E-Minders September 2015

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 "Free for Rest of '15" No-Risk Trial to see what you are missing. Here are 10 Good Reasons to try us now.

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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" on August 25th — 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.

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 September 17th for the webcast - "Whistleblowers: What Companies Are Doing Now" - to hear the Chief of the SEC's Office of the Whistleblower, Sean McKessy - as well as Goodwin Procter's Jennifer Chunias, DLA Piper's Deborah Meshulam and K&L Gates' Mike Missal, as they explore the latest developments at the SEC - and the issues that companies should consider when adopting changes to their whistleblower policies and procedures.

And 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.

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 September 16th for the webcast - "Evolution of M&A Executive Pay Arrangements" - to hear Morgan Lewis' Jeanie Cogill, Sullivan & Cromwell's Matt Friestedt, Cravath's Eric Hilfers and Wachtell Lipton's Andrea Wahlquist cover the latest in executive compensation arrangements in deals.

And join us on October 7th for the webcast - "Transaction Insurance as a M&A Strategic Tool Transaction Insurance as a M&A Strategic Tool" - to hear Dechert's Markus Bolsinger, Aon Transaction Solutions's Matt Heinz, Pepper Hamilton's Jim Rosener 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.

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.

"Pay Ratio Workshop": Model Disclosures & Audio Archives Now Available!

In the wake of the pay ratio rules being adopted, we just held our "Pay Ratio Workshop: What You Need to Do Now" on August 25th — 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.

Pay Ratio: 10 Things to Know About the New Rules

Yesterday, by a 3-2 vote, the SEC adopted its pay ratio rules. Here's the 294-page adopting release - and here's the press release. Commissioner statements for White, Aguilar and Stein - dissents from Gallagher and Piwowar.

Here's 10 things to know:

1. Effective Date is Not Imminent (But You Still Need to Gear Up Now): We can look forward to new "Top 10″ Lists in a couple years. Highest and lowest pay ratios. Although the rules aren't effective until the 2018 proxy statements for calendar end companies, you still need to start gearing up, considering the optics of your ultimate disclosures. The rules don't require companies to make pay ratio disclosures until fiscal years beginning after January 1, 2017.

2. You Don't Need to Identify a New Median Employee Every Year! - This is the BIG Kahuna in the rules! A big cost-saver as the rules permit companies to identify its median employee only once every three years (unless there's a change in employee population or employee compensation arrangements). You still need to disclose a pay ratio every year - but you don't have to go through the hassle of figuring out who your median employee is each year. During those two years when you rely on a particular median employee, your median employee's - and CEO's - pay are the variables.

3. Pick Your Employee Base Within 3 Months of FYE - The rules allow companies to select a date within the last three months of its last completed fiscal year to determine their employee population for purposes of identifying the median employee (so you don't count folks not yet employed by that date - but you can annualize the total compensation for a permanent employee who did not work for the entire year, such as a new hire).

4. Independent Contractors Aren't Employees - Duh. Except there are nuances - so unfortunately it's not a "duh"!

5. Part-Time Employees Can't Be Equivalized - The rules prohibit companies from full-time equivalent adjustments for part-time workers - or annualizing adjustments for temporary and seasonal workers - when calculating pay ratios.

6. Non-US Employees & The Whole 5% Thing - For some reason, the mass media is in love with this part of the rules. The rules allow companies to exclude non-U.S. employees from the determination of its median employee in two circumstances:

- Non-U.S. employees that are employed in a jurisdiction with data privacy laws that make the company unable to comply with the rule without violating those laws. The rules require a company to obtain a legal opinion on this issue - can you say "cottage industry"!
- Up to 5% of the company's non-U.S. employees, including any non-U.S. employees excluded using the data privacy exemption, provided that, if a company excludes any non-U.S. employee in a particular jurisdiction, it must exclude all non-U.S. employees in that jurisdiction.

