E-Minders October 2015
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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"Pay Ratio Workshop" — Model Disclosures & Audio Archives Now Available! Part of Our Pair of Popular Executive Pay Conferences: In the wake of the pay ratio rules being adopted, we just held our "Pay Ratio Workshop: What You Need to Do Now"— and the audio archives are now available! The Course Materials include 22-pages of annotated model pay ratio disclosures (in Word to facilitate your starting point!) — and 128-pages of detailed analysis of executive pay disclosures made during the 2015 proxy season.
This new audio-webcast only event is paired with our pair of executive pay conferences to be held on October 27th-28th in San Diego and by video webcast. Three conferences for the price of one!
We expect nearly 2000 attendees — live in person - for that pair of popular conferences - "Tackling Your 2016 Compensation Disclosures" & "12th Annual Executive Compensation Conference: Say-on-Pay Workshop" — to be held October 27th-28th in San Diego and via video webcast on TheCorporateCounsel.net. Here are all of the agendas.
Coming Soon! 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 headed to the printers! 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 soon after it's done being printed. Here's the Detailed Table of Contents listing the topics so you can get a sense of the Treatise's practical nature. Order Now.
2015 Edition of Romanek's "In-House Essentials Treatise": Broc Romanek has wrapped up the 2015 Edition of the definitive guidance on securities law for the in-house lawyer and it's done — Romanek's "In-House Essentials Treatise." With over 1000 pages—spanning 18 chapters—you will need this practical guidance for the challenges ahead.
2015 Edition of Morrison & Romanek's "The Corporate Governance Treatise": We are happy to say that Randi Morrison & Broc Romanek have wrapped up the 2015 Edition of Morrison & Romanek's "The Corporate Governance Treatise" — and it's just back from the printers. Here's the "Table of Contents" listing the topics so you can get a sense of the Treatise's practical nature. You will want to order now so you can receive your copy as soon as you can. With over 1100 pages—including 239 checklists—this tome is the definition of being practical.
Upcoming Webcasts on TheCorporateCounsel.net: Join us on October 6th for the webcast - "Regulation A/A+: Developing Market Practices" - to hear Morrison & Foerster's Marty Dunn & Dave Lynn, as well as Greenberg Traurig's Jean Harris and Locke Lord's Stan Keller, as they look at Regulation A/A+'s developing market practices and discuss how these new offering alternatives stack up against traditional offering techniques.
And join us on November 10th for the webcast - "How to Draft Meaningful Sustainability Reports" - to hear Lou Coppola of the Governance & Accountability Institute, Kate Kelly of Bristol-Myers Squibb and Pam Styles of Next Level Investor Relations explain the keys to drafting sustainability reports that are meaningful to investors & other constituents and a "how to" list of things you should be aware of when drafting.
And join us on January 20th for the webcast - "Proxy Drafting: Mid-Cap & Smaller Company Perspective" - to hear Gunderson Dettmer's Richard Blake, Denbury Resources' Sarah Wood Braley and Covington & Burling's Keir Gumbs provide practice pointers on what approaches to preparing the proxy for mid-cap & smaller companies work best.
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 firstname.lastname@example.org - or call us at 925.685.5111.
Upcoming Webcasts on DealLawyers.com: Join us on October 7th for the webcast - "Transaction Insurance as a M&A Strategic Tool" - to hear Dechert's Markus Bolsinger, Aon Transaction Solutions's Matt Heinz, Pepper Hamilton's Jim Epstein and Haynes and Boone's George Wang discuss all the "in's & out's" as insurance in M&A transactions has gained in popularity.
And join us on November 5th for the webcast - "An M&A Conversation with Myron Steele & Jack Jacobs" - to hear about the latest state law developments from former Delaware Supreme Court Chief Justice Myron Steele and former Delaware Supreme Court Justice Jack Jacobs.
