February 22, 2018

SEC Approves Cybersecurity Guidance! Our Big Webcast Coming Soon!

Despite a dose of drama when the SEC cancelled its open Commission meeting, the SEC released its 24-page interpretive release on cybersecurity disclosures in the early afternoon yesterday by seritim.

Here’s a statement by SEC Chair Clayton that indicates that Corp Fin will be reviewing disclosures to help decide whether further guidance – or rulemaking! – is necessary. And these statements by Commissioner Jackson & Commissioner Stein are a bit critical of the new guidance.

We’ll be posting the inevitable flood of memos about the guidance in our “Cybersecurity” Practice Area. I’m sure many will analyze the “duty to update” discussion in the guidance…

Our Coming “Cybersecurity” Webcast: Meredith, Keith & Dave!

Join us on Wednesday, March 14th for the webcast – “The SEC’s New Cybersecurity Guidance” – to hear WilmerHale’s Meredith Cross, Ropes & Gray’s Keith Higgins and Jenner & Block’s Dave Lynn discuss the SEC’s brand new cybersecurity guidance.

When is the SEC Required to Hold an Open Commission Meeting?

So the SEC approved this interpretive guidance by seritim rather than in the open Commission meeting context. Which really doesn’t matter – except the sudden cancellation of the open meeting made it feel like the guidance wasn’t coming out. The cancellation was probably related to another matter on the open meeting agenda – some liquidity rules that most of us luckily don’t care about. Read more in this blog about why the SEC isn’t required to hold an open meeting to approve rules or guidance…

Poll: Did Release of Cybersecurity Guidance Have More Drama Than the Olympics?

Please participate in this anonymous poll:

web polls

Broc Romanek

February 21, 2018

Cancelled: Today’s “Cybersecurity Disclosure” Open Meeting

Just 90 minutes before the meeting was supposed to start, the SEC posted a simple note saying today’s open Commission meeting – which would have given us interpretive guidance on cybersecurity disclosure – has been cancelled. A few hours later, the SEC’s interpretive guidance was posted. I’ll be blogging about it manana…

February 21, 2018

Three Women on Every Board! That’s Progress?

I blogged a few weeks ago about BlackRock’s desire for a quota of two women on every board. I’m glad that BlackRock is advocating for two women on every board – but I’m sad that an investor has to advocate for such a thing as quotas at all. There should be more than two women on every board – but ideally it should happen naturally, just as gender diversity has happened in so many professions over the past 40 years or so. We’ll get there – but unfortunately it’s pretty clear that it won’t happen “naturally” as progress is moving at a glacial pace.

Anyway, Allen Matkins’ Keith Bishop told me about this bill recently introduced in California that would require at least three women on a board when the authorized number of directors is six or more. This bill would apply to public companies with their principal places of business in California, to the exclusion of the law of the state of incorporation…

The SEC’s Home Page Redesign: Mobile Friendly

As someone who studies site design (yes, I design all of our sites), I am always curious when the SEC redesigns its home page. It’s only been 2 years since the last redesign – and the prior redesign was four years before that.

The new design of the SEC’s home page is particularly suited for viewing by mobile devices. Since studies show that a majority of online traffic comes through mobile devices, it’s logical that the SEC would go this route. I changed the design of this site’s home page so it was optimal for mobile – and many folks weren’t happy so I reversed course & went back to the old design!

The SEC’s redesigned home page continues to cater to retail investors – as well as tout the new Chair’s objectives that he discussed in his first speech a few months ago. For those of us that rely on the SEC’s rules, regulations & guidance, the tabs at the top continue to be of the utmost importance…

Just Announced! The “Section 16 Forums”

In response to those doing Section 16 work who have told us that they want to network with those similarly-situated, we are holding two “Section 16 Forums.” Hosted by Alan, these are one-day events for all Section 16 practitioners – not just beginners.

This pair of “Section 16 Forums” are:

Washington DC on Tuesday, June 19, 2018
San Francisco on Tuesday, June 26, 2018

You can “register now.” The cost is only $295.

Broc Romanek

February 20, 2018

Edgar Problems: The Crisis Continues

I’m calling it a “crisis” because periodic problems continue to happen – and the SEC continues to provide very little (if any) transparency around what is going on with Edgar. The last time that I blogged about Edgar problems was October – when I heard that offerings were being delayed and there were fee problems. I heard about this from a number of members – but the SEC never said a word about it.

