As we watch the peaceful transition of power & wonder if we will come together as a nation after a deeply divisive election, there’s one question on everyone’s mind this Inauguration Day – “So, is Edgar open?” According to this press release from the SEC, the answer is “yes.”
The SEC’s press release notes that due to Inauguration activities, there will only be limited filer support – as DC is shut down & government employees there aren’t heading into the office. The press release doesn’t address the issue of whether today is a “business day” for purposes of determining filing due dates. However, as Broc pointed out in this blog from 2009, Inauguration Day is not a national holiday – so in the absence of any guidance from the SEC to the contrary, companies should assume that it is a “business day.”
The “Make-Whole” Investor Revolt
This Bloomberg News story tells the tale of a revolt among bond investors over efforts by issuers to change indenture language relating to make-whole payments. Apparently, a number of high-profile issuers were sent back to the drawing board earlier this month after investors refused to come on board for new language intended to prohibit make-whole payments in connection with defaults.
Make-wholes entitle investors who have their notes redeemed to receive the discounted present value of the future payments they would have received absent the redemption. They have historically been payable only in connection with optional redemptions. Last fall, two judicial decisions imposed make-whole obligations on issuers in non-traditional settings. The first, Wilmington Savings v. Cash America (SDNY 9/16) applied a make-whole as a remedy for a “voluntary” non-bankruptcy default. The second, In Re Energy Future Holdings (3d Cir. 11/16) held that a make-whole was payable in a bankruptcy redemption.
In response, issuers added language to indentures “undoing” the result in these cases – by clarifying that no make-whole is due upon default or bankruptcy.
The investor revolt was prompted by comments from a covenant review service to the effect that this new language was “the end of covenants” and the “single worst change” ever to emerge in the bond market. This Davis Polk memo responds to these contentions by trying to provide some historical perspective:
Not all capital markets notes include an optional right of redemption. We believe that market participants and practitioners have generally understood that an issuer’s right of redemption, including at a stated premium or make-whole, exists to provide flexibility for the benefit of the issuer. It would be odd, to say the least, if when an issuer defaults on notes without this feature, the issuer only has to pay principal and interest, but if that additional feature is included–for the issuer’s benefit– the issuer must pay a premium.
Accordingly, the memo contends that this new language “is not really much of a change at all from what has been, in our view, established practice.”
Yesterday, the SEC sanctioned MDC Partners for violating Reg G & Item 10(e) of Reg S-K in connection with its use of non-GAAP financial measures. Some people are calling this the first non-GAAP enforcement case – but that’s not quite right. There aren’t many, but this isn’t the first non-GAAP case. In fact, this isn’t even the first non-GAAP case since the new CDIs!
Despite agreeing to comply with non-GAAP financial measure disclosure rules in December 2012 correspondence with the Commission’s Division of Corporation Finance, MDCA continued to violate those rules for six quarters by failing to afford equal or greater prominence to GAAP measures in earnings release presentations containing non-GAAP financial measures. Furthermore, for seven quarters between mid-2012 and early-2014, MDCA did not reconcile “organic revenue growth,” which as calculated by MDCA was a non-GAAP financial measure, to GAAP revenue.
In addition, the SEC announced that the company agreed to pay a $1.5 million penalty to settle charges that it failed to disclose certain perks enjoyed by its then-CEO. In April 2015, the company disclosed that the SEC was investigating its CEO’s expenses & the company’s accounting practices.
The SEC’s order says that the company disclosed a $500k annual perk allowance for its CEO – but didn’t disclose millions of dollars in additional perks. These included private aircraft usage, club memberships, cosmetic surgery, yacht and sports car expenses, jewelry, charitable donations, pet care, & personal travel expenses. The CEO resigned in July 2015 and returned $11.3 million worth of perks, personal expense reimbursements, and other items of value improperly received over a 5-year period. We’ll be posting memos regarding this case in our “Non-GAAP Disclosures” Practice Area.
Update: Francine McKenna tipped us off to this MarketWatch article, which notes that the earlier post-CDI non-GAAP enforcement case also resulted in a criminal indictment.
Internal Controls: GM Sanctioned for Deficiencies Related to Ignition Switch Recall
Yesterday was a busy day for the SEC’s Division of Enforcement. The SEC announced that General Motors agreed to pay a $1 million penalty to settle charges that deficient internal accounting controls prevented it from properly assessing the potential financial statement impact of a defective ignition switch found in some vehicles.
