Recently, Dave blogged about how Corp Fin has commented upon cybersecurity disclosures during the past year since the Staff issued CF Disclosure Guidance: Topic No. 2, Cybersecurity. Since then, Bloomberg ran this article noting how some high profile companies have received futures comments in this area (including Google and Amazon) (Gunster’s Securities Edge blog covered this yesterday). One member wrote in:
This story is consistent with my experience with a number of clients, some of who have only minimal cyberrisks – that they had determined not to be material – but were told that they needed to add a risk factor. Any company that has an attack described in the media should expect a comment, regardless of the level of attack. Most companies do not want to elaborate on the details in responses to the Staff, because doing so could make them more vulnerable.
Feel free to share your own experiences (on a confidential basis as always)…
Death Rattles for Mass Media Covering Business Stories?
As long as I am blasting reporters this week. When I returned from vacation a few Sundays ago, I was struck by how thin the Business section was for the NY Times. It was merely 8 pages long – and the last page was entirely comprised of ads. For the Sunday issue. I breezed through the section in about 3 minutes. And given my area of interest, I mainly focused on a lead article that claimed that SEC Commissioner Aguilar had voted against SEC Chair Schapiro’s proposal for money market reform without previously raising any issue with it. [Several years ago, the Washington Post completely disbanded a separate Business section other than on Sunday – now, any biz stories are buried in the middle of the “A” section.]
As money market reform is not in my bailiwick, I don’t have any strong opinions as to what is the proper reform – but I do know enough to believe that the NY Times article was wildly off the mark as Aguilar has actively participated in SEC roundtables on the topic going back as far as two years (as well as speeches). This article was corrected for this point the next day – but the tone of the article lived on.
My point is that I am much more likely to trust blogs written by folks in the field than reporters who have a tough job covering a wide sea of topics for which they have a passing familiarity, boxed in by the stress of strict deadlines. It doesn’t look good for the mass media unless they continue to transform their reporting model by using real pros to cover these highly specialized topics that are nearly impossible to pick up in a day. There are several examples of successful reporters doing this type of thing – the NY Times’ Steven Davidoff and Forbes’ Francine McKenna for starters (although to be fair, they are columnists. They may write about news but are paid to put a definitive, personal spin on it. We still need beat reporters to cover and analyze the news).
The Second Deal Cube Tourney: Round One; 13th Match
As noted in these rules (and keep sending more pics for the next tourney), please vote for two of the following four cubes below:
Did you know that approximately 2000 people attend this Conference every year? And the vast majority of our attendees are in-house. They have figured out that we work hard to ensure that the panels are practical and that you leave with valuable knowledge – and new friends. If you haven’t been to our Conferences before, give it a try – particularly this year when New Orleans needs the tourism dollars. Here are the agendas for the event. Register Now.
In my capacity as the DJ for our Conferences – “Dr. Broc” – I’ll soon be putting together my set list. Here’s a sampling of last year’s set list. Feel free to send suggestions…
Congress Delays Bill to Increase Executive Power Over Independent Regulatory Agencies
I almost can’t write about this stuff anymore. I don’t like being so negative. But how are agencies supposed to be “independent” when Congress controls the purse strings – and now some in Congress want to ramp up the President’s oversight of these agencies through the `Independent Agency Regulatory Analysis Act of 2012,’ as noted in this DealBook article. And again, they are trying to get a bill passed without any hearings!
I just announced a webcast – “How the SEC Really Works” – in which you will learn how the various offices within the SEC work and the real role of the SEC Commissioners, etc. You also will learn how members of Congress (and their Staff) interact with the SEC.
The Second Deal Cube Tourney: Round One; 12th Match
As noted in these rules (and keep sending more pics for the next tourney), please vote for two of the following four cubes below:
As someone who grew up being a wheeler-dealer in baseball cards – I amassed over 25k cards in the mid-70s when I was a young teenager – my head got turned when I read this article about how the Coalition for Accountability in Political Spending was using the tactic of handing out SEC Commissioner trading cards outside of the Union Station Metro Station (which is next to the SEC’s HQ) in an effort to have the SEC adopt rules that would mandate political contributions disclosures (remember the rulemaking petition in this area that received a quarter million comments). I love it (meaning the trading cards)! Here are pictures of the trading cards, as well as pics of the street teams handing them out, etc.
I hate the Citizens United decision. Living in a swing-state, I am witnessing firsthand the destruction to our society wrought by that wrong-headed decision. Something clearly needs to be done to fix the problems caused by the decision before we are truly living in that world dominated by Biff from “Back to the Future Part II.”