Now I’ve heard through the grapevine that the filing deadline for Schedule 13G amendments on Valentine’s Day caused some rough sledding for Edgar. Form 5s were due then too. Companies with 8-Ks, etc. couldn’t get their filings through on Edgar. Again, not a word from the SEC. Same story told in these old blogs: “Edgar is Down? (Crickets)” – or this one: “EDGAR is Down”: A Familiar Refrain?

I’ve blogged about a simple solution for years – that the SEC launch an Edgar blog in which they indicate when Edgar is experiencing issues. And they then post follow-up blogs when the issues are resolved. Without this transparency, we are left to assume the worst. And given the high-profile hacking problems that the SEC has faced over the past year, you would think they would want to improve how they are perceived when it comes to handling this type of crisis communication…

Why am I so invested in this issue? Trying to save the SEC’s reputation I guess. Edgar is the most important asset that the SEC has – the market depends on it. And it’s ironic that this lack of disclosure is from an agency tasked with eliciting disclosure – not to mention that the SEC will be issuing guidance to companies tomorrow about how they should disclose hacks. And as John blogged recently, the SEC’s proposed budget seeks to boost its own cybersecurity resources…

Corp Fin Departures: Karen Garnett

Associate Director Karen Garnett has announced that she will depart Corp Fin after 23 years in the Division. No word yet on her next destination…

By the way, former Corp Fin Chief Accountant Mark Kronforst has joined EY’s National office in DC…

Transcript: “Tax Reform – What’s the Final Word?”

We’ve posted the transcript for the recent webcast: “Tax Reform: What’s the Final Word?”

Broc Romanek

February 16, 2018

SEC to Issue Cybersecurity Guidance on Wednesday!

Perhaps a long time coming, as noted in this Sunshine Act notice, the SEC will hold an open Commission meeting on Wednesday to issue an interpretive release providing cybersecurity disclosure guidance. The last cybersecurity guidance came from Corp Fin – not the Commission itself – back in 2011. Just this week, Commissioner Stein delivered a speech noting that current cybersecurity disclosure from companies was insufficient.

Not sure of the source & accuracy of this article, but the “SD Times” seems to know what will be in the interpretive guidance. Here’s an excerpt:

The updates are expected to take effect in the first and second quarter of this year, and it will require that investors are notified of all data breaches, instead of only notifying them of major cyber attacks.

The new update will include rules about sending timely breach notifications to senior management. Secondly, the upcoming guidance is expected to address how firms should disclose cybersecurity events that represent a material risk to their investors. In addition, it will provide information on how firms can create a blackout to prevent insider trading following a cybersecurity event.

Kyle Moffatt Named Corp Fin’s Chief Accountant

Yesterday, Corp Fin announced that Kyle Moffatt would be the Division’s Chief Accountant. Not surprising given that Kyle has been serving in that capacity since Mark Kronforst left last month.

Transcript: “Alan Dye on the Latest Section 16 Developments”

We have posted the transcript for the recent webcast: “Alan Dye on the Latest Section 16 Developments.”

Broc Romanek

February 15, 2018

Should We Lose the 10-Qs?

In recent years, some prominent governance commentators have advocated that the SEC follow the lead of EU & UK regulators and eliminate mandated quarterly reporting.  A recent study published in the March issue of “The Accounting Review” says that there’s empirical data supporting the idea that the SEC should “lose the 10-Qs.”  Here’s an excerpt from a recent American Accounting Association press release on the article:

With regulatory reform a high priority for the Trump administration, a new study focuses on one possible target – and it’s a fat one – the half-century-old SEC rule mandating the filing of quarterly financial reports by public companies.

The EU and UK no longer require quarterly financials, and the question of whether the SEC should follow suit has evoked heated debate. While there has been plenty of theorizing about the subject, what has been absent until now is large-scale evidence of the advantages less frequent reporting offers to companies and their shareholders. The research challenge: How to compare the effect of reporting frequency when all U.S. companies have to file quarterly.

Now a study in “The Accounting Review,” published by the American Accounting Association, finds a way around this problem by analyzing evidence from periods when reporting-frequency mandates changed in the U.S., permitting before-and-after comparisons to be made.

