Wow! That was fast. I had a bunch of blogs ready to run leading up to President Trump selecting a SEC Chair. Just yesterday, I blogged about Carl Icahn providing input. And now Sullivan & Cromwell’s Jay Clayton has been tapped. Jay won’t likely need to clear much of a hurdle during his Senate confirmation hearings – but given Trump’s posturing during his campaign, he will need to sit through questions about his ties to Goldman Sachs – including his wife’s job there (as noted in this Reuters article).
Some of other candidates also were from big law firms – this article notes that Trump met with Gibson Dunn’s Debra Wong Yang. But Debra doesn’t do deals. Jay’s bio indicates he does more than deals, but he’s primarily a deal guy. You have to go a ways back to find the last SEC Chair who was a deal lawyer – Chris Cox (who was a deal lawyer before he became a Congressman).
And it’s been a long time – a real long time – since the last SEC Chair was plucked directly from a law firm. Of course, that background is quite common for a Division Director. Richard Breeden had been a law firm lawyer, but he had two gigs between firm life & becoming Chair. The closest comparison is Ray Garrett, Jr., who left a Chicago firm to become SEC Chair. Garrett had been head of Corp Fin a few years before he left his firm to lead the Commission in the early ’70s.
It’s also been a long time since someone was appointed who wasn’t previously publicly visible (this MarketWatch article notes that the wire services don’t even have Jay’s pic on file). Let me review the Chairs over my career: Shad, Breeden, Levitt, Pitt, Donaldson, Cox, Schapiro and White – all had been in the public eye before ascending to SEC Chair. Ruder is the exception here. But I’m not suggesting that visibility is some sort of SEC Chair qualification. It isn’t.
Some folks asked me yesterday what was “normal” for a SEC Chair. There really isn’t a standard for the job – the backgrounds of former SEC Chairs are all over the lot. A few have worked at the SEC before. Chair Levitt wasn’t a lawyer. Chair White was a prosecutor. Chair Ruder was an academic. Chair Cox was a Congressman. And it’s not the sort of appointment where you read tea leaves from past writings. Obviously, someone’s background plays a role – but the biggest indicator of what a Chair will do is looking at the general direction the President points to…
The Sad Saga of Disbarred SEC Chair Brad Cook
Here’s something that I admit to not knowing before. When Ray Garrett, Jr. became the SEC Chair in 1973, he replaced Brad Cook – who resigned when he got caught up in a securities fraud scandal & was temporarily disbarred in two states for lying to a grand jury in the case. Before becoming the SEC Chair, Cook was the SEC’s General Counsel and first Market Reg Director (serving as both at the same time). He was the youngest person ever to lead a federal agency. He was 35!!!
Corp Fin: Mark Shuman Retires!
It’s notable that Mark Shuman retired at the end of 2016 because he was one of the most dedicated Staffers to ever work in Corp Fin! Serving as Branch Chief in the Office of Information Technologies & Services, Mark mentored more young staffers than you can imagine. He firmly believed in the SEC’s mission – and he will be sorely missed…
Carl Icahn is helping to pick the next SEC Chair! Here’s the intro from this WSJ article by Andrew Ackerman:
A common assumption about Donald Trump is that he’ll run one of the most pro-business administrations in recent memory. But what if, instead, he hews to more of a pro-investor agenda that clashes with big business? That is certainly an increasingly likely outcome after Wednesday’s announcement that the president-elect has tapped billionaire investor Carl Icahn for an unpaid advisory role on overhauling financial regulations. Mr. Icahn, who has already played a part in selecting Mr. Trump’s head of the Environmental Protection Agency, is also vetting candidates to lead the Securities and Exchange Commission, The Wall Street Journal reported.
The appointment suggests the president-elect will select policy makers more in the mold of Mr. Icahn, who has spent the past four decades battling big companies as an activist investor, than those favored by the pro-business wing of the Republican Party. While it’s true that Mr. Icahn generally supports rolling back regulations that he believes crimp the U.S. economy, he is also an outspoken advocate of corporate-governance changes loathed by the business community.