Wouldn’t it be groovy to have trading cards of the SEC Staffers themselves? Who would be the valuable Charizard? And would rare cards of folks that didn’t stay long be worth more than tenured Staffers who spent their entire careers there? “I’ll trade you a Howard Morin for a Bobby O and MaryAnne Busse, but only if you throw in a Terry Hatfield as a kicker”…
FINRA’s New Rule 5123: Kicks In Beginning December 3rd
Here’s news from Cleary Gottlieb: “On September 5th, FINRA announced a December 3rd effective date for new FINRA Rule 5123 (Private Placements of Securities). Upon effectiveness of the Rule, FINRA members that sell certain securities in private placement transactions under Section 4(a)(2) of the Securities Act or Rule 506 of Regulation D to individual, non-institutional investors who do not meet limited exemption criteria will be required to file the offering documents used, or file a notice stating no offering document was used, with FINRA within 15 days after the date of first sale. FINRA members also will have to file any material amendments to any filed offering document within 15 days after the date of first sale made using the amended document. All filings made under FINRA Rule 5123 will be confidential and submitted electronically through the FINRA Firm Gateway system.
FINRA Rule 5123 will not apply to many of the most common private placement transactions, including (i) sales pursuant to Rule 144A or Regulation S, (ii) sales to qualified institutional buyers (QIBs), institutional accredited investors, qualified purchasers, employees and affiliates (as defined in FINRA Rule 5123) of the issuer, eligible contract participants, or knowledgeable employees (as defined in the Investment Company Act), even if sales are made pursuant to Section 4(a)(2) or Rule 506, and (iii) sales of certain investment grade, non-convertible debt or preferred securities or certain short-term debt securities. Additionally, the filing required by FINRA Rule 5123 is a “notice” filing only. FINRA will not conduct any pre-sale review or clearance of any private placement offering documents.”
This September-October issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Dealing With Activist Hedge Funds
– A Year-End Rush for the Exit? Tax Uncertainty and Transactional Planning
– Shareholder Activism Via Board Control Often Requires Long Range View
– The Nuts & Bolts of NDAs
– Asset Acquisition Due Diligence: Search for Hidden Unclaimed Property Liabilities Required
Companies incorporated outside of California but with significant California contacts (so-called “quasi-California corporations”) have struggled with exactly how to comply with the long-arm statute found in Section 2115 of the California Corporations Code. The statute purports to impose a number of provisions of the California Corporations Code on quasi-California corporations, including the state’s requirement to obtain separate approval from holders of each class of capital stock on a merger “to the exclusion of the law of the jurisdiction in which [the quasi-California corporation] is incorporated.”
Section 2115 has been thought to be legally infirm for some time, particularly after a decision by the Delaware Supreme Court in 2005. However, there never has been an acknowledgement by a California court that Section 2115 reaches too far. That changed earlier this year, when a California Court of Appeal stated in dicta that certain matters of internal corporate governance fall within a corporation’s internal affairs and should be governed by the laws of the corporation’s state of incorporation.
The Second Deal Cube Tourney: Round One; 10th Match
As noted in these rules (and keep sending more pics for the next tourney), please vote for two of the following four cubes below:
SEC Enforcement Director Rob Khuzami recently penned this blog on the SEC’s ‘revolving door’ myth that I blogged about last month. We both saw things similarly – that the mass media was trying to turn the “revolving door” into something it isn’t, just as the academics found – and I was going to leave this blog at that.
Then I got mad. Last week, Bloomberg came out with this silly article – entitled “Top Bank Lawyer’s E-Mails Show Washington’s Inside Game” – in which I bet the reporters wrote the article’s title before they slugged through a bunch of emails from the SEC that they accessed via a FOIA request. In a way, I felt kind of sorry for them. I’m sure they were hoping for so much more.
I’m not sure why but the reporters decided to focus on former SEC Commissioner/Market Reg Director Annette Nazareth – and her big “abuse” is that she sent friendly emails to Commissioners and Staffers with whom she used to work with. The horror! In one email, she provides her ten cents on certain provisions of Dodd-Frank. What a scandal! And there is much more nonsense in this long and detailed piece. Do you think other emails traded with the Staff by thousands of others have a different tone than the ones singled out in the article? All of the highlighted emails were innocuous – with the crime that they were written by a human and not a machine. These are emails for heaven’s sakes. Not formal memos.