While acknowledging that, yes, there may very well be advantages in increased reporting frequency – such as lower cost of capital and more information for investors – the study concludes, crucially, that shorter reporting intervals engender “managerial myopia” which finds expression in a “statistically and economically significant decline in investments” along with “a subsequent decline in operating efficiency and sales growth.”

Therefore, “our evidence…supports the recent decision by the EU and the UK to abandon requiring quarterly reporting for listed companies with an apparent intent to preventing short-termism and promoting long-term investments,” write the study’s authors, Rahul Vashishtha and Mohan Venkatachalam of Duke University’s Fuqua School of Business and Arthur G. Kraft of the Cass Business School of City University London.

The study says that prior to the reporting mandates, firms that reported results at longer intervals had greater annual sales, annual sales growth and return on assets than firms that reported more frequently. By contrast, in the period three to five years post-mandate, sales and sales growth were about the same for the two groups, while the difference in return on assets narrowed significantly.

Of course, one of the truisms of corporate governance research seems to be that for every study that says “white,” there’s another that says “black.” This MarketWatch article from last year suggests that the issue of reporting frequency is no exception.

DOJ’s New Policy Restricting Use of Agency Guidance

Late last year, Attorney General Sessions issued a memo announcing his intention to curb the practice of “rulemaking by guidance.” This King & Spalding memo says that the DOJ has acted to implement the AG’s directive. Here’s an excerpt summarizing the new policy:

On January 25, 2018, Associate Attorney General Rachel Brand issued a memorandum significantly restricting Department of Justice civil litigating units’ use of executive agency guidance documents in affirmative civil enforcement actions. The Brand Memo outlines new policies for cases in which an executive agency previously issued relevant non-binding guidance, including:

– Reinforcing the long-standing principle that guidance documents are just that—recommendations for regulated industries;

– Emphasizing that guidance does not bind regulated parties or create new legal obligations beyond the scope of existing statutes and regulations;

– Precluding the Department from “effectively convert[ing] agency guidance into binding rules”; and

– Preventing Department lawyers from using noncompliance with guidance to establish violations of law.

The Brand Memo’s potential impact is very broad, and it will influence any DOJ investigation that relies heavily on regulatory agencies’ non-binding interpretive guidance, but the King & Spalding memo suggests that it may have a particularly significant impact in the life sciences sector – where DOJ attorneys have long leveraged guidance from the DHS’s Office of the Inspector General and the FDA to support the government’s claims.

Nasdaq Proposes Changes to Shareholder Approval Rule

This Morrison & Foerster blog highlights a recent Nasdaq proposal that would tinker with the rules governing when listed companies would have to go to their shareholders for approval of new stock issuances. Here’s an excerpt summarizing the proposed changes:

The proposal would, among other things:

– Amend the measure of “market value” in connection with assessing whether a transaction is being completed at a discount from the closing bid price to the lower of: the closing price as reflected by Nasdaq, or the average closing price of the common stock for the five trading days preceding the definitive agreement date;
– Refer to the above price as the “Minimum Price,” and existing references to “book value” and “market value” used in Rule 5635(d) will be eliminated; and
– Eliminate the references to “book value” for purposes of the shareholder vote requirement.

For some Nasdaq companies, this is kind of a big deal. Currently, listed companies need shareholders to sign off on any financing transaction (other than a public offering) that would result in the issuance of 20% or more of their outstanding shares at a price less than the greater of book or market.

Changing the rules to eliminate the reference to book value and shake out some of the effects of market volatility will enhance companies’ ability to raise private money quickly – and doesn’t seem to do violence to shareholders’ interests either.

John Jenkins

February 14, 2018

Proxy Access: Game Over?

Wasn’t it was only yesterday that proxy access was one of the most hotly contested corporate governance issues? Now this Sidley memo says the game’s pretty much over – and proxy access has become mainstream:

As of the end of January 2018, 65% of S&P 500 companies have adopted proxy access. Through the collective efforts of large institutional investors, including public and private pension funds and other shareholders, shareholders are increasingly gaining the power to nominate a number of director candidates without undertaking the expense of a proxy solicitation. By obtaining proxy access (the ability to include shareholder nominees in the company’s own proxy materials), shareholders have yet another tool to influence board decisions.

