E-Minders February 2017
In This Issue:
E-Minders is our monthly e-mail newsletter containing the latest developments and practical guidance for corporate & securities law practitioners.
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Heavens. We could launch a new blog just devoted to the topic of dramatically cutting the number of rules with the stroke of a pen. Here's the intro from Cydney Posner's blog about this:
The WSJ reports about yet another executive order that was signed today, this one designed to cut back on federal regulation. Under the executive order, federal agencies will need to eliminate two regulations for every new one created. The intent of the order, according to the new President, is to cut at least 75% of all federal regulations. In addition, according to the WSJ, the order "caps costs of new regulations for the remainder of the fiscal year and creates a budget process for new regulations in the next fiscal year, which begins in October. This budget, separate from the congressional appropriation process, will be set by the White House."
It sounds great in theory. But implementing a regulatory reduction like this - forcing agencies to kill two rules for every new one - is bound to result in disaster. There needs to be some sort of sophisticated - & holistic - approach. Perform surgery with a scalpel. Or we guess you could just go at it with a meat cleaver. This Politico article says it would take years to accomplish, with costly court challenges along the way.
The White House confirmed on Monday that a new executive order to slash regulations will not apply to independent regulatory agencies such as the Securities and Exchange Commission, a spokeswoman said.
Wow! That was fast. Broc had a bunch of blogs ready to run leading up to President Trump selecting a SEC Chair. Just the day before Trump tapped his Chair, Broc blogged about Carl Icahn providing input. And now Sullivan & Cromwell's Jay Clayton has been tapped. Jay won't likely need to clear much of a hurdle during his Senate confirmation hearings – but given Trump's posturing during his campaign, he will need to sit through questions about his ties to Goldman Sachs – including his wife's job there (as noted in this Reuters article).
Some of other candidates also were from big law firms – this article notes that Trump met with Gibson Dunn's Debra Wong Yang. But Debra doesn't do deals. Jay's bio indicates he does more than deals, but he's primarily a deal guy. You have to go a ways back to find the last SEC Chair who was a deal lawyer – Chris Cox (who was a deal lawyer before he became a Congressman).
And it's been a long time – a real long time – since the last SEC Chair was plucked directly from a law firm. Of course, that background is quite common for a Division Director. Richard Breeden had been a law firm lawyer, but he had two gigs between firm life & becoming Chair. The closest comparison is Ray Garrett, Jr., who left a Chicago firm to become SEC Chair. Garrett had been head of Corp Fin a few years before he left his firm to lead the Commission in the early '70s.
It's also been a long time since someone was appointed who wasn't previously publicly visible (this MarketWatch article notes that the wire services don't even have Jay's pic on file). Let's review the Chairs over my career: Shad, Breeden, Levitt, Pitt, Donaldson, Cox, Schapiro and White – all had been in the public eye before ascending to SEC Chair. Ruder is the exception here. But Broc is not suggesting that visibility is some sort of SEC Chair qualification. It isn't.
Some folks asked me yesterday what was "normal" for a SEC Chair. There really isn't a standard for the job – the backgrounds of former SEC Chairs are all over the lot. A few have worked at the SEC before. Chair Levitt wasn't a lawyer. Chair White was a prosecutor. Chair Ruder was an academic. Chair Cox was a Congressman. And it's not the sort of appointment where you read tea leaves from past writings. Obviously, someone's background plays a role – but the biggest indicator of what a Chair will do is looking at the general direction the President points to...
In mid-January, the SEC sanctioned MDC Partners for violating Reg G & Item 10(e) of Reg S-K in connection with its use of non-GAAP financial measures. Some people are calling this the first non-GAAP enforcement case – but that's not quite right. There aren't many, but this isn't the first non-GAAP case. In fact, this isn't even the first non-GAAP case since the new CDIs!
Here's an excerpt from the SEC's order:
Despite agreeing to comply with non-GAAP financial measure disclosure rules in December 2012 correspondence with the Commission's Division of Corporation Finance, MDCA continued to violate those rules for six quarters by failing to afford equal or greater prominence to GAAP measures in earnings release presentations containing non-GAAP financial measures. Furthermore, for seven quarters between mid-2012 and early-2014, MDCA did not reconcile "organic revenue growth," which as calculated by MDCA was a non-GAAP financial measure, to GAAP revenue.
In addition, the SEC announced that the company agreed to pay a $1.5 million penalty to settle charges that it failed to disclose certain perks enjoyed by its then-CEO. In April 2015, the company disclosed that the SEC was investigating its CEO's expenses & the company's accounting practices.
The SEC's order says that the company disclosed a $500k annual perk allowance for its CEO – but didn't disclose millions of dollars in additional perks. These included private aircraft usage, club memberships, cosmetic surgery, yacht and sports car expenses, jewelry, charitable donations, pet care, & personal travel expenses. The CEO resigned in July 2015 and returned $11.3 million worth of perks, personal expense reimbursements, and other items of value improperly received over a 5-year period. We're posting memos regarding this case in our "Non-GAAP Disclosures" Practice Area.
