September 23, 2016

Corp Fin: New CDI on 401(k) Broker Windows

Yesterday, Corp Fin issued this new “CDI 139.33/126.41” under the Securities Act Section 5/Form S-8 areas – while withdrawing “CDI 239.16/226.15.”

The new CDI deals with whether a company-sponsored 401(k) plan that doesn’t have an employer securities fund alternative might still be deemed to be offering securities that require ’33 Act registration (when the plan permits contributions through a self-directed “brokerage window”). The CDI concludes that “it depends” – whether the securities need to be registered “depends on the extent of the employer company’s involvement.” And the CDI goes on to provide more gloss…

Whistleblowers: OSHA’s Interim Guidance

Here’s a note from Hunton & Williams’ Scott Kimpel about interim OSHA guidance that was issued last month:

Through a peculiar quirk of Sarbanes-Oxley, OSHA administers Section 806, which provides whistleblower protection for certain parties who report (1) federal mail, wire, bank, or securities fraud, (2) federal law relating to fraud against shareholders, and (3) any rule or regulation of the SEC. The interim OSHA guidance lays out various confidentiality and related provisions in employee settlement agreements that OSHA deems problematic.

Many of the points are derived from the three SEC enforcement cases brought over the past year on this issue. But the OSHA guidance goes a step further and deems problematic any provision that requires a complainant to waive a government whistleblower award. There has been some uncertainty as to the enforceability of such waiver provisions, and the SEC enforcement cases to date do not address the issue directly. While the OSHA guidance is not binding on the SEC, it is still instructive to parties seeking to comply with the SEC whistleblower rules in the absence of any formal guidance from the agency or its staff. Of course, if parties find themselves in a situation in which OSHA has the responsibility to review a settlement agreement, as detailed in the OSHA guidance, we fully expect each of its criteria to apply.

“How the SEC Enabled the Gross Under-Reporting of CEO Pay”

Here’s the intro from this blog entitled “How the SEC Enabled the Gross Under-Reporting of CEO Pay” by “truthout”:

Think it’s scandalous that the average 2014 pay of the CEOs of the 500 biggest companies was 373 times that of the typical worker, as the AFL-CIO reported? You aren’t scandalized enough. Their take home pay, which is reported in the bowels of SEC filings, as opposed to the Summary Compensation Table that the AFL-CIO, along with most analysts and reporters rely on, was a stunning 949 times that of the average worker in 2014.

How did this massive disparity come about, and why is the SEC on the side of such gross understatement?

An important new paper by William Lazonick and Matt Hopkins, which is recapped in detail in The Atlantic, explains this gaping disparity. The culprit is the differences in the approach used to measure stock-related compensation, which is the bulk of top executive pay.

Broc Romanek

September 22, 2016

Broc & John: “Blues Brothers Don’t Have Nothing on Us”

John & I had a lot of fun taping our first “news-like” podcast. This 9-minute podcast is about director compensation & Smithsonian museums – the new African-American museum is opening this weekend (it’s already “sold out” for a few months)! I highly encourage you to listen to these podcasts when you take a walk, commute to work, etc. And as we tape more of these, it’s inevitable we’ll figure out how to be more entertaining…

This podcast is also posted as part of my “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…

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Transcript: “After Brexit! Current Developments in Capital Raising”

We’ve posted the transcript for our recent webcast: “After Brexit! Current Developments in Capital Raising.”

Corp Fin Updates Small Business Guide for Resource Extraction

Last week, Corp Fin updated its “Small Business Compliance Guide for Resource Extraction“…

And last week, SEC Chair Mary Jo White threw out the first pitch at a Washington Nationals game!

Broc Romanek

September 21, 2016

Auditor Independence: SEC Settles 1st Violation Caused By Personal Relationships

Here’s the intro from this Cooley blog:

In two orders made public today, the SEC announced settled charges against EY and individual EY auditors with regard to alleged violations of the auditor independence rules as a result of “close personal relationships” with officers at audit clients. According to the press release, these “are the first SEC enforcement actions for auditor independence failures due to close personal relationships between auditors and client personnel.”