Some of the 2017 developments noted in the memo suggest that not only is the concept of shareholder proxy access well-established, but investors and management are generally in accord on what it should look like:

– The continuing pace of proxy access bylaw adoptions and ongoing convergence toward standard key parameters (83% of companies that adopted proxy access in 2017 did so on the following terms: 3% for 3 years for up to 20% of the board (at least 2 directors) with a nominating group size limit of 20);

– Slightly increased average support (54% versus 51%) for shareholder proposals to adopt proxy access in 2017, but fewer proposals being voted on as more companies adopted proxy access in exchange for withdrawal of the proposals;

– The failure to pass of all shareholder proposals seeking specified revisions to existing proxy access provisions (so-called “fix-it” proposals) in 2017, despite favorable recommendations from ISS, which voting results suggest that many shareholders are satisfied with proxy access on market standard terms.

The memo also points out that Fidelity’s shift from opposing to supporting proxy access shareholder proposals may seal the fate of many companies that receive such a proposal in the future.

It seems fair to say that given current trends, proxy access may soon become ubiquitous. Of course, one big question remains – is anybody ever going to actually use it?

Cybersecurity: “I, For One, Welcome Our New Cyber Insurance Overlords”

This Cleary blog says that a group of corporate titans are joining forces to roll out an innovative new cyber insurance product that’s designed to reward good cybersecurity practices:

In response to the growing threat of malware and ransomware attacks and other cybersecurity threats facing businesses today, Apple, Cisco, Allianz and Aon announced a new holistic cyber risk management solution on February 5, 2018. The new product is designed to provide a comprehensive framework for companies to reduce cyber risk by leveraging the expertise of each of the partners. As cyber incidents often impose significant costs on companies that can be difficult to bear directly, cyber insurance can help provide some protection.

Companies interested in purchasing the new insurance product must first undergo a cyber resilience evaluation from Aon to determine their “cybersecurity posture.” Aon will also recommend ways for the company to improve their cybersecurity defenses. Companies that employ Cisco’s Ransomware Defense product and/or Apple devices such as iPhones, iPads and Mac computers, may then be eligible for an “enhanced cyber insurance offering” underwritten by Allianz Global Corporate & Specialty that provides what Apple describes as “market-leading policy coverage terms and conditions,” including lower deductibles, or in certain cases, no deductibles. Companies that purchase this insurance package will also have access to Cisco’s and Aon’s incident response teams in the event that they do suffer a cybersecurity incident.

The blog notes that providing incentives for good cybersecurity practices benefits both insurer and insured – and it won’t hurt Apple & Cisco’s bottom lines either.

There’s one other thing that caught my eye in the blog – the rather alarming statistic that 68% of U.S. businesses haven’t purchased any cyber insurance. Really? Hey, you guys – doesn’t anybody watch “Mr. Robot?”

Cybersecurity: The Board’s Role

While we’re on the subject of cybersecurity, this recent Deloitte memo addresses the board’s role in overseeing the company’s cyber risk management efforts. The memo lays out a model for how boards can develop strong oversight of cyber risks, and notes that this oversight function involves the many of the same risk management skills that directors apply to other areas of the company’s business. Here’s an excerpt:

Board members needn’t become cyber security specialists. But by bringing to bear their deep experience in risk management, they can push management to answer tough questions and identify potential weaknesses in an organization’s cybersecurity strategy and capabilities.

Knowing that every company will have to accept some risk, the board can help management focus its efforts on the highest risk areas, while preserving the company’s ability to innovate. Again, the question returns to the organization’s risk appetite, and the board’s ability to make sure the organization’s cyber security efforts align with agreed upon risk parameters.

John Jenkins

February 13, 2018

SEC’s Budget Seeks Cybersecurity Boost

Yesterday, the SEC issued a press release announcing its proposed budget for fiscal 2019.  Last fall, SEC Chair Jay Clayton told Congress that he’d seek more funding to boost cybersecurity and IT in the wake of disclosure that the Edgar system had been hacked – and he’s a man of his word.