This Davis Polk blog discusses an abundance of legislative initiatives designed to enhance Congressional control over the agency rulemaking process. In early January, the House passed two separate statutes that would make it easier for Congress to intervene in the regulatory process. Naturally, the proposed statutes have the kind of colorful & politically charged names that we've come to expect from our lawmakers.
First, there's the "Midnight Rules Relief Act of 2017," which would enable Congress to pass omnibus disapproval resolutions that cover multiple regulations submitted during the final year of a President's term. Next comes the "Regulations from the Executive in Need of Scrutiny (REINS) Act of 2017," which provides that "major rules" – those identified as likely to cause annual economic effects of at least $100 million - could only take effect if Congress adopted a joint resolution approving of the rule.
A third bill, the "Require Evaluation Before Implementing Executive Wishlists (REVIEW) Act of 2017," has also been introduced. Under this statute, agencies would have to postpone the effective date of "high-impact" rules—those determined to impose annual economic costs of $1 billion or more—until after the final disposition of all actions seeking judicial review of the rule.
The blog's skeptical that any of this legislation will pass absent a decision by the Senate to eliminate the filibuster, but this excerpt suggests that these statutes reflect the mood of Congressional Republicans:
Congressional Republicans are both eager to unwind the Obama Administration's regulatory agenda and cognizant of the difficulties of doing so through notice-and-comment rulemaking. Moreover, these bills signal the desire of many in Congress to play a greater role in the regulatory process and a view that, according to the Purpose section of the REINS Act, "Congress has excessively delegated its constitutional charge while failing to conduct appropriate oversight and retain accountability for the content of the laws it passes."
While reforms as sweeping as those proposed in some of these statutes are not expected, we should expect further efforts by Congress to increase its control over agency rulemaking.
Remember when John said in the above that we should expect further Congressional action on rulemaking? This blog from Cydney Posner says that they're already back at it. After passing the REINS Act & the Midnight Rules Relief Act, the House of Representatives came back the following week with another round of legislation:
In mid-January, the House Republicans (with five Democratic votes) passed H.R. 5, the "Regulatory Accountability Act," a bill that would change the way federal agencies issue regulations and guidance. This bill would require agencies to, as part of their rulemaking processes, expand the factual determinations required, provide advance notice with regard to certain important rule proposals and follow specified procedures for issuing important guidance, among other processes. Included as part of the same bill is the "Separation of Powers Restoration Act," which provides for de novo judicial review of agency actions.
Another bill has been introduced in the House that has the SEC's rulemaking process squarely in the cross-hairs. The "SEC Regulatory Accountability Act" would enhance the requirements for cost-benefit analyses of proposed SEC rules & provide for post-adoption impact assessment and periodic review of existing regulations.
In her final speech as SEC Chair, Mary Jo White pushed back against legislative initiatives to remake the rulemaking process. In particular, she said that the SEC Regulatory Accountability Act would provide "no benefit to investors beyond the exhaustive economic analysis we already undertake" and that the Act's requirements would prevent the SEC from "responding timely to market developments or risks that could lead to a market crisis."
Broc tries to innovate with something new every year. In 2016, it was the "Big Legal Minds" podcast series. The year before was a facelift for the home pages of our sites (with new features like our "Job Board"). In 2014, he launched the "Women's 100" events & started posting the popular videos on CorporateAffairs.tv.
For 2017, it's this new "Broc Tales" blog – as well as a counterpart on DealLawyers.com, "John Tales" – which attempts to educate through storytelling. The stories on "Broc Tales" will relate to the topic at hand – Reg FD for the bulk of '17. Within the stories, he'll be throwing in personal anecdotes occasionally. Inspired by the writings of Sarah Vowell. Hoping to spice it up. Here's the first two entries:
But maybe his life ain't your cup of tea. Not much Broc can do about that. Go ahead & subscribe to this blog now (using this "Subscribe" link) so that you can receive new entries pushed by email during the coming year! And if you do check it out, let Broc what you think!
Education by entertainment! The new blog on DealLawyers.com – "John Tales" – will teach you the kinds of things that you don't learn at conferences, nor in treatises or law firm memos. John Jenkins is a 30-year vet of the deal world & he brings his humorous stories to bear on this new "long-form" blog.
When you check out "John Tales" – located at the top left corner of the DealLawyers.com home page – insert your email address when you click the "Subscribe" link if you want these precious tales pushed out to you!
