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.
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.
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.
Last year, we blogged about Corp Fin’s new policy of not asking for Tandy Letter reps in comment letter responses and acceleration requests. Apparently, IM also ceased requiring similar representations in connection with their review of 1933 Act and 1934 Act filings.
So I presumed that Tandy letters were dead. But I forgot about the SEC’s Office of Chief Accountant (known as “OCA”; not to be confused with Corp Fin’s own Chief Accountant’s office). OCA has required a stand-alone Tandy letter for auditor independence determinations for a long time – and still does. I can be forgiven for forgetting this as lawyers don’t often get involved in auditor independence issues…
Is there any way for the SEC’s Enforcement Division to better bring a message case then using the hit musical – “Hamilton” – in the title of a press release?
Form AP: Updated PCAOB Staff Guidance
Recently, the PCAOB issued Staff Guidance on Form AP that updates its guidance from June. Here’s the press release, which notes that the primary addition is an explanation of the filing deadline for companies that don’t file reports with the SEC…
FASB Proposal: Call Out Debt Waivers on Balance Sheet
This Deloitte memo discusses FASB’s recent proposal to simplify the process of determining whether debt should be classified as “current” or “noncurrent” – that’s “long-term” to us Earthlings – on a balance sheet. One part of the proposal that caught my eye relates to the disclosure of lender waivers of covenant defaults:
Entities would be required to separately present the amount of debt that is classified as noncurrent as a result of the waiver exception on the face of a classified balance sheet.
Some folks have tried to play games with disclosure of covenant waivers over the years, but I think there’s a recognition of the need for greater transparency about them. Under the new proposal, there would be no place to hide.
Shrinkage. One of the best Seinfeld episodes. Anyway, the Trump Administration is targeting a smaller Federal government with much fewer benefits, as noted in this Washington Post article. Although the SEC doesn’t seem to be specifically targeted, it likely will be impacted by these efforts in a major way. The question remains – just how much?
We have come full circle from the aftermath of the ’07 financial crisis, when hiring 800 new Staffers was being bandied about – and eventually happened, an increase of total staff by over 20%!
How to Reduce the SEC’s Regs By 75%…
Speaking of shrinkage, let’s talk about President Trump’s goal of reducing government regulations by 75%. As I blogged a few days ago, the SEC is not impacted by the Executive Order. But let’s pretend it was. I wonder how the SEC would go about doing such a thing. Give me your feedback as to which rules & regs would go on your own personal “eliminate vs. keep” list.
But note that the rules of the game are that you have to keep or eliminate entire rule or regs, not merely portions. Give me your feedback & then I’ll roll up your answers – anonymously – into a poll so that we can crowdsource this thing. Thanks to Eliot Robinson of Bryan Cave for the idea!
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Last night, SEC Acting Chair Piwowar released this statement, announcing that the SEC would be reconsidering its conflict minerals “2014 guidance.” Here’s an excerpt from Lawrence Heim’s note:
Although there is ambiguity in this statement that we hope to get clarity on soon, it appears that the statement may only relate to the 2014 guidance and not the rule as a whole. In addition, it also appears that the outcome of the SEC’s action in relation to Piwowar’s statement applies to filings covering calendar year 2017 and therefore may not impact activities currently underway by issuers preparing for their CY2016 filings.
The statement notes that Chair Piwowar visited Africa last year & has seen the rule’s unintended consequences firsthand (and see more analysis in this Gibson Dunn blog). Comments on the reconsideration can be submitted over the next 45 days.
This news comes just in time for our webcast tomorrow – “Conflict Minerals: Tackling Your Next Form SD” – featuring our own Dave Lynn of Morrison & Foerster, Ropes & Gray’s Michael Littenberg, Elm Sustainability Partners’ Lawrence Heim and Deloitte’s Christine Robinson. They will discuss what this latest development means for you, as well as what you should be considering as you prepare your Form SD for this year.