7. Don't Count New Employees From Deals (This Year) - The rules allow companies to omit employees obtained in a business combination or acquisition for the fiscal year in which the transaction took place (so long as the deal is disclosed with approximate number of employees omitted.)

8. Total Comp Calculation for Employees Same as Summary Comp Table for CEO Pay - The rules state that companies must calculate the annual total compensation for its median employee using the same rules that apply to CEO compensation in the Summary Compensation Table (you may use reasonable estimates when calculating any elements of the annual total compensation for employees other than the CEO (with disclosure)).

9. Alternative Ratios & Supplemental Disclosure Permitted - Companies are permitted to supplement required disclosure with a narrative discussion or additional ratios (so long as they're clearly identified, not misleading nor presented with greater prominence than the required ratio).

10. Register NOW for the Archive of "Pay Ratio Workshop" - You need to register now. Registration also includes access to our two October conferences "Proxy Disclosure/Say-on-Pay" (for those, it's either in person in San Diego or by video webcast - for the "Pay Ratio Workshop," it's an audio-webcast only event). The Course Materials include model disclosures and more. Here's the agendas for all three conferences. Act now!

According to Broc's poll, pay ratios remind the most folks of Pink Floyd's "Another Brick in the Wall"...

Pay Ratio: SEC Commissioner Piwowar Doubles Down (On His "No")

As Broc has blogged before, it used to be rare that a SEC Commissioner put a dissent to a rulemaking in writing. Now in this age of partisan politics, that is fairly common. But in a new "first," SEC Commissioner Piwowar has penned a second dissent to the pay ratio rulemaking! Here's his first dissent.

The second dissent could be a blueprint for how a complaint would look if this rulemaking is challenged in court. It claims the SEC violated the Administrative Procedure Act in adopting the rule and similar legal mumbo jumbo (eg. the SEC acted in an "arbitrary & capricious" manner, a phrase that describes a standard of review used when a government agency's actions are challenged under administrative law). This is interesting because Piwowar is not a lawyer, he's an economist...

Conflict Minerals: SEC Loses 1st Amendment Rehearing

Below is news from Hunton & Williams' Scott Kimpel (also see this Cooley blog):

In mid-August, the DC Circuit Court of Appeals finally issued its opinion on rehearing in NAM v. SEC and, by a 2-1 vote, reaffirmed its earlier decision that the SEC's conflict minerals rules violate the First Amendment to the extent they require companies to describe their products as not being "conflict free." The DC Circuit first issued its ruling in April 2014, but parts of the opinion were called into question by a subsequent DC Circuit opinion in American Meat Institute v. Department of Agriculture. Yesterday's opinion reconsidered the earlier holding in light of American Meat.

The Corp Fin Staff has been rumored to be waiting for this ruling before it issues any further interpretive guidance on the conflict mineral rules. One area where guidance would be helpful concerns the interplay between the DC Circuit opinions and the rule's two-year transition provisions, which - but for the DC Circuit's ruling - would otherwise cease to apply to Forms SD filed in 2016. A recent Wall Street Journal article posited that issuers would have to begin obtaining third party audits over their conflict minerals reports in 2016, but the court's holding calls this conclusion into question because the audit requirement is premised on the same constitutionally infirm language the court struck down. Corp Fin Director Keith Higgins issued a statement in April 2014 indicating that an independent private sector audit "will not be required unless a company voluntarily elects to describe a product as 'DRC conflict free' in its Conflict Minerals Report."

Is Director Higgins's statement still valid? Should issuers make any other changes to conflict minerals reporting in the future? The Staff may now feel empowered to answer these questions. The next Form SD is due May 31, 2016.

SEC Busts Earnings Release Hackers! 150K Releases Stolen Over 5 Years...

Who said the Ukraine is weak? (Kramer did.) In mid-August, the SEC announced fraud charges against 32 defendants for taking part in a global scheme that involved hacking into news wires to obtain nonpublic information from 150,000 earnings announcements over 5 years (but they only traded on 800 of those 150k). Those charged include two Ukrainian men - Ivan Turchynov and Oleksandr Ieremenko (hope they keep those names for the movie) - who allegedly did the hacking & 30 others who then traded on it, generating more than $100 million in profits. 150,000! 5 years! $100 mil!