And join us on January 28th for the webcast - "Best Efforts Offerings: Nuts & Bolts" - to hear about from Hunton & Williams' Greg Cope, Arnall Golden Gregory's Bob Dow and Pillsbury's Bob Robbins to learn the nuances of Rule 10b-9 and "best efforts" offerings.
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 email@example.com - or call us at 925.685.5111.
Upcoming Webcast on CompensationStandards.com: Join us on January 15th for the webcast - "The Latest Developments: Your Upcoming Proxy Disclosures" - to hear Mark Borges of Compensia, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn discuss all the latest guidance about how to overhaul your upcoming disclosures in response to say-on-pay-including the latest SEC positions-and the other compensation components of Dodd-Frank, as well as how to handle the most difficult ongoing issues that many of us face.
Upcoming Webcast on Section16.net: Join us on January 27th for the webcast - "Alan Dye on the Latest Section 16 Developments" - to hear Alan Dye of Section16.net and Hogan Lovells discuss the most recent updates on Section 16, including new SEC Staff interpretations and Section 16(b) litigation.
1. Proxy access - Survey responses fell close to the ISS policy adopted last year as "large majorities" of investors believe ISS should issue negative recommendations if management adopts a higher-than-3% requirement - with 90% investors seeking negative recommendation if the threshold exceeds 5% or if the ownership requirement exceeds 3 years. Large majorities (ranging from 68-80%) believe negative recommendations are warranted if the aggregation limit is fewer than 20 shareholders - or if a cap on nominees is less than 20% of the existing board size.
2. Overboarding - For directors who are not CEOs at the company, 34% of investors believe that a 4-directorship limit is appropriate; 18% believe that 5 is acceptable, and 20% believe that 6 is fine (which is the status quo for ISS policy). 16% said "it depends/other" suggesting a 3-directorship limit - and 12% didn't support any limit. For CEOs at the company, 48% of investors believe that 2 seats (including the CEO's own company) is an appropriate limit, while 32% believe that 3 seats is fine (the status quo for ISS policy) - and 12% didn't support any limit.
In late September, the SEC posted this 35-page "request for comment" about Regulation S-X for entities other than a registrant, including acquired companies, unconsolidated subsidiaries, guarantors & more. This is the first step in the SEC's disclosure effectiveness project. The comment period runs 60 days.
As noted in this blog, the SEC's Advisory Committee on Small & Emerging Companies has come up with three written recommendations, one seeks to enlarge the smaller company universe by revising the threshold to become one to a $250 million float...
In late September, the SEC rolled out a new "Rules Database." Here's is Chair White's official announcement. It appears this new database will run in conjunction with the long-standing "Proposed Rules"; "Final Rules", etc. pages that the SEC has maintained for a while.
What does Broc think of the new database? Broc was not sure anyone needed it. But it doesn't hurt as now proposing releases are listed together with adopting releases (of course, this combo is available on our site along with firm memos, etc. in our "Practice Areas"). And as a web designer myself, Broc can't help but notice some minor stuff that he would change (some of the text is in light colors - hard to read; font sizes are a wee bit small too). And the layout highlights how some of the SEC's releases have really LONG names (eg. "Final Rule Purchase of Certain Debt Securities by Business and Industrial Development Companies Relying on an Investment Company Act Exemption"). Broc almost always shorten the names of the SEC's releases when he posts them on our site.
In late September, the SEC proposed amendments to how it's administrative tribunals work in an attempt to quell the firestorm over its use of ALJs (although, as this blog notes, the proposal does little to address constitutional challenges to the SEC's use of ALJs). The proposals include three primary changes to the SEC's Rules of Practice:
- Adjust the timing of administrative proceedings, including by extending the
time before a hearing occurs in appropriate cases
This proposal comes a few days after, as noted in this blog, the Second Circuit handed the SEC another defeat - forcing the SEC to stay the administrative proceeding against well-known fund manager Lynn Tilton. It's hard to tell why though, as the Second Circuit's order is one sentence long.