According to the SEC’s order, ASC 450 requires companies dealing with potential loss contingencies – such as GM’s potential recall – to assess the likelihood of whether the potential recall will occur & provide an estimate of the loss or range of loss, or provide a statement that such an estimate cannot be made. In GM’s case, shortcomings in its controls prevented that from happening:
The SEC’s order finds that the company’s internal investigation involving the defective ignition switch wasn’t brought to the attention of its accountants until November 2013 even though other General Motors personnel understood in the spring of 2012 that there was a safety issue at hand. Therefore, during at least an 18-month period, accountants at General Motors did not properly evaluate the likelihood of a recall occurring or the potential losses resulting from a recall of cars with the defective ignition switch
The GM proceeding is the second involving internal controls this month. Last week, the SEC announced that L3 Communications agreed to pay a $1.6 million penalty to settle charges that it failed to maintain accurate books and records and had inadequate internal accounting controls.
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:
– Proxy Access: Is NYC Comptroller Graduating to Submitting Candidates?
– Shareholder Proposals: GHG Emissions Excludable
– Shareholder Proposals: “Bringing in the Vote” Disclosure
– Climate Change Chart: How Mutual Funds Vote
– SEC Comment Letters: Top Issues in 2016
We have posted the transcript for our popular webcast: “Non-GAAP Disclosures: Analyzing the Comment Letters.”
Whistleblowers: BlackRock Nailed in Separation Agreement Enforcement Action
As Yogi Berra might put it, “it’s like deja vu all over again.” Yesterday, the SEC tagged BlackRock for language in separation agreements that it believed created disincentives for whistleblowing. According to the SEC’s order, more than 1,000 departing BlackRock employees signed separation agreements containing violative language stating that they “waive any right to recovery of incentives for reporting of misconduct” in order to receive severance payments. This action is notable because BlackRock is one of the biggest institutional investors out there!
Last month, Broc blogged about the latest separation agreement case – the day after he blogged about another separation agreement case – and noted that more were on the way.
The SEC’s ongoing emphasis on separation agreements hammers home the need to modify agreements that may create impediments to whistleblowing. It’s also another excellent reason to tune into our upcoming webcast – “Whistleblowers: What Companies Should Be Doing Now”…
Tomorrow’s Webcast: “Privilege Issues in M&A”
Tune in tomorrow for the DealLawyers.com webcast – “Privilege Issues in M&A” – to hear Alston & Bird’s Lisa Bugni, Bass Berry’s Joe Crace & Akin Gump’s Trey Muldrow discuss how to deal with the attorney-client privilege in M&A transactions.
This Davis Polk blog discusses an abundance of legislative initiatives designed to enhance Congressional control over the agency rulemaking process. In early January, the House passed two separate statutes that would make it easier for Congress to intervene in the regulatory process. Naturally, the proposed statutes have the kind of colorful & politically charged names that we’ve come to expect from our lawmakers.
The blog’s skeptical that any of this legislation will pass absent a decision by the Senate to eliminate the filibuster, but this excerpt suggests that these statutes reflect the mood of Congressional Republicans:
Congressional Republicans are both eager to unwind the Obama Administration’s regulatory agenda and cognizant of the difficulties of doing so through notice-and-comment rulemaking. Moreover, these bills signal the desire of many in Congress to play a greater role in the regulatory process and a view that, according to the Purpose section of the REINS Act, “Congress has excessively delegated its constitutional charge while failing to conduct appropriate oversight and retain accountability for the content of the laws it passes.”
While reforms as sweeping as those proposed in some of these statutes are not expected, we should expect further efforts by Congress to increase its control over agency rulemaking.
But Wait! There’s More!
Remember when I said we should expect further Congressional action on rulemaking? This blog from Cydney Posner says that they’re already back at it. After passing the REINS Act & the Midnight Rules Relief Act, the House of Representatives came back the following week with another round of legislation:
On Wednesday, the House Republicans (with five Democratic votes) passed H.R. 5, the “Regulatory Accountability Act,” a bill that would change the way federal agencies issue regulations and guidance. This bill would require agencies to, as part of their rulemaking processes, expand the factual determinations required, provide advance notice with regard to certain important rule proposals and follow specified procedures for issuing important guidance, among other processes. Included as part of the same bill is the “Separation of Powers Restoration Act,” which provides for de novo judicial review of agency actions.