I kept reading, waiting for a smoking gun. But basically it showed that Annette did her job on behalf of her clients – and that the SEC did it’s job of not treating her differently. If anything, the article’s title should have been “We Stuck Our Noses In Other People’s Emails and Proved the Revolving Door Study Was Correct.” It’s really unbelievable that Bloomberg’s editors let this thing see the light of day (as well as the WaPo editors who re-ran the Bloomberg piece yesterday).
Sadly, other publications blindly decided to run with the theme floated in the Bloomberg piece, such as this Advisor One article. This New York Magazine article expounds on the Bloomberg piece and goes as far to liken the responsibilities of lawyers to journalists. Here’s an excerpt: “We don’t like these kinds of cozy relationships between journalists and the sources they cover, and we roundly criticize journalists who step over the line.” It’s news to me that this type of code applies to lawyers. In fact, all government agencies want input from the outside – without it, we would get laws that don’t work. [And I certainly wouldn’t characterize the type of emails in the article as “cozy.” They were normal informal emails. They weren’t talking about going to the ballgame together, etc. – and even that type of email doesn’t show anything sinister.]
The problem with this exaggerated journalism is that it could impact someone’s reputation. And even more importantly – looking at the big picture – it could cause some bright folks from deciding to ever work at the SEC. Why take a huge pay cut to serve your country if you will then be pilloried for continuing relationships with those you worked with when you leave?
So Bloomberg reporters, please step up and be real journalists. There is plenty of real news to cover these days. If you can’t think of anything, give me a half hour to troll through your emails and let’s see what I come up with. I imagine it will be a whole lot juicer than the trivial trove of nothingness that you found here…
NYSE Proposes 4% Average Drop in Proxy Distribution Fees
A few weeks ago, the NYSE filed this proposal with the SEC that follows up on some of the NYSE Proxy Fee Advisory Committee’s recommendations from May to streamline proxy distribution fees and make them more transparent. If approved by the SEC, the net effect of the proposed changes would be a decrease in proxy distribution fees of approximately 4%, with the impact depending on a company’s circumstances.
Dodd-Frank: SEC Sends Credit Rating Standardization Study to Congress
There is no issue that lights up the Twittersphere in the corporate governance area than board diversity. Thus, people certainly were tweeting heavily earlier this week when news of a proposal by the European Union justice commissioner that companies allocating fewer than 40% of the slots on supervisory boards to women could face serious sanctions after 2020. [Although certainly not tweeting at the record 50k per minute that occurred last night during the President’s speech.]
For this proposal to go forward, the European Commission must first approve it in the coming weeks, then the legislation would need approval from the EU’s 27 governments and the European Parliament. As the studies in our “Board Diversity” Practice Area show, the number of women on US boards remains around 10% (with 30-40% of boards not having a single woman!) – with not much improvement in recent years…
“Getting Beyond Denial: Conflict Mineral Rules More Important (And Apply Sooner) Than You Thought”
I have calendared a webcast for September 27th with the longest title I have ever used – “Getting Beyond Denial: Conflict Mineral Rules More Important (And Apply Sooner) Than You Thought” – because I think the significance of the SEC’s new conflict mineral rules has been missed by some. And because one subtlety to the new rule’s 2014 effective date is that although it is a long time before companies are required to first report, those disclosures are going to cover 2013 – so companies need to have their ducks in a row by 2012 year-end. That’s right – by the end of this year!
Last week, the US District Court of Delaware delivered this decision – in Delaware Coalition for Open Government v. Strine – holding that Delaware’s confidential Chancery Court arbitration statute violates the First Amendment of the US Constitution. My understanding is that defendants plan to appeal. We are posting memos in our “Securities Litigation” Practice Area.
Mailed: July-August Issue of “The Corporate Executive”
We just mailed the July-August Issue of The Corporate Executive, and it includes pieces on:
– Barnes & Noble’s Gaffe: Grant Limits Under Section 162(m)
– Recent Court Decisions May Create Openings for Litigation
– Follow-Up: One Tax Question Resolved for 2013
– Say-on-Pay Round-Up: Year 2
Here are the survey results on insider trading policies related to pledges & margin accounts:
1. Does your company’s insider trading policy prohibit insiders from pledging their company shares?
– Yes – 37.7%
– No – 62.3%
2. If your company’s insider trading policy does not prohibit pledges, does your company:
– Discourage or advise against pledges – 55.^%
– Require preclearance for pledges – 66.7%
– Include criteria that must be met for pledges (e.g., financial wherewithal, limited to a specified percentage of holdings) – 18.6%
3. If your company’s insider trading policy requires preapproval or satisfaction of certain criteria for pledges, who makes that determination?