As first came to our attention in this Gibson Dunn blog, Corp Fin has issued this no-action response to HP, allowing the company to exclude a Chevedden proposal that sought to prevent the company from holding virtual-only annual meetings. Corp Fin based its decision on Rule 14a-8(i)(7), the first time that the Staff has ruled that this type of proposal is "ordinary business." Just a few weeks earlier, Corp Fin issued this no-action response to Hewlett Packard Enterprises – not to be confused with HP (they are separate companies) – that allowed the exclusion of a similar proposal on procedural grounds. Don't forget the transcript from our recent webcast: "Virtual-Only Annual Meetings: Nuts & Bolts"...
By the way, EQS Group became the 1st company in the UK to hold a virtual-only meeting during this past year...
In early January, CII published a group of FAQs to majority voting. CII believes that companies should adopt meaningful majority vote standards that are clear and that require failed nominees. CII also doesn't want companies to dress up a plurality-plus standard – as described in a proxy statement – to look like a majority vote standard. Here's an excerpt from this blog by Davis Polk's Ning Chiu:
The Council of Institutional Investors has published an FAQ on majority voting for directors in which it advocates for "consequential majority voting," a form of majority voting in director elections that essentially removes board discretion if a director receives less than majority support.
90% of S&P 500 companies have a traditional form of majority voting, compared to only 29% of Russell 3000 companies. Most mid-cap and small-cap companies elect directors under a plurality vote system, where the nominees who receive the most "for" votes are elected until all board seats are filled. In an uncontested election, given that the number of nominees is equal to the number of board seats available, a nominee can be elected with one vote.
In mid-January, the SEC announced that General Motors agreed to pay a $1 million penalty to settle charges that deficient internal accounting controls prevented it from properly assessing the potential financial statement impact of a defective ignition switch found in some vehicles.
According to the SEC's order, ASC 450 requires companies dealing with potential loss contingencies – such as GM's potential recall – to assess the likelihood of whether the potential recall will occur & provide an estimate of the loss or range of loss, or provide a statement that such an estimate cannot be made. In GM's case, shortcomings in its controls prevented that from happening:
The SEC's order finds that the company's internal investigation involving the defective ignition switch wasn't brought to the attention of its accountants until November 2013 even though other General Motors personnel understood in the spring of 2012 that there was a safety issue at hand. Therefore, during at least an 18-month period, accountants at General Motors did not properly evaluate the likelihood of a recall occurring or the potential losses resulting from a recall of cars with the defective ignition switch
The GM proceeding is the second involving internal controls this month. Last week, the SEC announced that L3 Communications agreed to pay a $1.6 million penalty to settle charges that it failed to maintain accurate books and records and had inadequate internal accounting controls.
We have posted the transcript for our popular webcast: "Non-GAAP Disclosures: Analyzing the Comment Letters."
The ABA recently announced that it has issued the first comprehensive revision to the "Model Business Corporation Act" since 1984:
Beginning in 2010, the Corporate Laws Committee has undertaken a thorough review and revision of the Model Act and its Official Comment. This effort has resulted in the adoption and publication of the Model Business Corporation Act (2016 Revision). The 2016 Revision is based on the 1984 version and incorporates the amendments to the Model Act published in supplements regularly thereafter, with changes to both the Act and its Official Comment. Also included are notes on adoption and revised transitional provisions that are intended to facilitate legislative consideration in adopting the new version of the Model Act.
The MBCA is the model for more than 30 state corporate statutes, so it's an extremely influential publication. On a personal note, the foreward to the new edition gives special recognition to the MBCA's Reporter Emeritus – the late Prof. Michael Dooley. I was fortunate enough to have Prof. Dooley for Securities Regulation when I was in law school – he was an excellent teacher, a distinguished scholar & a real gentleman.
As Yogi Berra might put it, "it's like deja vu all over again." In mid-January, the SEC tagged BlackRock for language in separation agreements that it believed created disincentives for whistleblowing. According to the SEC's order, more than 1,000 departing BlackRock employees signed separation agreements containing violative language stating that they "waive any right to recovery of incentives for reporting of misconduct" in order to receive severance payments. This action is notable because BlackRock is one of the biggest institutional investors out there!
Last month, Broc blogged about the latest separation agreement case – the day after he blogged about another separation agreement case – and noted that more were on the way.
The SEC's ongoing emphasis on separation agreements hammers home the need to modify agreements that may create impediments to whistleblowing. It's also another excellent reason to tune into our upcoming webcast – "Whistleblowers: What Companies Should Be Doing Now"...
ESG – particularly sustainability & climate change – continues to grow in importance. There continues to be a multitude of standards to be aware of. The latest is a group of new standards from GRI ("Global Reporting Initiative"). The new GRI standards are modules that replace the former 4th generation of GRI standards, as fully explained on their site. We continue to post all the latest standards in our "ESG" Practice Area – as well as all sorts of memos on the latest (such as this 118-page guide on ESG integration for investors)...