A key to better usability of the proxy framework is the voting machines. That's why Broc was excited to see that Broadridge has updated its ProxyVote.com to make it easier for folks to vote. Here's an excerpt from the press release:
Examples include a capability to vote additional ballots, with fewer steps, for other shares held in current meetings, and to easily view additional communications from issuers, including video and virtual shareholder meetings. As part of this initiative, Broadridge also redesigned the content and format of the email messages that initiate proxy communications with shareholders. Broker-dealers can also easily add their branding and custom messages.
In the wake of late September's merger announcement, a reporter sent me this question: "What do you make of Korn Ferry's acquisition? Does this raise independence issues under Dodd-Frank for companies that might pay a substantial amount to Korn Ferry for CEO, board search etc. who also consult with Hay Group on executive compensation? Most companies use the same consultant for executive and director compensation consulting. Is there extra due diligence required by the comp committee if they use the same firm for both services? Additional disclosure? Will boards have to start reporting how much they pay for executive and board searches?"
Here's an answer from Mark Borges:
I wouldn't think board recruiting would trip a comp consultant's independence. As you know, advisor "independence" must be considered, but there's no requirement that a Compensation Committee use an independent advisor. So the assessment is really all about whether, in the opinion of the Compensation Committee, the highlighted relationship with the company impairs independence.
As you note, there is, on its face, a possible independence issue where a company retains Korn Ferry for specific services (such as a CEO, director search) while the Compensation Committee also uses the Hay Group for its executive compensation consulting. It's really no different than the issue that the major HR firms faced a few years ago when they had to choose between their retirement and health care consulting services and their executive compensation consulting services. They chose the former because it presented a larger revenue stream and spun off their consulting businesses.
You can argue that an organization such as Korn Ferry is large enough to establish an effective barrier between its general services and its consulting business to avoid actual conflict situations (and, I suspect, that's exactly what they will do). However, for many companies, it's the appearance rather than the reality of a conflict which caused them to shy away from relationships with companies where they may have been receiving both consulting and non-consulting services. This may, in fact, happen here.
While the rules don't prevent anyone from using Korn Ferry for their general services and Hay Group for their compensation consulting, it's probably going to lead to a little extra diligence to justify the arrangement to be able to respond to inquiries about independence.
In early September, Judge Denise Casper of the U.S. District Court for the District of Massachusetts ordered the SEC to file an expedited schedule for promulgating final rules regarding disclosure of payments by resource extraction issuers. The SEC has 30 days to file this expedited schedule. The order indicates that the court will retain jurisdiction to monitor the schedule and to ensure compliance.
As you may recall, the SEC's original attempt at writing rules to comply with the Dodd-Frank Act's resource extraction issuer disclosure directive was vacated in 2013 by the U.S. District Court for the District of Columbia Circuit. That court had remanded the matter to the SEC to fix the defective parts of the rules, but the SEC did not propose any revisions to the rules. In light of the delay, Oxfam America filed the present lawsuit in an effort to compel SEC action on the rulemaking. Now we have something new in the ongoing battle that is Dodd-Frank - real-time, court-monitored SEC rulemaking.
In early September, the NYSE filed a rule proposal to expand the pre-market hours during which listed companies must notify the NYSE prior to the dissemination of material news, and to provide the exchange with the authority to halt trading in pre-market hours under certain circumstances. The NYSE believes the rule changes are necessary to facilitate and orderly opening when a listed company is releasing news prior to NYSE's scheduled market hours.
The amendments to the Listed Company Manual were effective upon filing with the SEC under a process for approving "non-controversial" rule changes set forth in the Securities Exchange Act of 1934 and will become operational on September 26th (unless the SEC designates an earlier date). As part of this process, the amendments are currently subject to a public comment period, and the SEC may temporarily suspend them within 60 days of the filing if it believes that doing so is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the statute. See more in this Gibson Dunn blog.