This quote from this Washington Post article gives a sense of the brazenness of this scheme:

The hackers, who called the early-accessed filings "fresh stuff," masked their movements through proxy servers and stolen employee identities, and recruited traders with videos showcasing how swiftly they could steal corporate data before its release. Traders kept "shopping lists" of the releases they wanted from select public companies, many of whom were large Fortune 500 conglomerates with heavy interest in market trading.

Here's Chair White's remarks - and here's an excerpt from the SEC's complaint (paragraph #68) that confounded me:

For each press release, there is a window of time between when the issuer provides a draft press release to the Newswire Service and when the Newswire Service publishes the release (the "window"). This window varied between a number of minutes and a number of days.

Are companies really giving their earnings releases to the wires days in advance? Obviously, not a good idea! Keep your confidential information under your control for as long as you can!

As an aside, here's Broc's 1st blog about this type of problem from 2010 - but these initial incidents didn't appear to involve hacking, just premature "hidden" posting of earnings releases by companies. In these initial cases, companies were posting their releases early - but the URLs weren't fully hidden. They weren't linked to from anywhere on the corporate site yet - but they were posted early and bots were able to sleuth them out.

Particularly because - in some cases - the URLs for these releases followed a corporate convention so that even a human could have sleuthed it out by just typing in a specific URL (eg. URL for last earnings release ended in "3rdQ" - so next release would be "4thQ"). Broc doesn't believe there's been this type of incident recently - the Twitter snafu back in May didn't seem to involve a URL sniffing bot per this blog...

Broc Doubts Apple's CEO Violated Reg FD With His "China" Email to Jim Cramer

In late August, Broc ran a popular poll about whether folks thought that Apple's Tim Cook violated Regulation FD by emailing CNBC host Jim Cramer about how Apple was faring in China. The poll results indicated that 19% thought it was nowhere near a violation - and 22% indicated it might look that way to the untrained eye (but that it wasn't). 29% thought it was clearly a violation - and 28% thought it was a toss-up and depended on how the SEC approached it (6% didn't realize that Seinfeld is available around-the-clock on Hulu these days).

In his blog about it, Broc indicated that the facts as we know them are semi-sparse. Based on the facts as we know them, here's his 10 cents:

1. I Agree That The Optics Aren't Good - In a great illustration of "perception matters," a plain face reading of the email that Cook sent to Cramer makes the securities lawyer in me cringe. The 2nd paragraph is about how Apple is experiencing strong growth in China, etc. Even worse is the start of the 3rd paragraph about "our performance so far this quarter is reassuring." This all comes after Cook's intro about how Apple doesn't give mid-quarter updates. This "perception" is probably why so many in our community think it's a clear-cut violation.

2. But Communications to Journalists Aren't Reg FD Violations - To the extent Cook's email was directed to Cramer as a member of the media (so intention matters) - and reasonably understood that way - there likely isn't a problem (absent other facts). This is supported by this excerpt from the SEC's adopting release in 2000:

Rule 100(b)(1) enumerates four categories of persons to whom selective disclosure may not be made absent a specified exclusion. The first three are securities market professionals — (1) broker-dealers and their associated persons, (2) investment advisers, certain institutional investment managers and their associated persons, and (3) investment companies, hedge funds, and affiliated persons. These categories will include sell-side analysts, many buy-side analysts, large institutional investment managers, and other market professionals who may be likely to trade on the basis of selectively disclosed information. The fourth category of person included in Rule 100(b)(1) is any holder of the issuer's securities, under circumstances in which it is reasonably foreseeable that such person would purchase or sell securities on the basis of the information. Thus, as a whole, Rule 100(b)(1) will cover the types of persons most likely to be the recipients of improper selective disclosure, but should not cover persons who are engaged in ordinary-course business communications with the issuer, or interfere with disclosures to the media or communications to government agencies.[FN]

[FN 27] While it is conceivable that a representative of a customer, supplier, strategic partner, news organization, or government agency could be a security holder of the issuer, it ordinarily would not be foreseeable for the issuer engaged in an ordinary-course business-related communication with that person to expect the person to buy or sell the issuer's securities on the basis of the communication. Indeed, if such a person were to trade on the basis of material nonpublic information obtained in his or her representative capacity, the person likely would be liable under the misappropriation theory of insider trading.

