February 17, 2017

Enforcement: Acting SEC Chair Trims Subpoena Power

Mike Piwowar may only be “Acting” SEC Chair – but he’s never going to be accused of just keeping the seat warm for Jay Clayton.  This WSJ article reports that Piwowar has revoked subpoena authority from about 20 senior Enforcement staffers. That action leaves the Director as the sole member of the Division of Enforcement with the authority to approve a formal order of investigation & issue subpoenas.

Traditionally, the Staff had to obtain the full SEC’s sign-off on a formal order before issuing subpoenas. Former Chair Mary Shapiro gave the Staff temporary subpoena power in 2009, in the wake of the Bernie Madoff fiasco – & the SEC adopted a rule making that authority permanent a year later.  Interestingly, because that rule was deemed to relate solely to internal agency procedures, the SEC adopted it without notice & an opportunity to publicly comment.

Acting Chair Piwowar has long been a critic of both the delegation of this authority to the Staff & the manner by which the SEC accomplished it.  Here’s an excerpt from his 2013 remarks to the LA County Bar:

Finally, the delegation of authority for approval of formal orders was deemed by the Commission to relate solely to agency organization, procedure, and practice, and therefore not subject to the notice and comment process under the Administrative Procedure Act. The mere fact that we can institute certain rules without obtaining comment from the public does not necessarily mean that we should. Given the significant ramifications for persons who are on the receiving end of a subpoena issued pursuant to a formal order, we should make sure that public comment is allowed on any review of the formal order process.

This action – which ironically occurred without a public announcement – is consistent with Piwowar’s longstanding concerns that the Staff has had too much power & too little oversight when it comes to investigations.

Conflict Minerals Case: Is a Final Judgment Looming?

This blog from Steve Quinlivan reports that a final judgment from a DC federal district court in the long-running challenge to the SEC’s conflict minerals rule may be on the horizon.  Judge Jackson has ordered the parties in National Association of Manufacturers, et al, v. SEC to file a joint status report by March 10, 2017 “indicating whether any further proceedings are necessary, and whether the Court should enter an order of final judgment to effectuate the Circuit’s decision.”

As Broc blogged at the time, the DC Circuit previously rejected the SEC’s appeal of an earlier ruling holding that the rule’s requirement to disclose whether products were “not found to be DRC conflict free” violated the 1st Amendment.

Acting SEC Chair Mike Piwowar recently announced that Corp Fin’s 2014 guidance for compliance with the conflicts minerals rule was also under scrutiny by the agency.

Audit Committees: Top Concern Is Risk Management

According to KPMG’s Global Audit Committee Survey, risk management heads the list of concerns for audit committees:

The effectiveness of risk management programs generally, as well as legal/regulatory compliance, cyber security risk, and the company’s controls around risks, topped the list of issues that survey participants view as posing the greatest challenges to their companies. It’s hardly surprising that risk is top of mind for audit committees—and very likely, the full board—given the volatility, uncertainty, and rapid pace of change in the business and risk environment. More than 40 percent of audit committee members think their risk management program and processes “require substantial work,” and a similar percentage say that it is increasingly difficult to oversee those major risks.

“Tone at the top,” corporate culture & short-termism also feature prominently in audit committee concerns.

John Jenkins

February 16, 2017

Our New “Form S-3 Handbook”

Spanking brand new. By popular demand, this comprehensive “Form S-3 Handbook” covers the entire terrain, from “baby shelfs” to “automatic shelfs” and everything in between. This one is a real gem – 108 pages of practical guidance – and it’s posted in our “Form S-3” Practice Area.

T+2 Settlement Adopted – But Firm Commitments Stay Put

Bryan Pitko notes that the SEC approved the Nasdaq & NYSE’s proposal to move from a three-day (T+3) to a two-day (T+2) settlement cycle for securities transactions.  However, despite earlier concerns, it looks like firm commitment underwritings may continue to follow a T+4 settlement cycle.  Here’s an excerpt from the blog:

The SEC’s adopting release does not, however, address the shortening of the T+4 settlement standard currently in place for certain firm commitment offerings under the exemption in Rule 15c6-1(c), as previously discussed in our prior posting (available here). It appears that, for now, despite contemplating such a change and soliciting for comment in the proposing release, the SEC and SROs are content to retain T+4 settlement for firm commitment offerings.

You Can Go Home Again (If You’re Mary Jo White)

The NYT Dealbook reports that Mary Jo White has decided to return to Debevoise & Plimpton, the firm she left when President Obama appointed her to serve as the SEC Chair.  She joins former SEC Enforcement Director Andrew Ceresney, who also returned to Debevoise when he left the agency at the end of last year.