EY and the other auditors charged consented to the SEC’s order without admitting or denying the findings and paid penalties. EY was also censured,and the individuals were suspended from practice before the SEC. These cases are of interest to issuers as well as auditors because the auditors’ violations caused the companies involved to violate Section 13(a) of the Exchange Act and Rule 13a-1, which require public companies to file Forms 10-K with financial statements that have been audited by independent accountants.

Cybersecurity: New York Proposes 1st State Legal Framework

Here’s an excerpt from this Morgan Lewis article (we’re posting memos in our “Cybersecurity” Practice Area):

The New York Department of Financial Services (NYDFS) has proposed cybersecurity rules that would require banks, insurers, and other NYDFS-regulated financial services companies to adhere to stringent cybersecurity requirements mandating firms to test their systems, establish plans to respond to cybersecurity events, and annually certify compliance with the cybersecurity requirements, among other mandates. Comments on the proposed rules are due in 45 days.

Political Spending Disclosure: Fight Within Congress Continues

Here’s the intro from this WSJ article:

A political fight over whether to require companies to disclose their political spending activities is complicating congressional efforts to hammer out a stopgap spending measure by the end of the month, Republican and Democratic aides say. Senate Democrats are asking their Republican counterparts to drop language from a short-term spending measure to keep the government operating through the fall. The GOP provision would prevent the Securities and Exchange Commission from working on a rule that would require publicly traded companies to disclose political contributions.

The government’s current funding, which expires next week, already bars the SEC from using its funding to “finalize, issue or implement” a political-spending disclosure rule. And Democrats face a high hurdle in getting that provision eliminated, since language from existing funding plans typically carry over into any new short-term spending bills.

Broc Romanek

September 20, 2016

The “Other” Reg Flex Agenda: Piwowar Tries to Make It “Real”

As I have blogged many times (here’s one), the SEC’s Reg Flex Agendas tend to be “aspirational” – and experience bears that out as the SEC often misses its “target” deadlines. I actually loathe blogging when a new Reg Flex Agenda comes out – because some folks read too much into it. In fact, I’m only blogging about it now to try to stave off more misinformation (until just the last few years, the Reg Flex Agenda was completely ignored by everyone)!

Last week, the SEC issued this Reg Flex Agenda, which is a different type of one than the ones that folks normally pay attention to – the new one is under Section 610 of the Regulatory Flexibility Act & requires federal agencies “to review its rules that have a significant economic impact upon a substantial number of small entities within ten years of the publication of such rules as final rules.” The other type of Reg Flex Agenda is like this one that foretells possible new rulemaking. One is forward-looking/future action; the other is to review old rules already on the books to see if they are still “state of the art.”

Anyway, in tandem with this new Reg Flex Agenda, SEC Commissioner Piwowar issued this statement – begging people to comment on the newly posted Reg Flex Agenda (particularly Reg NMS). As Piwowar notes in his statement: “the annual Rule List has prompted, on average, only one comment.” It’s likely that Piwowar asked that Reg NMS be included in the list – the inclusion of that item doesn’t necessarily mean that Chair White thinks it should be. Because the list has little meaning – because it’s aspirational…

I’ll leave you with three thoughts:

1. The SEC Chair primarily sets the agenda for the agency’s rulemaking (see the transcript from our webcast: “How the SEC Really Works”). For the most part, it doesn’t matter how many people seek a rulemaking change. Remember that the political contribution rulemaking petition has garnered over 1 million comments in support – and the SEC hasn’t proposed anything there.

2. This year’s Reg Flex Agenda is even more aspirational than normal – because there is a high likelihood that the SEC Chair (and some of the Division Directors) will be gone soon after the upcoming Presidential election. A new SEC Chair will then eventually be appointed – and that Chair will be driving the bus in 2017.

3. Our community has more than enough things to comment on these days. The pace of change is breathtaking. We don’t need to be commenting on topics that aren’t even proposed yet…

The “Lookback” Reg Flex Agenda: What’s On The List?

Anyway, here are a few notables from the newly posted Reg Flex Agenda:

– Securities offering reform
– Section 16, including Item 405 disclosures
– Accelerated filer definition & deadlines
– Penny stock
– Shell companies
– Deregistration under Section 12(d)

Poll: When Will SEC Chair White Serve Her Last Day?