I've always wondered (or worried) about the journalist exception when the journalist is a conduit for the market. It's possible that FN 27 wasn't written to address this type of situation. For example, it may have been included to assure company officials that communicating high demand to a supplier in an effort to secure additional supplies would not violate Reg FD - even if the supplier is a "holder' (which likely should have been written in the regulation as "owner") of company securities. And the thing about the press is that it's not usually a very good way to plan for Reg FD compliance (although the live interview situation is probably not subject to the usual concerns about what the press will actually report - and when they'll actually report it publicly).

3. Doubtful Directed to Cramer In His Investor Capacity - So far at least, there is no indication that Cook intended his email to be received by an investor. If so, any misuse by Cramer would create problems for Cook. Barring that type of situation, this is merely an exclusive with media. Done all the time.

As I understand it, Cramer is the manager of a charitable trust fund (at least, he's portrayed that way), as well as the talking head on his own show. But if you ask 100 people what Jim Cramer does, my hunch is that at least 99 will say "media personality" or "news show host" - not "fund manager."

On the other hand, there certainly is the argument that intent of the communicator is not intended to part of Reg FD - that it's more mechanical. Instead, Cook might have a strong argument - similar to the "intent" concept - that the email to Cramer was not sent under circumstances that were reasonably foreseeable to Cook that Cramer would purchase or sell securities on the basis of the information contained in the email. More particularly, it seems reasonable that Cook could conclude that MSNBC has a policy, applicable to Cramer, that - to the extent it even allows trading in public securities - material information received by its personnel must be disseminated broadly before the personnel can trade securities of a company that is the subject of the information (or discuss the information in a selective forum, essentially equivalent to a "tip"). Thus, it seems reasonable that Cook could conclude that Cramer - even to the extent he is a manager of a fund that holds Apple stock - would be required to broadcast the material information in the email and allow for appropriate dissemination before using the information for another purpose. Presumably, that would not constitute a violation of Reg FD.

By the way, I have always wondered how MSNBC got comfortable with Cramer trading while running his own show, but that's another ball of wax. And don't forget to check out our comprehensive 119-page "Regulation FD Handbook"...

SEC's Filing Fees Going Down 13% for Fiscal Year 2016!

In late August, the SEC issued this fee advisory that sets the filing fee rates for registration statements for 2016. Right now, the filing fee rate for Securities Act registration statements is $116.20 per million (the same rate applies under Sections 13(e) and 14(g)). Under the SEC's new order, this rate will dip to $100.70 per million, a 13.3% drop. Nice to see another reduction after last year's 10% drop (which combined with a drop in the rate two years ago, offsets a hefty price hike from three years ago).

As noted in the SEC's order, the new fees will go into effect on October 1st like the last four years (as mandated by Dodd-Frank) - which is a departure from years before that when the new rate didn't become effective until five days after the date of enactment of the SEC's appropriation for the new year - which often was delayed well beyond the October 1st start of the government's fiscal year as Congress and the President battled over the government's budget

Corp Fin Updates Financial Reporting Manual: How Delinquent Filers Can "Catch-Up"

In late August, Corp Fin posted an updated Financial Reporting Manual to provide guidance about how delinquent filers can make a "catch-up" filing. This guidance seems to reflect the long-standing position taken in Corp Fin's Office of Chief Counsel about how companies that haven't filed their '34 Act reports in a long time can come back into compliance without filing all of their missed reports (since most of those missed reports would provide little value to investors at this point). Read Section 1320.4 of the Manual - but the guidance essentially is that Corp Fin has the discretion to allow a company to catch-up:

- By filing the last due Form 10-K (with "all material information that would have been included in those filings") and any subsequent 10-Qs due since that last 10-K (the Manual doesn't mention the 10-Qs but that is the Staff's position)
- This discretion doesn't absolve the company of any potential liability it has for being delinquent (nor preclude SEC Enforcement action)
- Catching up this way doesn't mean that the company is now "current" for S-3/S-8/Rule 144 or Reg S purposes "until it establishes a sufficient history of making timely filings"

General Solicitation & Reg D: Corp Fin Issues 12 New CDIs (& a No-Action Letter)

In mid-August, Corp Fin issued 11 Securities Act Rules CDIs (256.23 - 256.33) & one Securities Act Forms CDI (130.15). The 11 Securities Act Rules CDIs provide guidance on "general solicitation" under Rule 502(c) and the Securities Act Forms CDI relates to Form D.

In addition, Corp Fin granted this no-action letter to Citizen VC - an online venture capital firm - which was requesting that the Corp Fin Staff concur with its process for creating substantive, pre-existing relationships with prospective investors over the Internet and that resulting offers & sales under Rule 506(b) of limited liability company interests would not constitute general solicitation or general advertising under Rule 502(c) of Regulation D.

Whistleblowers: SEC Issues Interpretive Release on Retaliation

In early August, the SEC issued this interpretive release that appears to lay to rest some uncertainty raised by a 5th Circuit case in 2013. The SEC confirmed that an individual who reports internally and suffers employment retaliation will be no less protected as a whistleblower than an individual who comes immediately to the SEC. Here's an excerpt from the release:

Since our adoption of the whistleblower rules, we have consistently understood Rule 21F-9(a) as a procedural rule that applies only to help determine an individual's status as a whistleblower for purposes of Section 21F's award and confidentiality provisions. Similarly, it has been our consistent view that Rule 21F-2(b)(1) alone controls the reporting methods that will qualify an individual as a whistleblower for the retaliation protections. Notwithstanding our view that Rule 21F-2(b)(1) alone controls in the context of determining the relevant reporting procedures for an individual to qualify as a whistleblower eligible for Section 21F's employment retaliation protections, the Court of Appeals for the Fifth Circuit expressed some uncertainty about this reading in a recent decision. [Asadi v. G.E. Energy (U.S.A.), L.L.C., 720 F.3d 620, 630 (5th Cir. 2013).] Although we appreciate that if read in isolation Rule 21F-9(a) could be construed to require that an individual must report to the Commission before he or she will qualify as a whistleblower eligible for the employment retaliation protections provided by Section 21F, that construction is not consistent with Rule 21F-2 and would undermine our overall goals in implementing the whistleblower program. .......... [reasons]

For the foregoing reasons, we are issuing this interpretation to clarify that, for purposes of Section 21F's employment retaliation protections, an individual's status as a whistleblower does not depend on adherence to the reporting procedures specified in Rule 21F-9(a).

CFO Survey: 20% of Companies Distort Earnings Within GAAP

This new paper discusses the results of a survey of approximately 400 public and private company CFOs about earnings quality, with an emphasis on GAAP-conforming earnings misrepresentation (i.e., not fraud).

