In this podcast, Dave Lynn and Marty Dunn engage in a lively discussion of the latest developments in securities laws, corporate governance, and pop culture. Topics include:
– Changes at the SEC
– Reflections on a “business day”
– Which is better: 450 5th Street versus 100 F Street?
– Which is better: Original Elvis or Comeback Elvis?
Congressional Committee Changes & the Impact on the SEC
This Reuters article discusses changes in the leadership of the Senate Banking Committee and House Financial Services Committee, the top oversight committees for the SEC. Senator Michael Crapo will now be the ranking Republican on the Senate Banking Committee, with Senator Tim Johnson (D-SD) remaining at the Chair. Newly elected Elizabeth Warren (D-Mass) will join that committee (here is a recent interview with her).
Representative Jeb Hensarling (R-Texas) will take over as Chair of the House Financial Services Committee (taking over for Spencer Bachus) with Maxine Waters (D-Cal) who will be the ranking Democrat on that committee…
The Legacy of SEC Chair Mary Schapiro
Tomorrow is SEC Chair Mary Schapiro’s last day and much has been – and will be – written about her legacy. There are a collection of articles about this linked from this Cooley new brief. And here is a brief interview conducted with Mary.
Personally, I will always be amazed at how long a career she has had in public service at the very top. Don’t forget she first became a SEC Commissioner at age 33! And she was the first woman to serve as the SEC Chair. In between, she served a variety of high-ranking roles at other agencies (including the head of FINRA) – all under the administrations of different political parties. I would be surprised if someone else ever matched Mary’s leadership record of public service in the securities law field…
Pretty interesting video featuring Naval Ravikant, co-maintainer of AngelList, describing his efforts to come to DC and change how the JOBS Act was put together. According to Naval, all it takes is calling in a hundred favors – and approach the task like a start-up. There was an online petition with 5000 signatories from the VC world that was used to influence Congress – “using technology as a weapon in this cause.” Fascinating background. He does laugh about the misnomer “Jobs” Act, which was not his doing…
With Led Zeppelin being in DC recently to be honored at the Kennedy Center, I have to throw in some reference. Anyways, here are recent JOBS Act items:
1. As noted in this Cooley news brief, two SEC commissioners, Luis Aguilar and Elisse Walter, have advocated that “more safeguards for investors should be considered before a rule lifting the ban on general advertising for private offerings is adopted. Here is Commissioner Walter’s speech on the topic. Here is a Gibson Dunn blog about what Elisse’s promotion might mean for the future of this rulemaking – and here’s a summary of the comment letters from McGuireWoods.
2. This article claims that Chair Schapiro dragged her feet on the general solicitation rule so it wasn’t adopted on her watch. But the reality is that the interim proposed rule did not meet the test the courts have prescribed for an interim final rule and would likely not have stood up in court. As is often the case in the bizarro world we live in, the people pushing for its quick adoption are the same people who have criticized the SEC for not doing enough cost-benefit analysis on rules viewed as being investor friendly.
3. Some IPOs appear to be avoiding the JOBS Act stigma as noted in this WSJ article entitled “Some Firms Shun Looser IPO Rules.”
4. Check out this blog entitled “Crunching the numbers on EGC shells.”
5. The Treasury Department has been participating in JOBS Act roundtables around the country – but there has been zero press about them as they are closed to journalists. Why the need for secrecy?
In this recent speech, SEC Commissioner Aguilar bemoans the recent finding that only 17% of Americans trust the market. This is a much bigger problem for Corporate American than they realize and ties into the numerous accounting scandals, pay-for-no-performance stories and other governance bombshells that occur on a daily basis. No buyers mean that sooner or later, stock prices start going down…
Our New “Voting Requirements & Results Disclosure Handbook”
One of my favorite topics is “usability” when drafting disclosure, whether it be for a paper document or for something posted online. I first wrote about the topic of usability for online documents in this article a dozen years ago. For many of us, drafting disclosure is our profession. We are the experts. And understanding how our disclosure is best consumed is something we should know a lot about.
Now I have written a checklist to help you get a better grasp on the process of writing more usable documents, with some great input from Jared Brandman of Coca-Cola (Coke has done some great things lately, from its online proxy statement to a revamped IR web page).
Proxy Drafting & Usability
In this podcast, Iain Poole of Labrador discusses how to best draft a proxy statement, including:
– How do you determine the ideal type of disclosure layout for a proxy statement?
– What trends are you seeing in proxy presentation?
– What about the ideal format for usability online?