John Jenkins

February 15, 2017

Earnings Releases: Rethink Using Your Website to Get the Word Out

MarketWatch’s reporters have been reading your earnings releases – and this article says they’re not impressed. It surveys a number of major companies’ releases, concluding that they’re generally a “confusing mess.”

However, the article saves its most pointed criticism for the practice of using releases simply to point readers to corporate website pages for earnings information:

MarketWatch has written before about the delay caused when companies make investors, and the reporters who serve them, search for earnings on a website, which almost invariably crashes under the strain of so many attempting to access it at the same time. The worst offender, in our view, is the video-streaming giant Netflix. This season, Netflix shares had moved almost 10% by the time most news services had started reporting the numbers, suggesting a clear advantage for institutional investors with machine-readable trading services that can scrape websites for relevant information at high speed. Retail investors are losing out.

My guess is that this practice is intended to provide shareholders with access to a more robust earnings presentation than what could be provided within the confines of a press release – but it looks like it’s giving retail investors the short end of the stick, and needs to be rethought.

Update: One of our members pointed out to me that for microcap companies, the costs associated with using news services for extensive earnings releases are often a factor – and that issuing a brief release directing investors to the website for more information is much more cost-effective for them. I think that’s a point worth acknowledging.

Enforcement: SEC Targets Control Contest Disclosures

Yesterday, the SEC’s Division of Enforcement announced two new actions involving disclosure violations that took place in the heat of takeover & activist battles. Disclosure in this arena seems to be an area of emphasis for the SEC – it recently sanctioned Allergan for failing to disclose merger negotiations with third parties while it was the subject of a tender offer from Valeant.

The first proceeding involves allegedly inadequate disclosures about “success fees” payable by CVR Energy to two investment banks that it retained to help fight off a tender offer. The second targets failures by individuals and investment funds to comply with beneficial ownership reporting obligations under Section 13(d) and 16(a) of the Exchange Act in connection with their joint efforts in several activist campaigns.

It’s interesting to note that disclosure of banker success fees was addressed in one of the new tender offer CDIs (159.02) issued in late 2016. Last month, I flagged a Cooley blog that said market practice on success fee disclosure would need to change as a result of the new CDI. The SEC’s press release notes that CVR’s cooperation and remedial actions resulted in a decision not to impose any monetary sanctions on it – but I suspect the fact that the company’s disclosures may have been consistent with market practice might have played a role in it as well.

Public companies and their advisors can be excused for enjoying the predicament of the targets of the second enforcement action – they’ve long complained about activists playing fast and loose with beneficial ownership disclosure requirements, and undoubtedly are relishing their comeuppance in this instance.

Speaking of disclosure requirements, there’s now one less – the SEC’s resource extraction rules are no more. This Davis Polk memo has the details.

Transcript: Privilege Issues in M&A

We have posted the transcript for the recent webcast: “Privilege Issues in M&A.”

John Jenkins

February 14, 2017

GAAP: Settlements Reveal Enforcement Trends

Last month, the SEC settled no fewer than seven enforcement proceedings involving alleged GAAP violations. Drinker Biddle’s Steve Stroup reviews the results of these proceedings – and draws some conclusions about trends & priorities in accounting enforcement actions.  Here’s an excerpt on the SEC’s increasing reliance on non-fraud based allegations:

The SEC has pursued fraud-based claims in accounting matters with less regularity in recent years and, in turn, has increased its reliance on the less-imposing strict-liability provisions under Section 13 and negligence-based antifraud provisions under Section 17. January was no exception. None of the accounting settlements during the month included alleged fraudulent conduct, even though, in several instances, the tenor of the settlement language arguably signaled a more culpable state of mind than the violations required.

Until recently, fraud-based allegations were routinely raised in these proceedings. The ensuing legal battle often focused on whether the SEC could establish the scienter required under Rule 10b-5. Under the current enforcement landscape, the absence of non-fraud claims takes the scienter issue off the table, and often incentivizes cooperation and settlement.

Tomorrow’s Webcast: “Activist Profiles & Playbooks”

Tune in tomorrow for the webcast – “Activist Profiles & Playbooks” – to hear Bruce Goldfarb of Okapi Partners, Tom Johnson of Abernathy MacGregor, Renee Soto of Sotocomm and Damien Park of Hedge Fund Solutions identify who the activists are – and what makes them tick.

Broc & John:  Beach Podcasting is Now a Thing. . .