Last week, the SEC announced an enforcement action that is based on two big NYC firms being hacked by some Chinese traders who used the stolen information for insider trading. The SEC’s complaint doesn’t identify the firms – maybe because there’s a parallel criminal proceeding & the law firms are victims of a crime – but this American Lawyer article and WSJ article seem to identify them…
“Occupy the SEC”: Going After Insider Trading
It’s been a while since I blogged about the “Occupy the SEC” group. As noted on its Facebook page, the latest is that the group has filed an amicus curie brief in the push to have the US Supreme Court review the Salman case (this memo summarizes the recent oral arguments in that case)…
Last week, the Department of Labor issued 19 pages of interpretive guidance on proxy voting & shareholder engagement, including the use of shareholder proposals. This guidance updates the DOL’s 2008 guidance in this area. While the new guidance is focused on ERISA funds, it provides affirmation to those investors engaged with companies on ESG issues. Some critics – like the Chamber of Commerce – have argued that some investors are violating their fiduciary duties when then spend time on climate change and diversity…
A Visionary Clawback Policy! (Bonus Edition)
I’m calling this a “bonus” edition blog because if you came to our executive pay conference a few months ago, you’ve heard a good deal of analysis about this visionary clawback policy from SunTrust Banks (I’ve all posted a version in Word in our “Clawbacks” Practice Area on CompensationStandards.com). Our expert panel on clawbacks – and what you should be doing now – covered that policy, the new Well Fargo one and others in detail. Come to our proxy disclosure conference in Washington DC this year!
Anyway, one of our panelists says that reading the SunTrust policy is just like reading “Gone With the Wind” – when you read it, you will laugh, you will cry. You will experience the whole range of human emotions. It’s a well-designed clawback policy, as it covers all incentives (time & performance-based) for all incentive eligible employees. It also allows a clawback for a wide range of issues – such as misconduct, theft, termination for cause, failure to perform duties and restatements to name a few. The clawback appears partly based on the banking regulators’ 2010 guidance that has a number of good principles-based recommendations that are relevant to users of incentive compensation in all industries. The company also has an internal “Events Tracking Group” that monitors incentive payouts – and the Group reports to the compensation committee regularly. SunTrust is one of the few companies that files their clawback policy as an exhibit to their SEC filings.
If you see a clawback policy that you like, let me know & I’ll add it to our samples posted in our “Clawbacks” Practice Area. Also check out these memos on the recent SEC v. Jensen case in the 9th Circuit about clawbacks under Section 304 of Sarbanes-Oxley…and this Covington blog for a high level thought piece on clawbacks…
Our January Eminders is Posted!
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Way back before the SEC started putting out concept releases related to its disclosure effectiveness project, I blogged a few times about disclosure reform (& I was recently interviewed about the topic in this MergerMarket report). I like some of the ideas that SEC Commissioner Kara Stein laid out in this speech earlier this year.
I now tackle how companies should make the disclosure available. Obviously, companies can make disclosure available through SEC filings – a topic that is covered in the next item below. But companies make disclosure available outside of their SEC reporting stream:
This is a tougher topic than it might seem – even though we really are working off a clean slate. There is minimal regulation of IR web pages, social media channels, etc. Other than a few requirements (eg. breaking out Section 16 reports on a SEC filing stream), companies have great liberty on how they make information available.
Should this change? I do believe companies should continue to have great liberty. But I also believe there needs to be a bare minimum as the quality of what companies are doing varies greatly. And many companies are near the bottom of the barrel.
One argument that I have heard is that “investors rarely bother looking at my IR web page, so why should I care?” I have two answers for that – one reason they might not be looking is because you don’t care and there’s nothing there. The bigger answer is that if disclosure reform is successful and companies do start disclosing more meaningful information, then investors will care more about how you make it available.
So what do I mean about bare minimum? I’m thinking out loud here – but I do think the minimum needs to apply to more than just the IR web pages. I think that once a social media channel becomes mainstream, then companies should be under an obligation to deliver information via that channel. This is akin to the listing standards for the stock exchanges requiring a press release. It all boils down to how investors expect information to be delivered. Let me know what you think.