Steve Quinlivan blogs that the resource extraction rules might turn to dust soon as the House seeks a “joint resolution of disapproval” today…
The Investor Stewardship Group’s Governance Framework
Yesterday, the “Investor Stewardship Group” wrapped up two years of work to release these long-term value principles: “Framework for U.S. Stewardship and Governance.” The group includes 16 large institutional investors & global asset managers: BlackRock, CalSTRS, Florida State Board of Administration, GIC Private Limited (Singapore’s Sovereign Wealth Fund), Legal and General Investment Management, MFS Investment Management, MN Netherlands, PGGM, Royal Bank of Canada (Asset Management), State Street Global Advisors, TIAA Investments, T. Rowe Price Associates, ValueAct Capital, Vanguard, Washington State Investment Board and Wellington Management.
Our February Eminders is Posted!
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Heavens. I could launch a new blog just devoted to the topic of dramatically cutting the number of rules with the stroke of a pen. Here’s the intro from Cydney Posner’s blog about this:
The WSJ reports about yet another executive order that was signed today, this one designed to cut back on federal regulation. Under the executive order, federal agencies will need to eliminate two regulations for every new one created. The intent of the order, according to the new President, is to cut at least 75% of all federal regulations. In addition, according to the WSJ, the order “caps costs of new regulations for the remainder of the fiscal year and creates a budget process for new regulations in the next fiscal year, which begins in October. This budget, separate from the congressional appropriation process, will be set by the White House.”
It sounds great in theory. But implementing a regulatory reduction like this – forcing agencies to kill two rules for every new one – is bound to result in disaster. There needs to be some sort of sophisticated – & holistic – approach. Perform surgery with a scalpel. Or I guess you could just go at it with a meat cleaver. This Politico article says it would take years to accomplish, with costly court challenges along the way.
Anyway, thanks to Keith Bishop for pointing out that this executive order doesn’t apply to the SEC! After the order was issued, Reuters reported the following clarification:
The White House confirmed on Monday that a new executive order to slash regulations will not apply to independent regulatory agencies such as the Securities and Exchange Commission, a spokeswoman said.
Transcript: “Pat McGurn’s Forecast for 2017 Proxy Season”
We have posted the transcript for the webcast: “Pat McGurn’s Forecast for 2017 Proxy Season.”
Tomorrow’s Webcast: “The Art of Working With Proxy Advisors”
Tune in tomorrow for the CompensationStandards.com webcast – “The Art of Working With Proxy Advisors” – to hear Strategic Governance Advisors’ Amy Bilbija, Davis Polk’s Ning Chiu, Teneo Governance’s Martha Carter and CamberView Partners’ Allie Rutherford analyze how to interact with proxy advisors to get the most out of your proxy season.
Over on “The Accounting Onion,” Tom Sellers blogs that Wells Fargo could be the next major MD&A enforcement case for the SEC. He notes that Wells Fargo’s former CEO told Congress that the board was aware of the bank’s unauthorized account issues in 2014. Tom focuses on MD&A’s “known trends” requirement, & says that the bank ran afoul of it here:
Companies often produce lengthy MD&A disclosures from core requirements that boil down to two criteria:
– As of the time of filing, what management knows.
– Whether a transaction, event or uncertainty that management does know about had, or is reasonably likely to have, a material effect on profitability, liquidity or capital resources.
“Stumpf testified management and the board was informed of the issues in 2014. The Los Angeles City Attorney filed a lawsuit against the bank in 2015 after Los Angeles Times first published reports of the problems in 2013.” [italics supplied]
Even so, no disclosure was made in an SEC filing through the second quarter of 2016. And just in case you are wondering, the MD&A rules do not permit a company to omit required MD&A disclosures out of concern for their effect on future litigation, creating a competitive disadvantage, or resulting in a self-fulfilling prophesy.
Tom goes on to suggest that while the financial impact of the $185 million settlement itself may not have been material to Wells Fargo, the collateral damage to the bank’s reputation & business was much larger – and should have been taken into account in management’s materiality assessment.