Take an anonymous guess as to when SEC Chair White will serve her last day in that position:


Broc Romanek

September 19, 2016

Non-GAAP: Many Quickly Moving GAAP Numbers Up (But 20% Still Don’t)

Here’s an excerpt from this Audit Analytics blog (also see these memos posted in our “Non-GAAP Measures” Practice Area):

According to Audit Analytics’ research published in a recent WSJ article, however, there is some evidence of a changing tide; in the most recent quarterly reports, more than 80% of the SP500 companies reported GAAP results first, compared to 52% in the prior quarter.

Nevertheless, only a handful of companies have so far stated their intent to drop non-GAAP numbers completely. The vast majority of companies will still present non-GAAP results, albeit presented after comparable GAAP numbers, with better labeling and clearer descriptions.

But let’s take this line of thought a bit further. If custom metrics are so important to investors, then, analogous to GAAP results, it should be important to investors when non-GAAP metrics turn out to be misstated. What would happen if non-GAAP numbers were to be revised – for example, to correct an error?

We have seen a few instances where this question would be very relevant. In a handful of cases where non-GAAP numbers were intentionally manipulated, we’ve seen an array of related negative events (including management turnover and SEC investigation), which makes these cases hard to overlook. So if errors are found in non-GAAP metrics, how should investors be notified? Non-GAAP numbers are not audited, there is no Item 4.02 requirement for them, and there are rarely any SOX 302 or 404 implications.

A few recent examples, provided below, provide some insight into how companies may disclose error corrections that affected only the non-GAAP presentation (i.e., comparable GAAP results were not revised). In both cases, the correction was discussed in a footnote to the non-GAAP reconciling tables.

Also check out this MarketWatch article which notes that the SEC’s Enforcement Division & DOJ brought a parallel case against a financial professional at a REIT for using non-GAAP metrics fraudulently…

Edgar Filings: 9 FAQs

Recently, the SEC’s Edgar Filer Support posted these 9 FAQs about common issues that folks have when filing…

Internal Controls: A 12-Year Review

Here’s an excerpt from this Audit Analytics blog:

Overall, the percentage of adverse 404 auditor opinions has seen a steady decrease, from 15.7% in 2004, the first year the requirements went into effect, to 5.3% in 2015. However, a less encouraging trend – depending on one’s perspective – is hidden in that overall view; the percentage actually hit its lowest point in 2010, at 3.4%. Since, we have seen an increase in the percentage of adverse 404(b) audit opinions.

Beginning in 2010, the PCAOB began to place a strong emphasis on whether the auditor obtained adequate evidence to substantiate its attestation of the effectiveness of ICFRs. This focus on the part of the PCAOB appears to have had an impact.

Turning our attention to smaller companies, we see a very different picture. One interesting aspect of our report highlights the difficulties faced by non-accelerated filers in achieving an effective level of internal controls over financial reporting. While larger companies rarely (5.3% in 2015) have material weaknesses in their ICFRs, smaller companies are much more often to be found in the weeds.

Broc Romanek

September 16, 2016

Our New “Director Independence Handbook”

Spanking brand new. By popular demand, this comprehensive “Director Independence Handbook” covers the entire terrain, from determinations to handling under proxy advisor definitions. This one is a real gem – 94 pages of practical guidance – and its posted in our “Director Independence” Practice Area.

Piwowar Seeks More Disclosure From Banks In Lieu of Other Regulation

In this WSJ piece, Andrew Ackerman describes this speech by SEC Commissioner Michael Piwowar:

Policy makers at the Federal Reserve and their counterparts at the Securities and Exchange Commission have fundamentally different approaches to regulation: The Fed focuses mainly on assessing how safe banks are, the SEC primarily on what companies disclose to markets. Given the two camps don’t always see eye to eye , it’s no surprise SEC officials have often chafed over efforts by the Fed to apply its prudential approach to the capital markets, particularly for asset-management firms. Now a top SEC official, Michael Piwowar, is pushing back — and, in a twist, pressing for more SEC-like regulation of banks.