Disclosure Reform: How Should Companies “File” Disclosure?
In what ways should companies “file” their disclosure so that investors can rest assured that it really is the company that made the disclosure? And perhaps this is also necessary for liability purposes?
I do think Edgar is necessary. There needs to be a well-known repository of information that investors can feel comfortable as being trustworthy. Edgar certainly is branded by now and it wouldn’t make sense to change its name or purpose. However, it does make sense to reconsider how disclosure filings are displayed. The suggestions that have been bandied about for some time make sense to seriously consider – e.g., requiring companies to file a “core” disclosure or “company profile” document with information that changes infrequently, supplemented by periodic and current disclosure filings with information that changes from period to period. In addition, there would be transactional filings that have information relating to specific offerings or shareholder solicitations.
And then there is my pet peeve about form labels and how confusing they must be for retail investors. How does a small investor know that – when they search Edgar – a proxy statement is called a “DEF 14A”? The nomenclature on Edgar should change sooner rather than later…
More on “Disclosure Reform: What Do Investors Want?”
Joe Hall of Davis Polk responded to my blog about what investors want by noting:
I think the most important point is the one you get to in the second post. The series of questions I would ask is, who is the investor we are writing for? What are the needs of that particular investor? What does that investor need to be informed about and what do we not need to bother with?
Lawyers who write disclosure, much less company officers who write disclosure, never really focus on this question and it’s because to the extent the SEC has addressed it, they have come up with things like the plain English rules that suggest we are communicating to readers with a ninth grade education and no discernible quantitative skills. And of course court decisions focus on the “reasonable investor” who does not exist.
We don’t really know who to write for because the SEC has never done any studies to find out who reads company disclosures. But ask yourself how likely it is that retail investors get any information at all from 34 Act or 33 Act filings. I would be it is between zero and something less than 1%. Probably why the SEC studiously avoids the question. And I completely agree with your critique of EDGAR. It’s a joke to think that a novice could find anything on it.
What if companies were told to assume their investor was a college educated securities industry professional with several years experience reviewing company disclosures? There are some simple implications to this – e.g. you would lose half of your risk factors and forward looking statement boilerplate and the ones that remain would be the ones that are actually relevant (no more “We are exposed to competition” . . . “If we lose access to capital this could have an adverse effect on our result of operations and financial condition”…”We depend on our chief executive officer”…). But this sort of instruction would also force CFOs and IR folk to think about what analysts really want to know – and they know what this is! They talk to them at least quarterly!
Analysts – and anyone who invests – want to know about the future, not the past. No one really cares how a pre-IPO company priced its options (except to the extent it reveals how willing to play fast and loose management is), and few care about things like dilution, endless product descriptions, “compensation philosophy” etc. They are often interested in company specific things that aren’t covered in S-K line item requirements. What’s your utilization ratio? How much are you going to have to spend to complete that new mine? How will that new product work on a mobile platform? The staff would still be able to review and comment on a filing – all they would have to do is listen to the company’s earnings call and see whether the company’s disclosures are addressing the questions on analyst’s minds.
Back in September, the US Supreme Court denied cert in the Tilton case based on a constitutionality argument of the SEC’s administrative law judge framework. Now there is another split in the circuit courts over the ALJ’s constitutionality that might be heading SCOTUS’s way in the wake of the new decision, Bandimere v. SEC (we’re posting memos about this new case in our “SEC Enforcement” Practice Area). Here’s this WSJ article by Dave Michaels:
A federal appeals court dealt a strong blow to Wall Street’s top cop this week, deciding that the Securities and Exchange Commission’s in-house courts don’t meet constitutional requirements. A three-judge panel of the U.S. Court of Appeals for the 10th Circuit, based in Denver, ruled 2-1 that the SEC’s process for hiring administrative-law judges violates a clause of the U.S. Constitution that governs presidential and other appointments. The 10th Circuit’s decision, issued Tuesday, diverges from an August ruling by the U.S. Court of Appeals for the District of Columbia Circuit, which upheld the SEC’s use of its in-house courts to air claims against people accused of violating securities laws.