I admit that when I first read this, I was a little skeptical about the argument – hey, I’m a petite bourgeois corporate tool, so I have my biases. Wells Fargo’s flat-footed response suggests that management viewed this situation primarily as a regulatory matter, and assessed its downside by reference to what the expected settlement with the CFPB and other regulators would be. Should they have anticipated the firestorm that followed, and factored that into the materiality assessment?
My first inclination was to say no – that kind of speculation is beyond what’s required by MD&A. I still think that’s the case in most situations. But the more I thought about it, the more troubled I became by the bank’s failure of imagination. Two million unauthorized accounts? More than 5,000 employees terminated because of this mess? Under those circumstances, was it reasonable for Wells Fargo to think that a $185 million settlement with regulators would be the end of it?
There’s still at least one aspect of the case that makes me think this isn’t really a slam dunk – we’re talking about management’s subjective opinion about the downside risk, & that means Virginia Bankshares may come into play. Wells Fargo could argue that while management’s opinion about the downside may have been wrong, it’s only actionable if management didn’t really believe it. Fait v. Regions Financial is the leading case when it comes to the applicability of Virginia Bankshares to accounting & financial judgments – and Omnicare doesn’t seem to have put much of a dent in it.
Data Breaches at Yahoo! – Another Potential SEC Poster-Child?
According to a recent WSJ report, the SEC is investigating the timing of Yahoo!’s disclosure of its highly-publicized data breaches. Kevin LaCroix of the “D&O Diary” speculates that Yahoo! may find itself as the poster-child for the SEC’s cybersecurity disclosure guidelines:
The question the agency likely will be examining is whether Yahoo’s apparent delays in reporting the breaches ran afoul of the requirements specified in the 2011 guidelines that “material information regarding cybersecurity risks and cyber incidents is required to be disclosed when necessary in order to make other required disclosures, in light of the circumstances under which they are made, not misleading.”
As the WSJ article notes, if the SEC were to bring a case against Yahoo, it could “make clearer to other companies what type of disclosures it views as potentially violating the law in this area.” An SEC case against Yahoo “could help clarify rules over timing because the guidance doesn’t lay out detailed requirements.”
Webcast: “Alan Dye on the Latest Section 16 Developments”
Tune in tomorrow for the Section16.net webcast – “Alan Dye on the Latest Section 16 Developments” – to hear Alan Dye of Section16.net and Hogan Lovells discuss the most recent updates on Section 16, including new SEC Staff interpretations and Section 16(b) litigation.
The SEC’s DERA Division recently published a White Paper examining the over-the-counter market. It doesn’t pull any punches. Here’s an excerpt from the conclusion:
These studies provide evidence that OTC stocks are predominantly illiquid, generate negative and volatile returns, are frequently targeted by alleged market manipulation schemes, and rarely transition to an exchange. These relationships worsen as OTC Markets’ self-established eligibility requirements pertaining to disclosure are reduced.
I’ve worked with several companies that either started on the OTC market or ended up there. Nothing the SEC says in its report is news to me or anyone else who’s worked with one of them. The deck is stacked against these companies – most of them have all of the costs associated with public company status, and none of the benefits in terms of liquidity or access to capital. Most of the time, they’re waging a desperate struggle to stay afloat. Many of these companies are forced to turn to a motley assortment of lenders of last resort & various other bottom feeders to meet their capital needs.
Remember Jack Lemon in Save The Tiger? There are a lot of folks like that out there in microcap land.
The precarious position most OTC companies find themselves in leaves their investors with the short end of the stick too – & to make matters worse, there are a lot of sharks in these waters. It isn’t too hard to manipulate a stock that has no institutional ownership, no analyst coverage, and – at the lowest ends of the food chain – minimal disclosure.
The SEC has brought dozens of penny stock enforcement proceedings in recent years & has issued three investor bulletins in recent months about the risks of the microcap market. Despite that, its White Paper concludes that “the size of the OTC market is large and has grown by dollar volume in recent periods, especially in the tier with the weakest disclosure-related eligibility requirements.”
