golden Gregory for authoring this beast! This is a hot topic, as noted in Broc's blog entitled "Non-GAAP Financial Measures: Will the SEC Curb Their Use?"...

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:

- Stats: How Retail Holders Vote
- Proxy Access: T. Rowe Price's Updated Policy
- Proxy Access: The Latest Stats
- Mobile Proxy Statements: Remember the "Tracking Cookie" Prohibition
- A Closer Look at Buffett's Annual Shareholders Letter
- ESG: Glass Lewis to Include Ratings in Reports

People: Who's Doing What and Where

SEC Commissioner Nominees: Political Spending Disclosure Throws a Wrench

In early April, the Senate Banking Committee met to approve the two SEC Commissioner nominees - but rather than going through the motions of a routine approval, a group of Democrats essentially forced a postponement after demanding that the SEC propose rules requiring political contributions disclosure. Here's an excerpt from this WSJ article by Andrew Ackerman:

A revolt by Democratic lawmakers is jeopardizing the nominations of two White House picks for the Securities and Exchange Commission, threatening to further hamper the short-handed agency struggling to complete key rules. During what was expected to be a routine vote Thursday, a group of Democratic senators drew a line in the sand, demanding that the markets regulator adopt new rules forcing companies to disclose spending on political activities–an issue on which the commission's current chairman, along with the nominees, have been noncommittal.

Four Democrats on the Senate Banking Committee, including Sens. Charles Schumer of New York and Robert Menendez of New Jersey, said they would oppose the SEC picks, after which the panel postponed the vote. The battle reflects growing desires by Democratic lawmakers and their allies to expand the SEC's work beyond typical investor-protection issues. It also shows intensifying divisions within the party over the proper qualifications and policies for financial nominees. "The SEC needs commissioners who believe in and support campaign spending transparency, and unfortunately these nominees have yet to answer that call," Mr. Schumer said in a written statement, adding the two nominees were "fence-sitting" on the issue.

The concerns cast a cloud over the ability of both SEC nominees–Lisa Fairfax, a Democrat, and Hester Peirce, a Republican–to win Senate confirmation, according to Senate aides. The SEC is now down to just three members, two less than its full complement, after two left the agency late last year. If the SEC remains with only three members for a prolonged period, it could be difficult for Chairman Mary Jo White to advance her agenda in what is likely her final year at the markets regulator.

The strength of the opposition is surprising, as the banking panel has easily advanced "paired" Democratic and Republican nominees in the past. That some Democrats are refusing to back Ms. Fairfax is also surprising because she was seen as a compromise pick after the White House's favored selection for the SEC slot, a well-known corporate securities lawyer, ran into Democratic opposition last summer over his ties to industry. White House nominees for financial positions have faced increasing resistance from Democrats as the party is torn by internal debate over the proper qualifications and policies for such officials, an argument that has also spilled into the Democratic presidential contest.

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

Broc received a flurry of questions in reaction to his blog about how the two SEC Commissioner nominees faced trouble during the Senate Banking Committee approval process. He turned to Jack Katz - former long-time Secretary of the SEC - to help him 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.

In Corp Fin, Lona Nallengara has joined Bridgewater Associates as the Chief Governance Officer. Karen Ubell has joined Cooley in the Palo Alto office.

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