Another bill has been introduced in the House that has the SEC’s rulemaking process squarely in the cross-hairs. The “SEC Regulatory Accountability Act” would enhance the requirements for cost-benefit analyses of proposed SEC rules & provide for post-adoption impact assessment and periodic review of existing regulations.
In what is likely to be her final speech as SEC Chair, Mary Jo White today pushed back against legislative initiatives to remake the rulemaking process. In particular, she said that the SEC Regulatory Accountability Act would provide “no benefit to investors beyond the exhaustive economic analysis we already undertake” and that the Act’s requirements would prevent the SEC from “responding timely to market developments or risks that could lead to a market crisis.”
Tomorrow’s Webcast: “Pat McGurn’s Forecast for 2017 Proxy Season”
ESG – particularly sustainability & climate change – continues to grow in importance. There continues to be a multitude of standards to be aware of. The latest is a group of new standards from GRI (“Global Reporting Initiative”). The new GRI standards are modules that replace the former 4th generation of GRI standards, as fully explained on their site. We continue to post all the latest standards in our “ESG” Practice Area – as well as all sorts of memos on the latest (such as this 118-page guide on ESG integration for investors)…
Delaware Supreme Court Finds Relationships Taint Director Independence, Promotes Internet Searches
Here’s the intro from this blog by Davis Polk’s Ning Chiu:
Recently, the Delaware Supreme Court reversed the Court of Chancery in Sandys v. Pincus on findings of director independence at Zynga. The Court of Chancery had dismissed the suit for failure to make pre-suit demand on the board or alleging that demand would have been futile, but the Delaware Supreme Court found that the plaintiff had created a reasonable doubt that the board could have properly exercised independent, disinterested business judgment in responding to a demand. If director independence is compromised, then demand is excused.
Attorney-Client Privilege: In-House Counsel Can’t Talk to Former Employees!
In a blow to in-house lawyers, the Washington Supreme Court has ruled that communications between corporate counsel and former employees are not privileged and are freely discoverable. The 5-4 decision states that attorney-client privilege doesn’t exist because the former employee no longer has an ongoing principal-agent relationship with the corporation. The case involves a parents’ suit against a school district, claiming that their football-playing son allegedly was sent back into a game after suffering a concussion.
General counsel are clearly bothered by the ruling, according to Amar Sarwal, vice president and chief legal strategist for the Association of Corporate Counsel in Washington, D.C. Sarwal says that they have been emailing him since it came down on Oct. 20, including “four or five within the first 24 hours.” The main problem, according to Sarwal, is that the ruling is going to interfere with in-house investigations that seek to determine the facts surrounding misconduct. “Former employees tend to have a stockpile of information,” Sarwal says. “They are a treasure trove of information about what happened, and in-house counsel need to speak with them to find out. But this decision will assure that never happens.”
I try to innovate with something new every year. In 2016, it was the “Big Legal Minds” podcast series. The year before was a facelift for the home pages of our sites (with new features like our “Job Board“). In 2014, I launched the “Women’s 100” events & started posting the popular videos on CorporateAffairs.tv.
For 2017, it’s this new “Broc Tales” blog – as well as a counterpart on DealLawyers.com, “John Tales” – which attempts to educate through storytelling. The stories on “Broc Tales” will relate to the topic at hand – Reg FD for the bulk of ’17. Within the stories, I’ll be throwing in personal anecdotes occasionally. Inspired by the writings of Sarah Vowell. Hoping to spice it up. Here’s the first two entries:
But maybe my life ain’t your cup of tea. Not much I can do about that. Go ahead & subscribe to this blog now (using this “Subscribe” link) so that you can receive my new entries pushed by email during the coming year! And if you do check it out, let me what you think! It’s a new style of writing for me, so I imagine I will be improving over time…
To assist audit committees in their oversight efforts, the Center for Audit Quality has just released a new publication, “Preparing for the New Revenue Recognition Standard,” a tool for audit committees. The publication is organized in four parts and provides important and sometimes quite specific and detailed questions for audit committees to ask management. The first section, Understanding the New Revenue Recognition Standard — What Is It?, is designed to help audit committees understand the new standard by providing a brief overview of its core principles. Generally, the new standard provides a five-step model for recognition of revenue “when the customer can use or benefit from the good(s) or service(s) provided.” The CAQ suggests that audit committee members ask management to explain the standard and how it affects (or does not affect) the company and encourages members to oversee the company’s decision regarding the appropriate transition method and consider the market impact.