Mr. Piwowar’s argument, fleshed out in a speech this summer in London, boils down to this: After a plethora of new and costly banking regulations since the financial crisis, regulators still have done very little to remedy the dearth of public information about the banking sector. Many investors see big banks as black boxes. Public mistrust of banks remains high. The solution, according to Mr. Piwowar, is for the SEC to use its authority over publicly traded firms to pull back more of the curtain on banks’ inner workings, just as it forces the companies it oversees to inform investors about factors that could hurt profits.
“Rather than imposing prudential regulation on markets, requiring banks to comply with the disclosure-oriented focus of market-based regulation would provide better protection to the financial system,” he said.

Mr. Piwowar outlined a handful of areas ripe for improved disclosures. They include more details about the loans banks make and the securities they hold as investments, as well as results of the Fed’s big-banks stress tests and granular details of their “living wills,” or plans to go through bankruptcy without needing taxpayer money. A fifth area involves greater disclosure of “material” regulatory costs, in terms of direct expenses as well as “opportunity costs” resulting from new regulatory requirements.

Cap’n Cashbags: Nepotism Reigns

In this 45-second video, Cap’n Cashbags – a CEO – hires three sons who probably aren’t qualified:

Broc Romanek

September 15, 2016

Dodd-Frank Repeal: “Financial CHOICE Act” Passes Committee

It seems that ever since Congress passed Dodd-Frank, the House GOP has been trying to repeal major chunks of it. This year is no exception. As noted in this Reuters article, the House Financial Services Committee has passed the “Financial CHOICE Act of 2016” (which I’ve blogged about several times before – remember my reference to choking a horse; see this MarketWatch article). Here’s a new letter from CII opposing the bill…

A few days ago, SEC Chair Mary Jo White threw out the first pitch at a Washington Nationals game! And the US Chamber’s Center for Capital Markets Competitiveness has published its latest “Plan to Reform America’s Capital Markets”…

Do CEOs Sway Political Choices of Their Employees?

Given the season we are in – and the heated debate over whether companies should disclose their political contributions – I was struck by this study entitled “Do CEOs Affect Employee Political Choices?” – here’s the abstract ( & here’s a MarketWatch piece):

We analyze how political preferences of CEOs affect their employees’ campaign contributions and electoral choices. Employees donate almost three times more money to CEO-supported political candidates than to candidates not supported by the CEO. This relation also holds around CEO departures, including plausibly exogenous departures due to death or retirement. CEO influence is strongest in firms that explicitly advocate for political candidates and firms with politically connected CEOs. Finally, employees are more likely to vote in elections in those congressional districts in which CEOs are more politically active. Our results suggest that CEOs are a political force.

My own personal experience has been mixed. In a modestly-sized law firm, the managing partner strongly encouraged us to donate money to a particular candidate in another state (I declined). At a Fortune 50 company, we were encouraged to register & vote – but we were never influenced about which party or candidate to vote for. My wife worked for a small business where all employees were strongly encouraged to donate to a candidate – with the subtle promise that a bonus would be forthcoming in about the same amount at the end of the year…

Poll: Have You Ever Been Swayed About How You Vote or Donate?

Please take a moment to participate in this anonymous poll:


Broc Romanek

September 14, 2016

Civil Penalties: SEC Increases Max Payable for Securities Law Violations

Here’s something that Alan Dye blogged last night on his “ Blog“:

The SEC has adopted an interim final rule to adjust for inflation the maximum civil money penalties payable for violations of the federal securities laws. The adjustments were mandated by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015.

The adjustments most pertinent to Section 16(a) compliance are those made to the monetary penalties the SEC may impose in cease and desist proceedings brought under Section 20C of the Exchange Act, since most enforcement actions that are based solely on Section 16(a) violations are brought under Section 20C. Section 21B(a) of the Exchange Act permits the SEC to impose a civil money penalty in a cease and desist proceeding brought under Section 20C if the SEC finds that the respondent is violating or has violated a provision of the Exchange Act (including Section 16(a)) or is or was a cause of such a violation. Section 21B(b) prescribes three tiers of penalties, depending on the nature of the violation, and establishes a maximum penalty for each tier. Each maximum penalty is subject to adjustment upward for inflation.