In mid-September, the SEC brought an enforcement action in the perks/related-person/internal controls area - In the Matter of MusclePharm Corporation - about how a company paid the spa tab for its CEO and his spouse, etc. The CEO is an ex-NFL football player as noted in this Bloomberg article. Good tabloid stuff to read upon my return.
But buried in the enforcement action is a claim that we don't often see that made my head spin:
Retention of Signature Pages for Commission Filings
Holy cow! Broc bets quite a few people aren't even aware of the requirement under Rule 302 of Regulation S-T to retain signature pages for five years. And he's certain no one would expect the SEC's Enforcement Division to care! In his Section16.net Blog, Alan Dye noted:
While the Rule 302 violation may never have been raised if the SEC hadn't concluded that more serious violations occurred, the fact that the SEC considered the 302 violation to be worthy of a separate claim suggests that the SEC is serious about the rule's record retention requirement. Compliance personnel should, therefore, make sure that they are keeping manually signed copies of insiders' Section 16(a) reports and, equally important, are storing the copies in a way that allows for easy location and retrieval by both current and future employees.
This SEC enforcement case might be opening a can of worms. Broc doubts that many have been keeping a manually-signed original signature pages - if what that means is a "signed in ink or pencil" original - for their SEC filings, particularly for Section 16 filings. For a Form 4, it's just too easy for the attorney-in-fact to file electronically without signing anything. Here's some fodder to consider:
1. We haven't saved a signed copy for the past five years, what should we do?
2. Can a scanned image of the manually signed document satisfy the five-year retention requirement?
3. How about filings by the company (eg. 10-K or registration statement) where the director or officers faxes or emails in signature pages - does the company need to follow-up to obtain originals?
4. How about where the manual signature is captured electronically in the first place (e.g., from a tablet or some board portals)?
On the heels of the SEC's controversial clawback proposal (see this convenient Fact Sheet), Audit Analytics provides some context and color around the potential clawback exposure if the new rule is adopted as proposed based on an evaluation of NYSE and Nasdaq company restatements in 2014 that triggered Item 4.02 Form 8-K (non-reliance on previously issued financials) filings.
Interestingly, in 2005, 67% of the total restatements (including but not limited to NYSE/Nasdaq-listed companies) were Item 4.02 restatements - compared to just 24% in 2014. Of the 69 NYSE or Nasdaq companies that filed Item 4.02 Form 8-Ks in 2014, only four mentioned their restatement in the executive compensation section of their proxy statement, and only one actually clawed back compensation from the restatement period.
Pending the new rules, clawbacks would have been prompted either voluntarily or by SOX 304's clawback provision, which is triggered by a restatement because of material noncompliance, due to misconduct, with financial reporting requirements under the federal securities clawbacks. Although the proposed Dodd-Frank clawback rule is no-fault (i.e., does not require misconduct to trigger the clawback), the number of Item 4.02 Form 8-Ks among listed companies is an indicator of overall potential exposure.
Companies reportedly incurred about $709 million and six million staff hours last year to comply with the controversial conflict minerals rules, according to research by Tulane University and Assent Compliance. Additionally:
2014 Conflict Minerals Filings
- 90% of the 1,262 companies that filed conflict minerals reports purportedly
couldn't determine whether their products are conflict-free.
See also this recent study by the American Action Forum revealing that from 2010 - 2014, the Dodd-Frank Act has imposed approximately $22 billion in costs and 61 million paperwork burden hours - including a combined $6 billion in costs for Conflict Minerals and Resource Extraction Issuers rulemaking. About 1/4 of the Act has yet to be implemented. See also this Chamber of Commerce blog illustrating Dodd-Frank's effects in chart form.
Access our heaps of helpful resources in our "Conflict Minerals" Practice Area.