Key results include:

- CFOs say that the key characteristics of high quality earnings are sustainability, the ability to predict future earnings, and backing by actual cash flows. More specific features include consistent reporting choices through time, and minimal use of long-term estimates. The factors that determine earnings quality are about half controllable (corporate governance, internal controls, proper accounting and audit function), and half noncontrollable or innate (nature of the business, industry membership, macroeconomic conditions).
- CFOs believe that in any given year 20% of companies intentionally misrepresent their earnings using discretion within GAAP. The magnitude of the typical misrepresentation is quite material - about 10 cents on every dollar. While most misrepresentation results in the overstatement of earnings, a full one-third of firms that are misrepresenting are intentionally lowballing their earnings.
- Main consequences from poor earnings quality are investor confusion and lack of trust in management, leading to stock price declines and higher cost of capital. CFOs acknowledge that investor confusion could also result in higher bid-ask spreads and lower analyst following but think that such effects are minimal for most sizable firms. In addition, firms with poor earnings quality frequently attract considerable short interest.
- CFOs provide a list of red flags (see Table 2, pg. 17) that outside observers like analysts and investors can use to identify poor earnings quality. Lack of correlation between earnings and cash flows is the top choice, followed by unwarranted deviations from industry or other peer norms. Presence of lots of accruals and one-time charges, and consistently beating analyst forecasts, also score highly.

The chief motivations to misrepresent earnings are to influence stock price and in response to outside pressure to hit earnings benchmarks. Here is a relevant excerpt:

Most CFOs think there is unrelenting pressure from Wall Street to avoid surprises. As one CFO put it, "you will always be penalized if there is any kind of surprise." As a result "there is always a tradeoff. Even though accounting tries to be a science, there are a hundred small decisions that can have some minor impact at least on short-term results. So that is a natural tension, and one that, depending on the company, the culture, and the volatility of the company, can be a source of extreme pressure or it can be a minor issue."

See Randi's previous blogs on long-term/short-term behaviors, creating a formal framework for accounting judgments, and audit committee oversight in connection with accounting changes, and our "Investor Composition" Practice Area.

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

While we recently saw a study about the substance of responses to Corp Fin comment letters - as Broc blogged about in May - there's now a study focusing on the number of comment letters being issued. Check out this blog by Audit Analytics that provides some interesting statistics (& a nifty chart) about the number of comment letters referring to issues in Form 10-K and 10-Q filings that Corp Fin has issued over the past five years. Here's an excerpt:

The overall trend is quite clear: 2014 marked the fourth straight year of steady (10% to 20% annually) decline in the number of 10-K and 10-Q comment letters. Starting in 2010 with almost 14,000 letters, the total decreased more than 50% to about 6,400 in 2014.

Audit Analytics does not draw any conclusions as to why the number of comment letters referring to Form 10-K and 10-Q filings has steadily decreased despite the SOX requirement to review the financials of every company every three years. However, it does offer some factors that may be impacting the statistics, including fewer or less complicated issues to comment on - and more resources being directed to the review of registration statements.

Checklist: Corp Fin Quick Reference Guide

Check out this "Corp Fin Quick Reference Guide" that we recently posted. The guide provides tips for interacting with the Corp Fin Staff, including:

- What's Corp Fin?
- What's the Organizational Structure?
- How Do I Determine Which AD Office Reviews a Company's Filing?
- Where Can I Find Corp Fin No-Action, Interpretive & Exemptive Letters?
- Where Can I Find Additional Corp Fin Interpretations & Guidance?
- How Can I get My Questions Answered By Phone?
- How Do I Contact a Corp Fin Staffer Directly?

The guide includes a number of links to the Corp Fin web page & our site that should be helpful when you want to reach out to the Corp Fin Staff.

CII Issues Proxy Access Best Practices (No Companies Comply)

In early August, the Council of Institutional Investors (CII) issued these Proxy Access: Best Practices outlining its position on seven proxy access bylaw or charter provisions that companies use and which CII characterizes as troublesome. According to this WSJ article, none of the 32 companies that had implemented proxy access as of late June comply with all seven, i.e., each had at least one of the "troublesome" provisions.

Seven "Troublesome" Proxy Access Provisions

- Ownership threshold of 5%
- % or number of directors that may be elected could result in fewer than two candidates
- Aggregation of stockholders limited to specified number
- Lack of clarity on whether loaned shares count toward the ownership threshold
- Requirement to continue to hold shares after annual meeting
- Restrictions on renominations when nominee fails to receive specific % of votes
- Prohibition on third party compensation arrangements with proxy access nominee

In this blog, Gibson Dunn describes each of the provisions, along with CII's position on what constitutes "best practices," the treatment of the issue under Rule 14a-11, and data on prevailing practices among companies that have adopted proxy access.