FINRA recently released FAQs and a user guide related to Rule 5123 filings. As discussed in more detail in the June/July issue of Up To Date, Rule 5123 requires, subject to certain exceptions, FINRA member firms that sell securities in certain private placements to submit a notice filing with FINRA. Such notice filing shall include a copy of any private placement memorandum, term sheet or other offering document, including any materially amended versions thereof, used in connection with such sale. Members that do not employ offering documents must indicate to FINRA that no such documents were used in connection with the applicable offering. Submissions must be made within 15 calendar days of the first sale.
The FAQs answer practical questions regarding filing requirements, such as: how members file a notice with FINRA, whether third parties can file offering documents on behalf of a member, and when does the 15-day period commence for filing with FINRA. In addition, the FAQs address matters relating to exemptions form Rule 5123. The FAQs also provide contact information at FINRA for members who have general inquiries and questions regarding Rule 5123. The user guide gives members step by step instructions regarding how to access the private placement filing system and how to make a Rule 5123 filing.
Oh boy. This is a hard one for me to swallow. I’ve been eagerly waiting for the SEC to modernize its guidance about how social media can be leveraged to enhance disclosures to investors. The latest guidance is from ’08, well before the golden age of social media. I know the SEC purposely didn’t mention the terms “Twitter” or “Facebook” in the ’08 guidance in an effort to accommodate new technologies – but it sorely needs to be updated (the guidance also didn’t mention “search engine optimization” but that’s another story). Since the guidance was issued, the SEC has had its hands full with a financial crisis and two major Acts of Congress. So I can understand why there has been no progress in this area.
Anyways, we now have this – news that the SEC’s Enforcement Staff has issued a Wells notice to Netflix and its CEO Reed Hastings over a Facebook post about the aggregate number of hours people were viewing content from the company. This has the potential to set back the use of social media to give investors more information about investment opportunities by a factor of five. And since more disclosure is better for the marketplace, it’s truly a sad thing. Getting more information available via social media already was an uphill battle, as legions of lawyers have been telling clients “no” without bothering to figure out what “Twitter” and other social media channels really are. Many of the lawyers I have talked to about this also blame a lack of clarity in the SEC’s guidance.
I’m not a fan of the SEC using enforcement for policy-making purposes by going after high profile companies or executives to make a point in the disclosure area. And here is the kicker: Netflix is one of the only high profile companies that is friendly to retail investors. They accept retail investor questions on their conference calls via email and make the analysts wait on the call until all the emailed questions are dealt with.
Should the SEC Chase Netflix for an Alleged Regulation FD Violation Over a Facebook Post?
Of course not. And not just for the reasons set forth above about the big picture of what this means for the world of disclosure. When I asked for folks to email me their thoughts on this Bloomberg article entitled “Netflix CEO Hastings Faces SEC Action Over Facebook Post,” the overwhelming response was that the SEC was out of bounds. Many reactions were along the lines of this blog by Darrick Mix of Duane Morris regarding questions of materiality and sufficient public disclosure.
On the materiality issue, one member noted: “It is debatable that hours viewed is remotely material because you can’t draw a line between how many hours people watch Netflix to how much money Netflix brings in. The Netflix subscription fee is fixed regardless of how much subscribers use the service. Hours viewed is a measure of customer engagement in the service. If anything, more hours viewed increases Netflix’s costs slightly. Netflix explained this in their Q4 ’11 conference call in January 2012.”
Another member mused whether the old ubiquitous McDonald’s signs – “over 99 billion served” – would have been actionable for the SEC if Reg FD had existed then, noting that catch-phrase arguably contained more material information. More hamburgers means more revenue and more profit, unlike Netflix’s flat fee structure.
Steps Netflix Could Have Taken to Possibly Fix This…
Let me start this analysis by asking if you were surprised to see that 8% of respondents to NIRI’s latest “use of corporate websites” survey planned to use their site as a recognized channel of distribution? NIRI’s press release characterized this result as “just 8%” – but I was shocked it was that high. I am only aware of Google and Microsoft having announced that they use their sites as recognized channels. Is anyone aware of other companies already doing so?
Netflix has never taken that crucial step of issuing a short press release telling investors to look to Hastings’ Facebook account for important investor information. If I correctly understand what Netflix is saying in the wake of the SEC’s action, they still say that they don’t use Facebook for that purpose – even though they also seem to say that they could if they wanted to because Hastings’ Facebook posts provide broad, non-exclusionary distribution (ie. his FB account is well followed by the media and they report what he posts quickly). I’d agree that Hastings generates more media coverage with his Facebook posts than the average company does with their news releases – but that it’s still unclear under the SEC’s ’08 guidance what that means for the company.