The SEC’s five administrative-law judges are a cornerstone of the agency’s enforcement efforts, handling most routine cases. “This is the first time that an appellate court has accepted the argument that challenges the constitutionality of the administrative-law judge system,” said Stephen Crimmins, a partner at law firm Murphy & McGonigle in Washington. “It sets up a conflict with other courts of appeals on a very important issue and it would appear ripe for a U.S. Supreme Court review to resolve that conflict.” An SEC spokesman said the agency is reviewing the court’s decision and wouldn’t immediately have further comment.
How Emotional Baggage Will Cost You!
As I wrap up a nice year of self-discovery (being an empty nester helps!), I can’t help but chuckle over this hilarious promo from Air Canada about how it intends to start charging for emotional baggage in 2017:
Air Canada announced this morning that as of 2017, passengers will be required to pay an extra fee to transport any emotional baggage they happen to be carrying with them onto their flight. Jacqueline Villeneuve, head of communications, explains that the exact amount of the fee will depend on the nature of the emotional baggage, how much space it will take up on the flight, and likely it is to interfere with the other passengers.
“When it comes to homophobia, misogyny, and deep-seated racism, we’ll be charging $500 per issue,” she explains. “That kind of emotional baggage is quite heavy and nearly impossible to store safely. It takes tremendous effort on behalf of the cabin crew to make room for those kinds of issues.” “However,” Villeneuve continues, “low-level anxiety, trust issues, fear of commitment, a sense of entitlement, or garden variety anger due to a delayed flight or a lack of gluten-free options in Terminal B – we will be happy to transport those for you for just $250.”
IPOs: Accounting & Legal Fees
Check out this “Audit Analytics” blog for the latest on legal & auditing fee levels in IPOs. One member notes that the accounting & legal fee data “trend” suffers from small sample sizes and the nature of IPO companies in the past three years…
In my new “Broc Tales” blog (go ahead & “Subscribe” to get those stories pushed to you), I’ll eventually get around to telling wacky stories about some SEC Staffers that I worked with back in the day. I’m tickled pink that the WSJ is covering that type of sensational stuff too! Here’s the intro from a recent WSJ article:
The internal watchdog for the Securities and Exchange Commission has taken the rare step of accusing an employee of committing “attendance fraud,” saying the public official was paid $125,000 for more than 1,200 hours of work “that he did not work or account for.” The claim is included in separate reports published this year by the inspector general for the securities regulator, most recently in the agency’s semiannual report issued Nov. 14.
Wall Street movie villain Gordon Gekko executed trades on a cellphone larger than his head. Today’s traders can execute thousands of trades ina second on their iPhones. One might assume that the Securities and Exchange Commission has kept up, enforcing its rules with state-of-the-art software, algorithms, and computers.
The SEC’s entire corporate-disclosure operation is based on the written document. For the most part, the agency collects financial information as documents, not as searchable data. Like many U.S. regulators, the SEC hasn’t kept pace with technological evolution. As a result, the firms it’s charged with overseeing are getting away with shady practices, investors are being denied easy access to key information, and, our economy is being put at risk.
To understand why the SEC’s low-tech disclosure system poses such a threat, consider the 2008 financial crisis. As the Treasury Department’s financial research director, Richard Berner, pointed out recently, “when Lehman Brothers failed six years ago, its counterparties could not assess their total exposures to Lehman. Financial regulators were also in the dark.”
The reason? Accessible data on Lehman just wasn’t available — not even to the SEC. Lehman had complied with relevant reporting requirements, but that information was trapped within thousands of documents, with no way to search across the whole. This lack of accessibility fueled a crisis that nearly toppled our financial system.