Access heaps of helpful resources in our "Proxy Access" Practice Area.

Retail Investors: Open to Activist Investor Viewpoints?

Here's news from Davis Polk's Ning Chiu: A recent survey by the Brunswick Group counters beliefs that retail investors are always "pro-management" in any voting contest. The survey examined the views of 801 US-based individuals who play an active role in their personal investment decisions.

Two-thirds are aware of shareholder activism and 74% think shareholder activism adds value to companies "by pushing corporate executives and boards to make decisions about issues that company management is otherwise unwilling to make." Most of these investors say that activists force companies to aim for long-term value creation for shareholders, while only a slight majority indicate that companies are already doing enough to return value to shareholders. 51% do not believe that boards of directors are working in retail investors' best interest.

Interestingly, excessive executive compensation or executive compensation that is not viewed to be tied to a company's performance is the main reason that a retail investor would support an activist proposal. Retail investors also tend to trust the financial press as the best source of information during a campaign, although a large majority would also read materials from the company as well as the activist investor and research the issue online.

The importance of retail investors, particularly in close contests, has been of increased interest lately and could be the subject of more focus as activism increases. The survey indicates from other sources that as of July 2015, 300 companies have already been subjected to activist campaigns, a 23% increase over the same period last year. Moreover, in 2014, a reported 249 companies were targeted by activists that had not experienced campaigns in previous years.

Push Toward Elimination of "Quarterly Capitalism"

Replacing quarterly financial reports with less frequent updates was reportedly among the ideas suggested at the Institute of Corporate Directors' recent conference in Toronto. The theme of the conference was short-termism. Quarterly reporting, aka, quarterly capitalism, is deemed to drive a short-term outlook and short-term behaviors, as companies repeatedly scramble to meet earnings expectations.

The Financial Post article notes the recent change in the UK by the FCA that allows companies to forgo mandatory quarterly reporting and report only twice a year. The UK's largest asset manager, Legal & General, recently announced that it had sent a letter to each of the FTSE 350 company boards supporting the change and asking those companies to discontinue quarterly financial reporting:

"Reporting which focuses on short-term performance is not necessary to building a sustainable business as it may steer management to focus more on short-term goals and away from future business drivers... 'For many businesses, we believe, reducing the time spent on frequent reporting could help management to focus more on long term strategies and articulate more on market dynamics and innovation drivers that will enhance their performance over time.'"

See also this FT article and Randi's previous blog on earnings call practices.

More on "The Mentor Blog"

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:

- "Fresh Eyes" in the Boardroom
- Survey: Auditor Evaluations Falling Short
- Governance Roadshows for Mid-Caps
- Reframing the Board Succession Dialogue
- Adapting to Mainstream Shareholder Activism
- 2015 Challenges & Practical "To Dos"
- Gender Balance on Boards: Five Steps to Achieve Success
- Inside Baseball: Working for an Independent Auditor
- Japan: A Proposal to Allow Only Long-Term Investors to Vote
- What's Up with IPOs?

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:

- Shareholder Engagement: TIAA-CREF
- Delaware Weighs In: Plain Vanilla Advance Notice Bylaws
- Some Ways to Shorten 10-Ks & 10-Qs
- Shareholder Proposals: Doing Research Through Free Databases
- Chamber: Report on How to Deal With Proxy Advisor Conflicts

People: Who's Doing What and Where

In Corp Fin, Shelley Luisi has been promoted to Associate Director. Shelly previously served as a Senior Associate Chief Accountant in the SEC's Office of the Chief Accountant. Jeffrey Riedler retired as Assistant Director of AD1's Office of Health Care and Insurance.

Conference Calendar

What's New on Our Websites

Among other new additions, during the last month we have:

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