The proposed budget represents a 3.5% increase over the agency’s 2018 request, and the bulk of the request for increased funding is directed at those areas. Here’s an excerpt:

In furtherance of the objectives of the SEC’s 2018–2020 Technology Strategic Plan, this request seeks an additional $45 million to restore funding for technology development, modernization, and enhancement projects. Together with the support of the SEC Reserve Fund, the FY 2019 request would allow the agency to continue implementing a number of multi-year technology initiatives.

Uplifting the agency’s cybersecurity program is a top priority. The FY 2019 request would support increased investment in tools, technologies, and services to protect the security of the agency’s network, systems, and sensitive data. Priorities for FY 2019 include maturation of controls through continuous diagnostics and monitoring, and further enhancements to firewall technologies. Another way the FY 2019 request helps reduce the agency’s cybersecurity risk profile is by enabling the funding of multi-year investments to transition legacy IT systems to modern platforms with improved embedded security features.

Additional funding is also being sought for the restoration of 100 positions (50 FTEs) across various SEC divisions. The SEC’s budget request assumes that it will continue to have access to its reserve fund – something that many Republican legislators & the Trump Administration have targeted for elimination.

Tax Reform: What’s It Mean for Loan Markets?

This Milbank memo takes a look at what tax reform might mean to the loan markets.  Here’s an excerpt of some of the memo’s preliminary conclusions:

The combination of a much lower corporate tax rate and the new limitations on the deductibility of interest may make debt financing a less tax advantageous form of financing for some U.S. taxpayers, although debt financing still has certain tax advantages over equity financing. Multi-national groups may rethink their financing structures now that the incentive to borrow in the United States rather than abroad due to much higher U.S. corporate rates has been reduced or eliminated.

As has been reported in the press, the change to corporate rates, the taxable deemed repatriation of deferred offshore earnings, the limitations on post-2017 NOLs and other provisions may result in significant financial accounting charges that will be reflected on financial balance sheets and earnings statements.

The memo also points out a variety of other potential issues. These include increased complexity in negotiating tax distribution provisions in loan documents due to the disparity between corporate and individual rates, and the potential need for multinational entities to reorganize their corporate structures in ways that may require them to renegotiate existing loan covenants.

Tomorrow’s Webcast: “The Top Compensation Consultants Speak”

Tune in tomorrow for the webcast – “The Top Compensation Consultants Speak” – to hear Mike Kesner of Deloitte Consulting, Blair Jones of Semler Brossy and Ira Kay of Pay Governance “tell it like it is. . . and like it should be.” The jam-packed agenda includes:

1. Pay ratio – last minute items
2. The tax reform bill eliminates the 162(m) exemption – what impact will that have on executive pay design, structure and governance (e.g., salaries and positive discretion on incentive payouts)?
3. Calculation of existing performance awards under tax reform
4. Director pay is continuing to get additional attention from the proxy advisors and the plaintiff’s bar. What will this attention mean for how director pay is structured & administered?
5. Clawbacks aren’t just for restatements anymore. What is the latest thinking on applying clawbacks to a broader range of activities and a broader population?
6. Goal-setting and performance adjustments remain major discussion points at the C-suite level: what are some best practices that can be helpful in this regard?
7. Investors, the SEC and proxy advisors are all still looking for the best way to assess pay & performance? What is the best thinking about how companies can kick the tires around their own pay & performance?

John Jenkins

February 12, 2018

Mandatory Arbitration: Clayton’s “Not Anxious” to Give ‘Thumbs Up’

This article quotes SEC Chair Jay Clayton as saying that he’s “not anxious” to pursue a rule that would allow companies to adopt bylaws compelling their shareholders to arbitrate securities claims. As we’ve previously blogged, it’s been suggested that such a move is under consideration by the SEC – but as we’ve also blogged, the idea has attracted heat from investor groups.

So, these comments suggest that this idea is likely dead, right? Not so fast. With a hot potato issue like this, we all probably read too much into prior reports suggesting that the SEC was ready to act, and we’re probably reading too much into his remarks now.

After all, those comments were in response to the customary “beating about the head and shoulders” that Senator Elizabeth Warren administers to every financial regulator who testifies in front of the Senate banking committee. Sen. Warren demanded a “yes or no” answer on whether the Chair would support “eliminating class actions” – and his response beyond the “not anxious to see a change” sound-bite fell far short of that. Here’s an excerpt:

“”If this issue were to come up before the agency, it would take a long time for it to be decided, because it would be the subject of a great deal of debate. In terms of where we can do better, this is not an area that is on my list of where we could do better.”