Here’s something that Mark Borgesblogged a few weeks ago over on CompensationStandards.com:
Although the future of the CEO pay ratio rule is somewhat uncertain, the corporate community continues to move forward to prepare for its eventual effectiveness in 2017 (and the attendant disclosures in the 2018 proxy season). While much attention has been given to the potential impact of this new disclosure, both externally (the various constituencies that will see and react to this information) and internally (your employee population), an ancillary consequence of the disclosure has been less discussed. Specifically, I’m talking about the potential state and local provisions that may tie directly to a company’s pay ratio.
As you may recall, over the past few years there have been a couple of initiatives introduced that would link the operation of a new law or regulation to the disclosed CEO pay ratio. For example, in 2014 a California legislator introduced a bill that would have modified the state’s corporate income tax rate to a sliding scale based on a company’s pay ratio. The rate would have been as low as 7% percent on the basis of net income if the ratio was no more than 25 to 1. At the other end of the scale, the rate would have been as high as 13% if the ratio was more than 400 to 1. Although the bill passed out of two state Senate committees, ultimately it failed on the Senate floor (in a tight 19-17 vote). In addition, in the same year the Rhode Island legislature considered a bill that would have given preferential treatment in receiving state government contracts to companies whose pay ratio between its highest-paid executive and its lowest paid full-time employee was 31-1 or less.
While, to my knowledge, neither initiative has made it all the way through the legislative process, the underlying concept is alive and well. Yesterday, the New York Times reported that the City Council of Portland, Oregon had voted to impose a surtax on companies whose CEOs earn more than 100 times the median pay of their rank-and-file workers. As indicated in the Times, “[t]he tax will take effect next year, after the Securities and Exchange Commission begins to require public companies to calculate and disclose how their chief executives’ compensation compares with their workers’ median pay.”
The article to goes on to say that the idea may not be limited to Portland: “Portland officials said other cities that charge business-income taxes, such as Columbus, Ohio, and Philadelphia, could easily create their own versions of the surcharge. Several state legislatures have recently considered bills structured to reward companies with narrower pay gaps between chief executives and workers.”
It certainly appears that if the CEO pay ratio rule goes forward, we may see more proposed laws and rules that seek to “piggy-back” on the disclosure.
Yesterday, ISS Corporate Solutions issued this primer that provides the basics of ISS Research’s Equity Plan Scorecard methodology that will affect meetings occurring on – or after – February 1st (see Appendix D for the ISS 2017 burn rates).
Climate Task Force Releases Proposed Disclosure Recommendations
Recently, as noted in this Davis Polk blog, the Financial Stability Board issued this 74-page set of recommendations that would enhance climate change disclosure on a global level. Participation would be voluntary. As noted in this article, there’s a recommendation to tie CEO pay to climate risk. There’s a 60-day comment period.
The SEC’s Investor Advocate Report
The SEC’s Investor Advocate has issued its annual report. Love the cover! Meanwhile, President Obama signed the legislation providing the SEC with a Small Business Advocate in the New Year (see John’s blog)…
Continuing my tradition of posting holiday disclaimers or what-not, here’s the intro of a funny take on Dr. Seuss by Lawrence Heim of Elm Sustainability Partners:
Oh, the jobs people work at!
Out west near Hawtch-Hawtch there’s a Hawtch-Hawtcher Bee-Watcher. His job is to watch… is to keep both his eyes on the lazy town bee. A bee that is watched will work harder, you see.
Well… he watched and he watched. But, in spite of his watch, that bee didn’t work any harder. Not mawtch.
So then somebody said, “Our old bee-watching man just isn’t bee-watching as hard as he can. He ought to be watched by another Hawtch-Hawtcher! The thing that we need is a Bee-Watcher-Watcher!”
The Bee-Watcher-Watcher watched the Bee-Watcher. He didn’t watch well. So another Hawtch-Hawtcher had to come in as a Watch-Watcher-Watcher!
And today all the Hawtchers who live in Hawtch-Hawtch are watching on Watch-Watcher-Watchering-Watch, Watch-Watching the Watcher who’s watching that bee.
You’re not a Hawtch-Watcher. You’re lucky, you see!”