Here are the three tiers and the new maximum penalty amounts. The maximum penalties prior to the recent adjustments are set forth in parentheses:

– First tier is available for any type of violation, and permits a fine of up to$8,908 ($7,500) per violation for a natural person and $89,078 ($80,000) per violation for any other person.
– Second tier is available only for violations involving fraud, deceit, manipulation, or deliberate disregard of a regulatory requirement, and permits a fine of up to $89,078 ($80,000) per violation for a natural person and $445,390 ($400,000) per violation for any other person.
– Third tier is available only if the requirements for the second tier are met and the violation resulted in substantial losses or a significant risk of substantial losses to other persons. Fines for third tier violations can range up to $178,156 ($160,000) per violation for a natural person and $890,780 ($775,000) per violation for any other person.

More on “Armageddon for ADRs”

Last month, I blogged about the SEC’s Enforcement Division having issued wide-ranging subpoenas to the four largest ADR banks. I don’t know if its directly related – but yesterday, the SEC announced that a Portuguese-based telecommunications company has agreed to pay a $1.25 million penalty for its failure to properly disclose the nature & extent of credit risk involved in an ADR offering (technically it was an ADS offering – “American Depository Shares”)…

FYI: Conference Hotel Nearly Sold Out

As always happens this time of year, our Conference Hotel – the Hilton Americas – Houston – is nearly sold out. Our block of rooms is indeed sold out – but there are still rooms outside our block available at essentially the same rate. Reserve your room online or by calling 713.739.8000. If you have any difficulty securing a room, please contact us at 925.685.9271.

And if you haven’t registered for the October 24-25th conference, register now. If you really want to go, but you’re having budget issues – drop me a line…

Broc Romanek

September 13, 2016

SEC’s Filing Fees: Going Up 15% for Fiscal Year 2017!

While I was on vaca, the SEC issued this fee advisory that sets the filing fee rates for registration statements for 2017. Right now, the filing fee rate for Securities Act registration statements is $100.70 per million (the same rate applies under Sections 13(e) and 14(g)). Under the SEC’s new order, this rate will go up to $115.90 per million, a 15% hike. This offsets last year’s 13% drop.

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 & the President battled over the government’s budget.

The New “Investor Forum”

This blog by Francis Byrd described the essence of the new “Investors’ Exchange”:

An anticipated autumn announcement, reported in today’s FT, by a coalition of forty institutional investors – including BlackRock, the Wellcome Trust and Allianz Global Investors – amongst others may create a powerful opportunity for these top investors to manage their individual clout in a collective manner on ESG issues.

What makes this collaborative so different, you might say, from ICGN (or CII in the United States) or other regional groups of investors in Europe or Asia with ESG concerns? The primary difference, according the FT story, is that this collective will be exempt from restrictions limiting groupings of large investors from taking or indicating that they might take certain and specific actions in concert. For example, one could envision these 40 institutional investors issuing a statement of concern regarding executive compensation or perhaps on a proposed transaction, at a portfolio company, standing against the board’s recommendation, without running afoul of UK market rules designed to limit stock manipulation and insider trading by large shareholders working in concert.

While the FT story does not delineate the specific issues that the group of 40 would be able to act in concert on, it is likely to mirror the issues listed in the UK Investor Forum’s Collective Engagement Framework (ESG issues such as CEO compensation, CEO and independent director succession, strategy and performance, capital management, reporting and communications). The UK Investor Forum’s collective action plan would also allow for the participation of U.S. and foreign institutional investors. It must be noted that the Investor Forum’s Collective Engagement Framework was informed by consultation and collaboration between the largest UK corporate issuers, the biggest UK institutional investors and leading UK corporate lawyers.

Looks like Ralph Nadar is putting on a conference here in DC about giving power to the people. It includes some shareholder & whistleblower stuff – with Bob Monks & Jack Bogle, etc. speaking…

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for 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:

– Issuing Shares Via Blockchain: Delaware Poised to Act
– Describing an Officer’s Duties 101
– Data Privacy: More Federal Agencies Join Enforcement Bandwagon
– Stats: Controlled Companies
– How Law Firms Should Strengthen Their Cybersecurity

Broc Romanek

September 12, 2016

House’s “Accelerating Access to Capital Act”: Penny Stocks Back In Vogue?