I had a lot of fun taping this 38-minute podcast with Stan Keller of Locke Lord. The dude can ball (meaning shoot hoops). I highly encourage you to listen to these podcasts when you take a walk, commute to work, etc. Stan tackles:
1. How did you become a lawyer in this field?
2. What was it like practicing in the ’60s?
3. What was it like drafting a state corporate code?
4. How has the ABA’s Business Law Section changed over the years?
5. What was it like presiding over the Federal Regulation of Securities committee during the Sarbanes-Oxley era?
6. How has it been working at a law firm that has gone through a succession of mergers?
7. Any final words of advice for new lawyers?
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…
ISS Buys an ESG Research Firm
Last week, ISS announced that it had bought IW Financial, a ESG research firm which has technology that allows users to comparatively rate companies based on user-defined criteria…
– The Disclosure of Material Relationships by Financial Advisors
– Small Company M&A: “Boy, Could This Deal Use a Few More 000s!”
– Proxy Access a’ la Private Ordering? Not So Fast!
– Tips for a Successful Working Capital Adjustment
– Questions Abound: FTC Antitrust Actions Under the New Administration
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
As first came to my attention in this Gibson Dunn blog, Corp Fin has issued this no-action response to HP, allowing the company to exclude a Chevedden proposal that sought to prevent the company from holding virtual-only annual meetings. Corp Fin based its decision on Rule 14a-8(i)(7), the first time that the Staff has ruled that this type of proposal is “ordinary business.” Just a few weeks earlier, Corp Fin issued this no-action response to Hewlett Packard Enterprises – not to be confused with HP (they are separate companies) – that allowed the exclusion of a similar proposal on procedural grounds. Don’t forget the transcript from our recent webcast: “Virtual-Only Annual Meetings: Nuts & Bolts”…
By the way, EQS Group became the 1st company in the UK to hold a virtual-only meeting during this past year…
“Consequential” Majority Voting: CII’s New FAQs
Last week, CII published a group of FAQs to majority voting. CII believes that companies should adopt meaningful majority vote standards that are clear and that require failed nominees. CII also doesn’t want companies to dress up a plurality-plus standard – as described in a proxy statement – to look like a majority vote standard. Here’s an excerpt from this blog by Davis Polk’s Ning Chiu:
The Council of Institutional Investors has published an FAQ on majority voting for directors in which it advocates for “consequential majority voting,” a form of majority voting in director elections that essentially removes board discretion if a director receives less than majority support.
90% of S&P 500 companies have a traditional form of majority voting, compared to only 29% of Russell 3000 companies. Most mid-cap and small-cap companies elect directors under a plurality vote system, where the nominees who receive the most “for” votes are elected until all board seats are filled. In an uncontested election, given that the number of nominees is equal to the number of board seats available, a nominee can be elected with one vote.
Tomorrow’s Webcast: “The Latest Developments – Your Upcoming Proxy Disclosures”
Tune in tomorrow for the CompensationStandards.com webcast – “The Latest Developments: Your Upcoming Proxy Disclosures” – to hear Mark Borges of Compensia, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn discuss all the latest guidance about how to overhaul your upcoming disclosures in response to pay ratio and say-on-pay – including the latest SEC positions, as well as how to handle the most difficult ongoing issues that many of us face.
Starting the new year with a bang! Tune in tomorrow for the webcast – “Non-GAAP Disclosures: Analyzing the Comment Letters” – to hear Meredith Cross of WilmerHale; Steven Jacobs of E&Y; and Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster provide practical guidance about what to do now with your non-GAAP disclosures given Corp Fin’s new batch of comment letters.
SASB’s Inaugural “State of Disclosure Report”
Hat tip to the SASB for their 1st annual “State of Disclosure Report,” which benchmarks sustainability disclosures in SEC filings, including:
– 81% of topics in SASB standards include some form of disclosure in the 10-Ks or 20-Fs; which indicates that companies acknowledge the majority of the sustainability factors identified in SASB standards have —or are reasonably expected to have—material impacts on their business.