Edgar: “Everything Edgar”
Recently, the SEC updated its “Everything EDGAR” page to provide additional information, including Quick Reference Guides…still needs a blog to provide info on outages in my humble opinion…
Check out Alan Dye’s blog on Section16.net about the SEC’s new procedures for setting Edgar passphrases…
Whistleblowers: Yet Another SEC Enforcement Action on Separation Agreements
The SEC’s Enforcement Division is on another whistleblower tear. On the heels of yesterday’s blog about an action involving severance agreements, here’s this settlement with SandRidge Energy over separation agreements. This WSJ article says more of these cases to come…
President-elect Donald Trump’s promise to eliminate regulations on U.S. businesses will likely take years to fulfill given the complex steps involved in reversing them and political and legal challenges from Democratic lawmakers and state attorneys general. Mr. Trump has said his administration will take aim at regulations across industries, and he will be backed by congressional Republicans eager to undo some of the more controversial Obama administration initiatives. Big targets include power-plant regulations and regulatory rules imposed on banks and financial institutions after the financial crisis of 2008, though the effort will also reach deep into the federal bureaucracy to include rules involving labor, telecommunications and health care.
Mr. Trump has a handful of ways to reach his goal, but they mostly point to a slow death of attrition for the Obama rules rather than an immediate elimination. He can opt not to defend rules currently tied up in court. His federal agencies can write new rules to justify revoking the ones he wants to eliminate. He can work with the GOP-controlled Congress to nullify recently completed regulations and restrict funding to certain parts of departments as a de facto way to hamstring a rule’s force.
In some cases, replacing rules will be as arduous as making them in the first place, particularly in the financial sector where some regulations have been issued by multiple agencies. The Volcker rule, which bans banks from making hedge-fund-like wagers, was adopted by five financial regulatory agencies. All five agencies would need to agree to changes for them to apply broadly. The Trump administration could loosen its enforcement of rules promulgated under Mr. Obama. That could make a difference where rules can be interpreted subjectively, such as in the case of the Volcker rule.
But where explicit rules are on the books, companies would be taking a risk by not complying, and there is no guarantee that career government staffers would agree to simply drop their enforcement actions.
Experience shows the difficulty of unraveling rules. Eight years ago the incoming Obama team pledged to review rules from the George W. Bush administration, including many so-called “midnight regulations” that were pushed through as Mr. Bush was preparing to leave office.
But of the more than 4,500 proposed or final regulatory actions cleared by the Bush White House, Mr. Obama repealed just 74 in his first nine months in office, when rules are most-often revisited, according to a 2009 presentation by a former official of the White House Office of Management and Budget. Of those, only 34 were final rules.
Whistleblowers: New SEC Enforcement Action Over Severance Agreements
Yesterday, the SEC announced that Neustar had settled whistleblower charges for routinely entering into severance agreements that contained a broad non-disparagement clause forbidding former employees from engaging with the SEC and other regulators “in any communication that disparages, denigrates, maligns or impugns” the company. Former employees could be compelled to forfeit all but $100 of their severance pay for breaching the clause.
In the wake of the financial crisis, federal regulators are demanding a vast trove of private data to help them better monitor markets. But in the age of routine, sophisticated hacks, many in the financial industry worry the government will be unable to keep that sensitive information secure.
Investment firms cite numerous breaches at federal agencies, most recently the late-October admission by the national bank overseer that a former employee had downloaded 10,000 records with two thumb drives and took them home.
Industry trade groups also fret about what they consider insufficiently specific assurances that regulators are beefing up cybersecurity commensurate with new demands. The Commodity Futures Trading Commission has drawn industry ire with a project to crack down on rapid-fire trading firms, which includes a provision that would require the firms grant the CFTC access to their confidential computer source code without a subpoena. Last month, the SEC completed new rules to increase significantly the volume of data mutual funds report about their holdings, including derivatives instruments and securities-lending activities, to better track risks across the industry. “We remain concerned about the SEC’s ability to safeguard confidential information, as they provide precious little detail about their plans,” David Blass, general counsel for the Investment Company Institute, a mutual-fund lobbying group, said following the rule’s completion.