Can the news about OTC stocks get any worse? Yeah, it can. Here’s the last sentence of the White Paper:
Demographic patterns reveal that OTC investor outcomes are especially negative for investors living in areas with greater proportions of older, retired, low-income, low-wealth, and low-education individuals.
In response to the Delaware Chancery Court’s 2014 decision in ATP Tour v. Deutscher Tennis Bund, the Delaware legislature amended Section 109(b) to prohibit fee-shifting bylaws for “internal corporate claims” – those alleging breaches of fiduciary duty or as to which the DGCL gives the Chancery Court jurisdiction.
In Solak v. Sarowitz, the Chancery Court recently applied this statute to invalidate a fee-shifting provision attached to a forum selection bylaw. This K&L Gates memo reviews the decision. Here’s an excerpt summarizing the Court’s holding:
To the extent it was unclear following the 2015 DGCL Amendments, the Court of Chancery’s decision in Solak confirms to practitioners that any fee-shifting bylaw (or charter provision) adopted by a stock corporation and relating to internal corporate claims is invalid. Indeed, in its decision, the Court discussed at length the motivations behind the 2015 DGCL Amendments, including the Corporation Law Council of the Delaware State Bar Association’s desire to limit fee-shifting following the Delaware Supreme Court’s decision in ATP Tour, Inc.
IPOs: 2016 at a Glance
Because I have the attention span of a guy who basically surfs the Internet for a living, I’ve started to develop a real fondness for infographics. Here’s a good one from MoFo highlighting the year in IPOs.
In 2016, individuals in more than 67 countries outside the United States accounted for more than 460 tips under the SEC’s whistleblower program – that’s 10% of the total, and the number is growing. This Dechert memo suggests that the number of tips from abroad will continue to increase, and offers some thoughts on best practices for multinational corporations’ compliance programs. This excerpt says that an appropriately designed program should include, at a minimum:
– Convenient and confidential channels for employees to report concerns and complaints;
– Proper recordkeeping and tracking of complaints from initial report to resolution;
– Pre-existing protocols setting forth how to properly engage whistleblowers, investigate allegations of misconduct and when to retain external counsel;
– Well-trained staff empowered to independently identify misconduct and thoroughly investigate complaints, possibly in conjunction with external counsel;
– Proper documentation of the results of investigations, including any remedial measures adopted in response; and
– Well-designed internal controls to reduce the incidence of complaints and reduce the likelihood of retaliation against complaining employees.
Even with a properly implemented program, a company may not be able to completely avoid whistleblower complaints. But companies with established policies and procedures for appropriately handling whistleblower complaints will be in the best position to defend themselves against government investigations, & their efforts will likely be favorably viewed by the authorities.
Cross-Border Investigations: Expect Another Active Year in 2017
This Skadden memo reviews recent developments in cross-border investigations and enforcement, while this DLA Piper memo suggests that companies should brace for another very active year in cross-border investigations. Here’s an excerpt highlighting some of the ongoing cross-border cooperation initiatives between the UK’s Serious Fraud Office (SFO) & US authorities:
The SFO and US regulatory authorities, including the US Department of Justice and the US Securities and Exchange Commission, have also stated that they are committed to cooperating on cross-border investigations. As part of that cooperation, the UK and US agencies announced in early December 2016 that the DOJ will be assigning one of its attorneys to work in London, the first year with the Financial Conduct Authority (FCA) and the second with the SFO. US Assistant Attorney General Leslie Caldwell stated that this position “builds on years of parallel investigations and significant cooperation” and that the FCA and SFO are “highly interested in reciprocating” with a position assigned from the UK to the US.
John Travolta Was Right. . .
Since we’ve got kind of an international focus today, I thought it was a good time to point out that John Travolta’s character in Pulp Fiction was right – they do call it a “Royal with Cheese” in France (or a “Royal Deluxe” if you get yours with lettuce & tomato). Note also the mayo with the fries. I’ll never doubt a character in a Tarantino movie again:
By the way, if you’re concerned about the potential decline & fall of Western Civilization, here’s something you probably don’t want to know — this McDonald’s is at the Louvre.