Because no sacrifice is too great for our members, Broc & I recently held an intensive, multi-day strategic planning retreat at’s winter headquarters in Siesta Key. We took a break when the saloon made us clear out our tab – and headed down to the beach to record this 5-minute podcast on the appointment of a deal lawyer as SEC Chair & “Weekend at Bernie’s.”

This podcast is also posted as part of our “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…

blm logo

John Jenkins

February 13, 2017

Financial Choice Act: The Wish List Gets Longer

Cooley’s Cydney Posner blogs about a number of reported changes relating to corporate governance & executive compensation that have been incorporated into the latest version of the “Financial Choice Act” – Rep. Jeb Hensarling’s bill to consign Dodd-Frank to the ash heap of history.  Changes to the bill include new provisions that would:

– Modernize shareholder proposal & resubmission thresholds for inflation

– Raise SOX 404(b) internal control audit threshold from $250 million to $500 million

– Prohibit SEC from promulgating a rule to require the use of “universal proxies”

– Modernize Section 12(g) registration requirements for smaller companies, including increasing the revenue/shareholder thresholds, indexing the revenue test for inflation and eliminating annual verification of accredited investor status

– Increase Rule 701 cap from $10 million to $20 million with an inflation adjustment trigger

– Expand provisions of Title I of the JOBS Act to apply more broadly by allowing all companies, not just emerging growth companies, to “test the waters” & file IPO registration statements with the SEC on a confidential basis

– Increase Reg A+ ceiling from $50 million to $75 million annually with an inflation adjustment trigger

So does any of this have a prayer of getting through the Senate without Republicans eliminating the filibuster?  Maybe. It’s been suggested that some aspects of the bill might be passed under “reconciliation,” which requires only a majority vote & can be used for legislation that changes spending, revenues or the debt limit.

By the way, kudos to Bass Berry’s Jay Knight who – in this blog – tracked down the memo from Jeb Hensarling that started all the speculation about “Financial Choice Act 2.0.”

FASB: 2016 in Review

This BDO report reviews FASB’s work in 2016 – which was a very busy year.  Here’s the intro:

During 2016 the Financial Accounting Standards Board (FASB) completed several major, long-term projects, and also issued guidance to resolve related practice issues. The FASB and the International Accounting Standards Board (IASB) focused on implementation issues related to the new revenue recognition standard, which resulted in several clarifying amendments during the year. Both boards also issued their respective lease standards, and the FASB finalized guidance on the classification, measurement and impairment of financial instruments.

In addition to reviewing last year’s guidance & previewing coming attractions, the report includes a helpful appendix showing the effective dates of recently issued accounting standards.

Transcript: “Conflict Minerals -Tackling Your Next Form SD”

We have posted the transcript for our recent webcast: “Conflict Minerals: Tackling Your Next Form SD.”

John Jenkins

February 10, 2017

Audit Committees: Disclosures Improving

Here’s the 3rd annual “Audit Committee Transparency Barometer,” jointly issued by the Center for Audit Quality (CAQ) and Audit Analytics. As noted in this Audit Analytics blog, among the highlights are:

– 31% of S&P 500 companies’ proxy statements present enhanced discussion of the audit committee’s considerations in recommending the appointment of the audit firm, up from 13% in 2014. 21% of MidCap companies show enhanced discussion (up from 10% in 2014) compared to 17% of SmallCap companies (up from 8% in 2014).
– 17% of S&P 500 companies’ explicitly stated the role audit committees play in negotiating audit fees, more than doubling from 8% in 2014.
– 34% of S&P 500 companies disclose the evaluation or supervision of the audit firm, more than quadrupling from just 8% in 2014.

Transcript: “Audit Committees in Action – The Latest Developments”

We have posted the transcript for our recent webcast: “Audit Committees in Action – The Latest Developments.”

Study: 14 Years of Audit Fees (& Non-Audit Fees)

As noted in this blog from Audit Analytics, audit fees have increased by 9% over the past year. The ratio of audit fees over revenue (including audit related fees for tasks such as due diligence, accounting consultations, and internal control reviews) increased to a 2015 value of $599 per $1 million of revenue…

FASB’s New Cash Flow Guidance

Recently, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the Emerging Issues Task Force)…

Broc Romanek

February 9, 2017

Conflict Minerals: Executive Order Banning Rule for 2 Years?!?

Lights, camera, action! There certainly is a lot of action so far by President Trump. Here’s an excerpt from this Reuters article:

President Donald Trump is planning to issue a directive targeting a controversial Dodd-Frank rule that requires companies to disclose whether their products contain “conflict minerals” from a war-torn part of Africa, sources familiar with the administration’s thinking.