Ahead of our webcast in two days that features the SEC's Chief of the Office of Whistleblower - Sean McKessy - the Second Circuit agreed with the SEC in a split decision that a Dodd-Frank whistleblower did not have to make a report directly to the SEC to bring a Dodd-Frank retaliation claim. As noted in this Cooley blog, the three-judge panel in Berman v. Neo@Ogilvy LLC reversed and remanded a decision of the SDNY, which had dismissed a claim for retaliation by a former employee on the basis that Dodd-Frank's whistleblower protections apply only to employees discharged for reporting violations to the SEC and not to employees who report violations only internally. This 2nd Circuit decision splits with the 5th Circuit - and as noted in this blog, it may be headed for the US Supreme Court...
Meanwhile, the SEC has posted its amicus curiae brief filed in Vincent Beacom v. Oracle America, an Eighth Circuit case about the interpretation of the anti-retaliation protection provisions to whistleblowers who report violations of securities laws internally without making a separate report to the SEC.
In mid-September, as noted in this NY Times article, the DOJ issued six new guidelines - being called the "Yates memo" after Deputy Attorney General Sally Yates - aimed at prioritizing its focus on individual responsibility in both civil and criminal corporate wrongdoing cases. The Yates memo's guidelines reflect a push by the DOJ to strengthen efforts at obtaining criminal penalties against responsible individuals in addition to the firms they work at. We're posting oodles of memos about the Yates memo in our "White Collar Crime" Practice Area.
The SEC takes enforcement actions against individuals too. See this enforcement action against General Employment Enterprises and two of its former CEOs and its Chair (as well as its outside auditor) from last week...
It is that perennial disclosure topic for discussion, and the debate grows only louder every time an election approaches: political spending disclosure. For reasons that I have never been able to understand, for many years various interest groups have been seeking to hijack the public company disclosure system to mandate specific disclosure about the money that companies spend on political activities, even though the amounts involved are often miniscule and by no means material. The SEC, to its credit, has withstood the onslaught of calls for more disclosure for as long as I can remember. (If only the SEC was able to stand its ground as well on conflict minerals disclosure.)
The latest salvo in this war of words came last week, when forty-four Senate Democrats sent a letter to Chair White expressing support for the rulemaking petition that was submitted way back in 2011 and which called for disclosure of how public companies use company resources for political activities. The letter from the Senators cites the more than one million comments that have been submitted in support of the rulemaking petition, and asks that the Commission make this topic a top priority.
FEI reports that word counts in the MD&As within the Form 10-Ks of the Fortune 50 - and footnotes - measurably decreased in 2014 compared to 2013. This is concurrent with the increased emphasis on improving disclosure effectiveness. Specifically, LogixData calculated 16,111 average words in 2014 - compared to 17,657 in 2013, which was up from 17,107 in 2012. However, it's unclear at this point whether these reduced word counts equate to improved disclosure effectiveness.
Not surprisingly (at least from this lawyer's point of view), participants in EY's discussions on this topic last year cited litigation and compliance risks, competing disclosure objectives in accounting and SEC reporting standards, and the different needs of different investors as impediments to more effective disclosure.
CEO pay levels continue to be good populist fodder for the campaign trail as Donald Trump weighed in as noted in this article - and this article. As noted in this blog, Hillary Clinton kicked off her campaign on a similar note...
We continue to post new items daily on our blog - "The Mentor 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:
- Board Basics: Director Effectiveness Reminders & Tips
Picking a PCAOB Chair: SEC Chair May Face Conflict
In the wake of our blog about how PCAOB Chair Jim Doty's term is coming to an end. This Bloomberg article notes how SEC Chair White may face a conflict in tapping a new PCAOB Chair. Meanwhile, Jim seeks another term and has a slew of people pulling for him as noted in this blog. Meanwhile, Chair White sent a letter to SIFMA supporting efforts to reducing the settlement cycle to no later than the second business day ("T+2")...
Among other new additions, during the last month we have:
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