– CEO – 0%
– CFO – 4.2%
– GC – 79.2%
– Board Committee – 4.2%
– Other – 16.7%
4. Does your company’s insider trading policy prohibit insiders from using margin accounts with their company shares?
– Yes – 40.4%
– No – 59.6%
5. If your company’s insider trading policy does not prohibit margin accounts, does your company:
– Discourage or advise against margin accounts – 65.2%
– Require preclearance for margin accounts – 56.5%
– Include criteria that must be met for margin accounts – 17.4%
6. If your company’s insider trading policy requires preapproval or satisfaction of certain criteria for margin accounts, who makes that determination:
– CEO – 0%
– CFO – 11.8%
– GC – 88.2%
– Board Committee – 0%
– Other – 11.8%
Failure to Produce Audit Records: Hong Kong Regulators Also Face Troubles
Check out this development on audit paper requests featuring a court battle between Hong Kong’s Securities and Futures Commission and Ernst & Young Hong Kong after E&Y failed to produce SFC-requested records.. It appears that it’s not just the PCAOB that’s having problems gaining access to China-based companies’ audit papers due to an auditor’s interpretation of China’s State Secrecy laws (as covered in this blog).
It will be interesting to see how E&Y is going to defend itself on this in open court, particularly given there’s a recent new law on accountant liability in Hong Kong that significantly ups the ante for auditors. Thanks to Liza Mark of Dorsey & Whitney for pointing this development out and her insight into this area!
To expound on Hong Kong’s new accountant liability law, it’s a little convoluted – the Hong Kong Legislative Council just passed a comprehensive rewrite of the existing Companies Ordinance of Hong Kong (Cap 32). One of the major initiatives of the rewrite provides for the imposition of criminal liability on auditors of Hong Kong incorporated companies for “inaccurate auditor’s report. Here’s a set of FAQs for the new Companies Ordinance rewrite – and here’s the Major Initiatives explanation. This memo does a good job of summarizing the situation. Note that the amended Companies Ordinance is waiting on implementation regulations, so it will take a while before it’s implemented.
Mailed: July- August Issue of “The Corporate Counsel”
We just mailed the July- August Issue of The Corporate Counsel, and it includes pieces on:
– Dodd-Frank Marches On: SEC Adopts Compensation Committee/Adviser Independence Rules
– Compensation Adviser Conflict of Interest Questionnaire
– Whose EDGAR Filing Is It, Anyway?
– Disclosures Regarding an SEC Investigation–The Latest Developments
– JOBS Act Update
Here’s a classic from John Jenkins of Calfee Halter: So I’m sitting here in my office on a sunny afternoon on the Thursday before Labor Day, and I get the bright idea to tackle the SEC’s release adopting the final version of the Conflict Mineral disclosure rules required by Dodd-Frank.
This was not the best idea I’ve had this week.
We’ve all made our way through massive SEC releases before (the Aircraft Carrier, the Executive Comp rules, and Securities Act Reform all come to mind), but this 368 page juggernaut may well be the Citizen Kane of bureaucratic prose. I tried to slog through it, but I only got to page 25 or so before the description of the labyrinthine due diligence and reporting requirements mandated by the new rules simply overwhelmed me:
As an exception to this requirement, however, an issuer that must conduct due diligence because, based on its reasonable country of origin inquiry, it has reason to believe that its necessary conflict minerals may have originated in the Covered Countries and may not have come from recycled or scrap sources is not required to submit a Conflict Minerals Report if, during the exercise of its due diligence, it determines that its conflict minerals did not, in fact, originate in the Covered Countries, or it determines that its conflict minerals did, in fact, come from recycled or scrap sources. Such an issuer is still required to submit a specialized disclosure report disclosing its determination and briefly describing its inquiry and its due diligence efforts and the results of that inquiry and due diligence efforts, which should demonstrate why the issuer believes that the conflict minerals did not originate in the Covered Countries or that they did come from recycled or scrap sources. On the other hand, if, based on its reasonable country of origin inquiry, an issuer has no reason to believe that its conflict minerals may have originated in the Covered Countries, or, based on its reasonable country of origin inquiry, an issuer reasonably believes that its conflict minerals are from recycled or scrap sources, the issuer is not required to move to step three.