Reuters could not learn precisely when the directive would be issued or what the final version would say. However, a leaked draft that has been floating around Washington, D.C., and was seen by Reuters on Wednesday calls for the rule to be temporarily suspended for two years. Reuters could not independently verify the authenticity of the document.

Someone sent me this draft executive order – but as Reuters notes, it’s unclear if it’s the real deal. This executive order apparently will be based on a “national security interests” rationale.

Anyway, conflict minerals filings are still due on May 31st – until we know otherwise. I’ll post the transcript from our recent webcast on conflict minerals in the next day or so (audio archive available now)…

Here’s a Mother Jones article about the impact (or lack thereof) of the conflict minerals disclosure rule…

Challenged in Court: Trump’s “2-for-1” Regulatory Order

Last week, I blogged about President Trump’s executive order that requires federal agencies to eliminate two regulations for every new one created. This order doesn’t apply to the SEC & other independent agencies. This order has been challenged now in this lawsuit: Public Citizen v. Trump. Here’s a press release from Public Citizen – and this blog summarizes the complaint.

White House’s Interim Guidance Encourages “Net Zero” Rulemaking

Meanwhile, the Administration issued this interim guidance last week about how to implement the “2-for-1” executive order – which includes language that encourages independent agencies that aren’t subject to the order – including the SEC – “to identify existing regulations that, if repealed or revised, would achieve cost savings that would fully offset the costs of new significant regulatory actions.”

Broc Romanek

February 8, 2017

Snap’s IPO: Sexting Arrives for Edgar!

Loving this CNet article about Snap’s impending IPO (Snapchat was renamed “Snap” last year; the company, not the app). The first sentence of the article is: “This may be the first time the word “sexting” has been included in an SEC filing.” Also see this CNet article about Snap’s Form S-1.

By the way, as noted in this article, Snap’s proposed governance structure is controversial – only non-voting stock is being offered to the public. Here’s a CII press release expressing anger about this structure…

Raytheon Adopts New Recognition Revenue Standard Early!

This blog from “The SEC Institute” tells us that Raytheon – in its 4th-quarter earnings release – announced it has adopted the new revenue recognition standard as of January 1, 2017, a full year before the required adoption date. Raytheon elected the full retrospective adoption method.

CII Report: How Proxy Access Private Ordering Is Faring

Last week, CII released this 11-page report about proxy access & private ordering. The conclusion states in part:

Reliance on private ordering (rather than a more standardized approach envisaged by the SEC in 2010) has meant that this area is even more complex, with the potential for various creative ways to block or frustrate what shareowners would see as legitimate uses of the mechanism. For example, some remarkably broad provisions require a nominating shareholder to file with the SEC anytime it communicates with another shareholder, regardless of whether that communication triggers a filing requirement under the SEC’s own regulations. CII is monitoring these and other onerous provisions, and intends to release an update to its 2015 Best Practices document in the second half of 2017.

Broc Romanek

February 7, 2017

Pay Ratio: The Slow (or Fast) Death Begins?

He’s on a tear! Yesterday, Acting SEC Chair Mike Piwowar issued yet another statement directing the Corp Fin Staff to revisit another set of existing rules – the pay-ratio disclosure rules. Last week, Piwowar did the same thing with the conflict minerals rules.

The stated rationale for the reconsideration is that some companies are experiencing “unanticipated compliance difficulties that may hinder them in meeting the reporting deadline.” No mention of employee morale – or the desire to avoid negative publicity with the general public. Comments should be submitted on the pay ratio rules within the next 45 days.

Although this statement doesn’t repeal – or even suspend – the looming deadline for the effectiveness of the pay ratio rule, it evidences a clear intent to re-visit the rule. It also gives a strong indication that the rule is going to be under scrutiny from both regulators & Capital Hill over the next few months. Since pay ratio disclosures aren’t mandated until next proxy season, there is some time for this to play out. But not a whole lot of time…

In this blog yesterday, I noted this list of “major” rules that are on the potential “hit list” under the “Congressional Review Act” – the resource extraction rules were just killed under that Act. Conflict minerals & pay ratio aren’t on the list.

How Fast – Or Slow – Can the SEC Act?

That is the question of the day. Here’s an excerpt from this WSJ article:

Republicans on the SEC could be stymied by the commission’s own procedures on the pay-ratio rule because undoing a regulation is handled by an often lengthy process that is similar to creating one. It also is difficult for the SEC to delay it outright, because of the commission’s depleted ranks. There are just two sitting commissioners—Mr. Piwowar and Kara Stein, a Democrat—meaning the SEC is politically deadlocked on most matters. Ms. Stein on Monday signaled opposition to efforts to ease the pay rule. “It’s problematic for a chair to create uncertainty about which laws will be enforced,” she said.