– More than 53% of disclosures on these topics use boilerplate language & less than 24% of these disclosures contain metrics – demonstrating that many companies take a minimally compliant approach to sustainability disclosure.
– For the 1st time, SASB has ranked the state of disclosure at the industry level. The top 5 industries, in terms of the overall effectiveness of sustainability disclosure: Education, Car Rental & Leasing, Cruise Lines, Gas Utilities and Tobacco.
The report includes specific examples of actual 10-K/20-F disclosures highlighting the variability in the quality of disclosure within an industry…
Even More on “The SEC Comment Process: What is a ‘Bedbug Letter’?”
Quite a few years ago, I blogged for a second time about what is a ‘bedbug letter.’ It’s a topic that I still receive emails about. As noted in that last blog, it probably derives from an old term for a standard “brush-off” response, which is basically what an SEC Staff bedbug letter is meant to be:
As the story goes, a traveler checked into an exclusive hotel. However, all night long, he could not sleep, because of being bitten by bedbugs. When he arrived home, he wrote a letter to complain. Soon, a letter came back, which said: “Dear Mr. Jones, we are in receipt of your letter which complains that you were bitten by bed bugs while a guest at our hotel. I must inform you that you are mistaken. There are no bedbugs in our hotel. It is completely impossible that you were bitten by a bed bug while a guest at our hotel.” Attached to this letter was a handwritten note, which said: “Send this fellow the bed bug letter.”
Another theory of the origin is that it came from one of the railroads – which commonly had bedbug problems with Pullman berths – that had one or another form of insincere denial or apology. Since this involves the telling of tales, it’s a good time to plug the new “Broc Tales Blog“…
Right before Christmas, the PCAOB issued this sparse statement about Jay Hanson’s abrupt resignation:
PCAOB Board Member Jay D. Hanson notified the PCAOB today of his resignation from the Board. In his letter to the Board, Board Member Hanson wrote: “This is to notify you that I have submitted my resignation as Board Member of the Public Company Accounting Oversight Board to the Commissioners of the U.S. Securities and Exchange Commission.”
The “Going Concern Blog” notes: “I can’t imagine a new appointee to be named any time soon; soon-to-be-former SEC chair Mary Jo White hasn’t reappointed Jim Doty as chair or a named his successor & his term ended in October 2015.” Remember that Jay dissented a few months ago when the PCAOB approved its latest budget…
Mary Jo’s Last “Speech”? We Need Good Global Accounting Standards
In what might be SEC Chair White’s last speech (technically, a “statement” as it wasn’t delivered anywhere) in that capacity, she urged the FASB & IASB to continue to work together & strive for high-quality globally-accepted accounting standards…
– Audit deficiencies are still quite high. The PCAOB considered 39.2% of the inspected audits for annually inspected firms to be deficient in the 2015 cycle. The PCAOB also cited an overall high number of deficiencies for triennially inspected firms.
– The number of deficiencies for annually inspected firms decreased slightly for the first time since we began our survey, from 42.9% in 2014 to 39.2% in 2015. The PCAOB also observed this trend in its 2015 inspection cycle and attributes improved audit quality to the use of practice-aids, checklists, coaching, support teams and efforts to monitor the quality of audit work.
– Audit deficiencies attributable to FVM and impairment engagements continue to be significant and made up approximately one-fourth of all deficiencies. Failures to assess audit risks, test internal controls and to test assumptions underlying prospective financial information are the root causes of most audit deficiencies.
– FVM audit deficiencies are increasingly attributable to business combination engagements, particularly for triennially inspected firms. of the top 25 firms, the incidence FVM deficiencies related to business combinations jumped from an average of 23.1% for 2009 through 2013 to 55.6% in 2014.
– In addition to M&A activity, other economic factors cited by the PCAOB as financial reporting risks are investments in high-yield, hard-to-value securities and impairment risk due to recent fluctuations in oil and gas prices.
– The PCAOB recently reorganized its inspection process and has designated two programs, one for global network firms and one for non-affiliate firms. The global network firms include the six largest annually inspected U.S. firms and approximately 145 of their affiliated firms, primarily located outside the U.S. The non-affiliate firms include four large, annually inspected U.S. firms and an additional 445 domestic and non-U.S. triennially inspected firms.