Also see this blog that Broc recently posted on the "Proxy Season Blog" entitled "Shareholder Proposals: Pressure on Investors About Their ESG Voting"...
Here's the intro from this blog by Davis Polk's Ning Chiu:
Recently, the Delaware Supreme Court reversed the Court of Chancery in Sandys v. Pincus on findings of director independence at Zynga. The Court of Chancery had dismissed the suit for failure to make pre-suit demand on the board or alleging that demand would have been futile, but the Delaware Supreme Court found that the plaintiff had created a reasonable doubt that the board could have properly exercised independent, disinterested business judgment in responding to a demand. If director independence is compromised, then demand is excused.
Broc had a lot of fun taping this 38-minute podcast with Stan Keller of Locke Lord. The dude can ball (meaning shoot hoops). We highly encourage you to listen to these podcasts when you take a walk, commute to work, etc. Stan tackles:
1. How did you become a lawyer in this field?
This podcast is also posted as part of our "Big Legal Minds" podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the "My Podcasts" app on your iPhone and search for "Big Legal Minds"; you can subscribe to the feed so that any new podcast automatically downloads...
– The Disclosure of Material Relationships by Financial Advisors
Remember that – as a "thank you" to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called "Back Issues" near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
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:
– Proxy Access: Is NYC Comptroller Graduating to Submitting Candidates?
Trump Freezes New Regs – But Order Doesn't Apply to the SEC!
This blog from Steve Quinlivan shares the details on the Trump Administration's decision to order an immediate freeze on the adoption of new regulations. Media reports have noted that the incoming Obama and Bush Administrations both instituted a similar freeze – but as this Davis Polk blog points out, those reports have overlooked the fact that Trump's freeze doesn't apply to independent agencies, like the SEC:
Like past memoranda, the Priebus Memo does not attempt to freeze rulemaking by independent agencies, nor does it request that independent agencies voluntarily comply with a regulatory moratorium, as did a similar memorandum issued shortly after the inauguration of President George W. Bush. Accordingly, the Priebus Memo means little for the financial sector, because most financial regulatory agencies—including the CFTC, FDIC, Federal Reserve, OCC, SEC and, at least for the meantime, the CFPB—are treated as independent agencies.
Although there wasn't a request for voluntary compliance with the freeze, with an interim GOP Chair now in place, it's unlikely that the SEC would "go rogue" and issue new regulations in any event.
Unlike the actions taken by the last two incoming Administrations, the Priebus Memo freezes not only executive-agency rulemaking, but also the issuance of any "guidance document[s]" by an executive agency. Again, because the SEC is an independent agency, this directive does not apply to it – but for those agencies subject to it, issuance of formal agency guidance on existing rules & statutory provisions is off the table for the duration of the freeze.
SEC's General Counsel Anne Small Departs
Not surprising given the change in Administration – particularly since she came from the Obama White House – the SEC's GC Anne Small announced her departure.
The Sad Saga of Disbarred SEC Chair Brad Cook
When Ray Garrett, Jr. became the SEC Chair in 1973, he replaced Brad Cook – who resigned when he got caught up in a securities fraud scandal & was temporarily disbarred in two states for lying to a grand jury in the case. Before becoming the SEC Chair, Cook was the SEC's General Counsel and first Market Reg Director (serving as both at the same time). He was the youngest person ever to lead a federal agency. He was 35!!!
Corp Fin: Mark Shuman Passes Away
It's notable that Mark Shuman retired at the end of 2016 because he was one of the most dedicated Staffers to ever work in Corp Fin. Sadly, he passed away a few weeks after he retired. Serving as Branch Chief in the Office of Information Technologies & Services, Mark mentored more young staffers than you can imagine. He firmly believed in the SEC's mission – and he will be sorely missed.
The Resignation of PCAOB Board Member Jay Hanson
Right before Christmas, the PCAOB issued this sparse statement about Jay Hanson's abrupt resignation:
PCAOB Board Member Jay D. Hanson notified the PCAOB today of his resignation from the Board. In his letter to the Board, Board Member Hanson wrote: "This is to notify you that I have submitted my resignation as Board Member of the Public Company Accounting Oversight Board to the Commissioners of the U.S. Securities and Exchange Commission."
The "Going Concern Blog" notes: "I can't imagine a new appointee to be named any time soon; soon-to-be-former SEC chair Mary Jo White hasn't reappointed Jim Doty as chair or a named his successor & his term ended in October 2015." Remember that Jay dissented a few months ago when the PCAOB approved its latest budget...
Glass Lewis' Bob McCormick to Join CamberView
In mid-January, CamberView announced that Bob McCormick – Chief Policy Officer of Glass Lewis – will join their shop. Bob has been a regular speaker at our "Proxy Disclosure Conference" and is a great guy...
Among other new additions, during the last month we have:
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