As I read this paragraph again and again in an effort to comprehend it, a strange thought occurred to me, so I took a break and Googled “Monty Python’s Meaning of Life script.” Sure enough, there was a copy online, and I quickly scrolled down to the scene where John Cleese plays a headmaster addressing a class full of British public schoolboys. I was right — the text of the Conflict Minerals Release bears a striking resemblance to Cleese’s ramblings in the film:
Headmaster: All right, settle down, settle down. Now before I begin the lesson will those of you who are playing in the match this afternoon move your clothes down on to the lower peg immediately after lunch before you write your letter home, if you’re not getting your hair cut, unless you’ve got a younger brother who is going out this weekend as the guest of another boy, in which case collect his note before lunch, put it in your letter after you’ve had your hair cut, and make sure he moves your clothes down onto the lower peg for you. Now…
Wymer: Sir?
Headmaster: Yes, Wymer?
Wymer: My younger brother’s going out with Dibble this weekend, sir, but I’m not having my hair cut today sir, so do I move my clothes down or…
Headmaster: I do wish you’d listen, Wymer, it’s perfectly simple. If you’re not getting your hair cut, you don’t have to move your brother’s clothes down to the lower peg, you simply collect his note before lunch after you’ve done your scripture prep when you’ve written your letter home before rest, move your own clothes on to the lower peg, greet the visitors, and report to Mr Viney that you’ve had your chit signed. . .
The resemblance between the two passages leads me to one of three conclusions. First, the staff members involved in writing this release are big Monty Python fans; second, President Obama appointed John Cleese to the Commission when I wasn’t looking; or third, life really is as absurd as the Monty Python guys make it out to be.
Reporting Equity Awards: Twists to Otherwise Durable Standard
Learn about Corp Fin’s new approach to reporting equity awards in the Summary Compensation Table and the Director Compensation Table when it comes to complex equity award structures in the Summer issue of our Compensation Standards newsletter. If you’re not a member of CompensationStandards.com, get this issue for free when you try a no-risk trial for 2013.
And learn more about this – and many more topics over 13 panels – during our upcoming “7th Annual Proxy Disclosure Conference,” which is only five weeks away. We are happy to report that the New Orleans conference hotel made it through Hurricane Issac just fine. But the city needs your support since tourism is the lifeblood of the city. If you can’t make it, you can always catch the conference by video. Register Now!
Webcast: “Hot Topics for Smaller Company Legal Depts”
Tune in tomorrow for the webcast – “Hot Topics for Smaller Company Legal Depts” – that will give you tips on how to beat a tight budget, etc. featuring Barbara Blackford, formerly of Superior Essex; Carrie Darling of Encore Capital Group; Bret DiMarco of Coherent; Stacey Geer of Primerica; Isobel Jone of Peet’s Coffee & Tea and David Scileppi of Gunster.
Note that we just added SEC Trading and Markets Deputy Director Jim Burns for today’s webcast – “JOBS Act Update: Where Are We Now” – that will analyze evolving market practices and the latest from the SEC including last week’s proposal to eliminate the ban on general solicitation in Rule 506 and 144A offerings. The program also features SEC Corp Fin Deputy Director Lona Nallengara, Wilson Sonsini’s Steve Bochner, Latham & Watkin’s Joel Trotter, Davis Polk’s Michael Kaplan and Dave Lynn of Morrison & Foerster and TheCorporateCounsel.net.
Tune in tomorrow for the webcast – “JOBS Act Update: Where Are We Now” – that will analyze evolving market practices and the latest from the SEC including last week’s proposal to eliminate the ban on general solicitation in Rule 506 and 144A offerings. The program features SEC Corp Fin Deputy Director Lona Nallengara, SEC Trading and Markets Deputy Director Jim Burns, Wilson Sonsini’s Steve Bochner, Latham & Watkin’s Joel Trotter, Davis Polk’s Michael Kaplan and Dave Lynn of Morrison & Foerster and TheCorporateCounsel.net.
Check out this WSJ article entitled “Warning to Investors: We’re an ‘Emerging’ Company” which states that 55% of investment bankers surveyed “…said they believe the new law’s easing of regulatory requirements increases “the chances of scandals at these businesses.”
SEC’s Filing Fees Going Up 19% for Fiscal Year 2013
On Friday, the SEC issued its 7th fee advisory for the year (along with this methodology). Right now, the filing fee rate for Securities Act registration statements is $114.60 million (the same rate applies under Sections 13(e) and 14(g)). Under the fee advisory, this rate will rise to $136.40 per million, a 19% pop. A pretty hefty price hike, unlike last year’s minimal decline.
As noted in the SEC order, the new fees will go into effect on October 1st like last year (as mandated by Dodd-Frank) – which is a departure from years before that when the new rates 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.