Having worked at the SEC during the heyday of penny stock fraud, I can’t help but chuckle at the notion of Congress trying to ramp those terrible deals back up in the just passed “Accelerating Access to Capital Act” (HR 2357), which incorporates the “Micro Offering Safe Harbor Act” and the “Private Placement Improvement Act.” Of course, not every penny stock offering was fraudulent – but plenty were back then. President Obama has threatened to veto this bill if the Senate ever passed it. Here’s the intro from this WSJ article:

Penny-stock firms, which regulators warn are more susceptible to manipulation by swindlers and company insiders, would be granted access to a regulatory shortcut for selling stock under legislation approved Thursday by the House of Representatives. The House voted 236-178, largely along party lines, to approve legislation that would allow microcap companies to tap a method of issuing shares that typically involves less oversight by regulators. Republicans who supported the legislation said it would allow smaller companies to use a fundraising tool that has so far been restricted to bigger companies. “Extending these cost-saving provisions to smaller companies that large companies are currently able to enjoy is absolutely critical, and makes a difference for in their ability to issue additional offerings, expand their business and create more jobs,” said Rep. Ann Wagner (R., Mo.), who sponsored the legislation. Only one Republican opposed it.

The bill, which doesn’t have a Senate sponsor, would allow microcap companies, including those that don’t meet exchange-listing standards, to offer stock on a rolling basis without having each sale approved by the Securities and Exchange Commission. The SEC defines microcaps as companies whose shares outstanding are valued at less than $300 million.

Meanwhile, here’s a letter from CII about the proxy advisors bill…

House Passes Private Equity Deregulation Bill

Here’s news from the intro of this WSJ article:

House lawmakers on Friday approved a bill to ease regulatory requirements on private-equity managers, legislation that the White House has threatened to veto. The House voted 261 to 145 to advance the bill sponsored by Rep. Robert Hurt (R., Va.), largely along party lines. The measure exempts private-equity firms from having to provide regulators with certain information, such as the debt levels of their portfolio companies and the countries where investments were made.

The legislation, which lacks a companion bill in the Senate and is opposed by the Obama administration, faces long odds of becoming law. Its likelihood of enactment hangs on the possibility of its provisions being added to a must-pass spending bill Congress often advances at the end of the year. The bill comes after years of failed attempts by the industry to exempt most managers of private-equity funds from having to register with the Securities and Exchange Commission. Instead, Friday’s legislation aims to roll back regulatory provisions that supporters say are unduly burdensome and crimp funds’ investment in companies that create jobs. Thirty-five Democrats supported the measure. Managers of private-equity funds pool their money alongside institutional investors such as pension funds and university endowments to buy equity stakes in companies or pieces of them.

Before Friday’s vote, the House agreed to modify some provisions that opponents found objectionable, approving by voice vote an amendment sponsored by Rep. Bill Foster, an Illinois Democrat. The amendment has the effect of preserving investor-protection rules set up in the wake of the Bernard Madoff Ponzi scheme. Those rules require that funds undergo a third-party audit or a surprise SEC examination to verify they actually own the assets they say they do.

Notables While I Was Gone: To Fly (With Bruno)

1. Nice scoop by John about a possible SEC Enforcement sweep over non-GAAP disclosures.

2. The SEC proposes to mandate links to exhibits! A capital idea that was long overdue. I’ll be blogging more about my own ideas on this – & may even submit my 1st personal comment letter to the SEC about a rulemaking!

3. Corp Fin has been able to get out a slew of proposals despite the limitations of having only three sitting SEC Commissioners! Bravo!

4. While I was gone, John did a helluva job with the Penske file – but he clearly isn’t Penske material (I didn’t even know that Mr. Tuttle was finished interviewing)…

5. Switzerland is awesome! Great vaca. Wasn’t planning on running off a steep cliff & paragliding. But it happened…here’s the 3-minute video to prove it!

Broc Romanek