But Maybe Congress Will Act Faster…

Mark Borges notes that this Bloomberg/BNA article reports that a new version of the “Financial Choice Act” will be introduced in Congress later this month. Not only is this bill likely to include a provision that would repeal of the pay ratio rule, it appears that it will also contain a version of the “Proxy Advisory Firm Reform Act of 2016.” As you will recall, that’s the bill that was introduced last year that would require the major proxy advisory firms register with the SEC and, among other things, disclose potential conflicts of interest.

Broc Romanek

February 6, 2017

Regulatory Reform Cometh! Trump’s Executive Order

On Friday, President Trump issued this Executive Order calling for a comprehensive review of Dodd-Frank. Here’s the pertinent language which applies to a broad swath of laws & regulations – including, but not necessarily limited to – Dodd-Frank:

Directive to the Secretary of the Treasury. The Secretary of the Treasury shall consult with the heads of the member agencies of the Financial Stability Oversight Council and shall report to the President within 120 days of the date of this order (and periodically thereafter) on the extent to which existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies promote the Core Principles and what actions have been taken, and are currently being taken, to promote and support the Core Principles. That report, and all subsequent reports, shall identify any laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies that inhibit Federal regulation of the United States financial system in a manner consistent with the Core Principles.

The “Core Principles” referenced in this directive are set forth in the first section of the Order:

It shall be the policy of my Administration to regulate the United States financial system in a manner consistent with the following principles of regulation, which shall be known as the Core Principles:

(a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;

(b) prevent taxpayer-funded bailouts;

(c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;

(d) enable American companies to be competitive with foreign firms in domestic and foreign markets;

(e) advance American interests in international financial regulatory negotiations and meetings;

(g) restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.

Here’s some analysis from “Mark Borges’ Blog“: It’s all very general in nature – but within the next four months (presumably sometime around the end of May), the Treasury Department will be delivering its report and (again presumably) it will address whether (and to what extent) Dodd-Frank promotes or does not promote the Core Principles. I expect that this report will cover the various executive compensation-related provisions of Dodd-Frank, including the CEO pay ratio requirement. While it’s still too early to know what this all means – or how it will play out, the Order clearly signals the start of the long-promised re-working of the law. This will likely include the repeal of some provisions, the modification and amendment of others, and, possibly, the survival of some provisions intact.

Also, it is being reported that Representative Jeb Hensarling (R-TX), Chair of the House Financial Services Committee and the catalyst behind last year’s Financial Choice Act, is expected to unveil legislation soon that will “overhaul” Dodd-Frank.

So, events appear to be picking up. Further, given the recent activity out of the White House, it’s entirely possible to that the Administration will want to demonstrate some degree of immediate progress on revamping the current law. If that’s the case, could a repeal – or delay – of the CEO pay ratio rule be in our immediate future?

Death of the SEC’s Resource Extraction Rule: R.I.P.

On Friday, the Senate passed a resolution under the “Congressional Review Act” that disapproves the SEC’s rule on resource extraction payments. As noted in this blog – citing this article – the vote was conducted pre-dawn! The House had already passed the resolution – so the rule is no longer in effect once the President signs it. The rule had a tortured history from the beginning, leaving it vulnerable to action under the Congressional Review Act…

Keir Gumbs notes: Interesting stuff. There is still a statutory mandate for resource extraction disclosures. Unclear what will happen if the rule is repealed & the mandate stands. The irony is that they only re-adopted it after they were ordered to by a federal court. Technically, the SEC will be required to move forward on the rule again until the relevant provision of Dodd-Frank is removed.

Given the recent change in Administration, it is doubtful that the SEC will pick this up again, which means that global transparency activists will have to pursue other means to get US companies to disclose this information. Notably, there is a comparable obligation in the EU that many US companies will have to comply with even though the US rules have been (or will be) repealed.

Form F-7: Green Light for Canadian Companies

From Paul Dudek of Latham & Watkins: On Friday, Corp Fin issued this no-action letter relating to MJDS Form F-7 rights offers by Canadian companies. Canadian securities regs were revised in 2015 – and there was a question as to whether companies could use F-7 with offers under the new regs. The Staff confirmed that rights offers under the new regs could be registered on a Form F-7. The incoming letter notes the number of Canadian rights offers taking place which have not been registered under the MJDS. This clarification could encourage more Canadian issuers to extend their rights offers to US holders through the MJDS.

Broc Romanek