This FedNet video captures Jay Clayton’s full testimony before the committee. The exchange with Sen. Warren begins at the 55:25 mark. The Senator didn’t get the yes or no answer she was looking for – instead, she got one that seemed to say “I’m not prepared to die on this hill, but I’m not going to let myself be pinned down either.”

Insider Trading: It’s Worse Than You Think?

Here’s a cheery item from “The Economist” – according to three recent studies, insider trading is running rampant on Wall Street. Here’s the intro:

Insider-trading prosecutions have netted plenty of small fry. But many grumble that the big fish swim off unharmed. That nagging fear has some new academic backing, from three studies. One argues that well-connected insiders profited even from the financial crisis. The others go further still, suggesting the entire share-trading system is rigged.

Nice. I sometimes think that John Calvin may have been on to something with that “total depravity” stuff.

Tax Reform: An Accounting Disclosure Primer

As Broc blogged last week, some investors are finding company disclosures about the effects of tax reform to be a jumbled mess.  While the complaints so far have surrounded disclosure in earnings releases, it’s not likely to get any easier for companies or investors when it comes time to spell things out in SEC filings.  That’s why this BDO memo detailing the accounting & financial statement disclosures associated with the new tax law is a handy resource.

John Jenkins

February 9, 2018

More on “’Black Monday’: 30 Years Ago Today!”

Recently, in this blog, John did a great job bringing back memories of the 1987 stock market crash – the largest single day drop in Wall Street’s history. Here’s my own personal story about it:

I was in law school on a field trip to the Philadelphia Stock Exchange that day. The head of the Exchange spoke to us and started crying. He said that everyone in the building had lost millions. Being a pauper myself – and having had a few drinks with my law school buddies on the train up there – I couldn’t relate.

A year later, I was working at the SEC – and the agency sponsored a HUGE keg party for the “Market Break” anniversary at a local bar. I thought the SEC would be routinely sponsoring keg parties at bars. That was the last of them…

Here’s other stories of the ’87 crash from some old-timers:

– I was just an associate and, fortunately, did not have much money in the market. However, when I was leaving for the day, a senior corporate partner advised me, “Don’t walk too close to the buildings. There may be people jumping.” I believe he was serious.

– I had taken the day off to take my daughter (who was about 20 months old) to the Bronx zoo. Didn’t see a TV or a radio until I got home. My doorman said he was ruined and could never retire!

– I was in a drafting session for an IPO that was being led by Smith Barney and Needham & Co. Because this was before the days of mobile phones and other handheld devices – and before 24-hour cable financial news shows – the bankers would periodically walk out of the room to call back to their offices and find out how bad it was. Their faces grew longer as the day wore on. The company went public two years later.

– I was working on a leveraged ESOP deal as an ERISA lawyer in Charlotte. I had just signed the preceding Friday a contract for a house in the Hamptons. When I got back to NYC I rushed off the plane (with everyone else) to see if the world as we knew it had ended. The next day we backed out of the Hamptons contract, without taking any loss. And the next week, my wife and I decided that New York was going to get ugly, which it did. That was the start of our 3-month decision making process to change my specialty – and to move to Palo Alto. Funny how bad can turn into all things good.

– I had just entered private practice and was new to both doing deals and buying stocks in my meagerly funded retirement account. All day long frantic co-workers were announcing the next new market low, and as the public offering I was working on fell apart, I wondered who in the world was on the buy side of all those trades. When I got home that night, I collapsed onto my apartment sofa to watch the market news on TV and noticed that the light was blinking on my answering machine (one of those clunky tape recorders everyone connected to their telephones at the time). My sole message was from the broker handling my IRA, informing me that a limit order to buy a particular stock that I had placed nearly two months earlier and had since forgotten about had been executed that morning at $19 a share. The stock closed that day at just over $12. The whole experience was sobering.

– I had left the night before on a flight to Europe to close a stock-for-stock acquisition of a privately-held business for a public client. As the stock plummeted during the day, the seller refused to close. The client and I hung around for another day to see if it would recover, but ended up heading home when it did not. A few weeks later it had recovered enough to close.

Broc Romanek