Anyways, here is more food for thought:
1. Hastings is using the “subscription” option that Facebook offers. That allows anyone on Facebook to subscribe to his public status updates and receive them in real time – in theory. In practice, his updates don’t come through in real time to public subscribers who are not also his friends, which is something Facebook can fix.
2. You don’t need a Facebook account to view Hastings’ public Facebook updates, but this is not handled as well as it could be by Facebook. If you go to his Facebook page without being logged into Facebook, you won’t see the previous post.
3. Netflix has done a poor job of making investors aware of its CEO’s Facebook account. There should be a link to it in his bio and on the IR homepage (this kind of thing is true for almost all companies). Ironically, the Wells Notice has now made the account very public through an SEC filing.
4. Hastings’ Facebook posts generate a lot of media publicity. There are many journalists and bloggers who are both friends and subscribers. He has 240k subscribers, more than I’m sure subscribe to the SEC’s NFLX feed on Edgar or that view the NFLX Yahoo Finance page on a daily basis. He has a pattern of posting things like hours viewed, commenting on competitors like HBO and even noting subscriber number milestones. Many investors subscribe to his public updates because they’re interesting and help them understand the company.
The Bottom Line: The SEC Needs to Regulate IR Web Pages (And More)
The state of affairs for IR web pages for many companies is atrocious. And I argue that this is where the SEC should spend its resources rather than chase a CEO who likes to inform investors. For starters, there needs to be bare minimums about how companies display information – and what they post.
Too many companies still blindly outsource their IR web pages to third-party providers – without realizing what those third-parties are doing. Did you know that one of these major providers use robots so that the Wayback Machine can’t archive what the IR web pages look like over time? This could be problematic if a company wanted to prove it made a disclosure on its IR web page on a certain date. Conversely, it could hurt the SEC if it wanted to prove that the disclosure wasn’t there. Given that the Wayback Machine is essentially the “Edgar” of online disclosures, should companies be permitted to “shred” their records like this?
This is just one of many examples illustrating how it’s still the Wild West on the Internet – and the fix isn’t to pretend that things on the Internet should be the same as it was before. It’s simply not and there are grand opportunities to better educate investors about a company’s prospects. The SEC needs to evolve and regulate more broadly. Get away from the hyperfocus on the disclosures it forces to be filed on Edgar. Focus more on what investors actually bother to read. Don’t punish the companies that want to reach investors in the manner that today’s investors consume information. Rather, lead the way so that companies can get on the social media bandwagon and stop hiding behind the excuse of Reg FD.
SEC Approves Nasdaq’s Revised Deficiency Disclosure Listing Standard
As I blogged before, Nasdaq-listed companies will now have to disclose details when they don’t comply with a listing standard – and Nasdaq will have the authority to make that disclosure for you if you don’t make the disclosure. Here is the SEC’s order approving the revised Nasdaq rule a few days ago.
NYSE Proposes That Companies Provide Notices Through Web-Based System
As noted in this Sullivan & Cromwell memo, the NYSE has proposed changes to the Listed Company Manual that would require most notices to the NYSE by listed companies to be made electronically through egovdirect.com, the NYSE’s web portal, or by email, rather than by telephone, fax, telegram or otherwise. Notice of material corporate events or statements regarding rumors during or shortly before market hours would still require telephone notice to the NYSE at least ten minutes prior to release.
Ning Chiu of Davis Polk provides this news from her blog:
ISS has released a detailed set of FAQs on how it will select a company’s peer group for purposes of conducting its pay-for-performance analysis. ISS uses this peer group to measure a company’s total shareholder return and CEO pay in deciding how to recommend for the say-on-pay vote.
The FAQs provide information on how ISS will select 14-24 peers from the company’s own GICS code, as well as the GICS code of the peers named in the subject company’s proxy statement. Subject to size constraints based on revenues or assets and market value, ISS describes the order in which peers will be selected from the potential universe of companies that will come up based on those GICS codes. Other questions address the use of size parameters, which are clearly key to the selection process, the GICS industry groups (financial services) where assets will be used instead of revenue, and what happens if a company discloses using more than one peer group.
In addition, by December 21st a company can inform ISS of any changes to its peer group since the 2012 disclosures, as a source of input into the ISS peer group selection.
While more information is always useful, this is unlikely to mean that companies will be able to proactively figure out the ISS peer group themselves given the complexity of GICS, the number of potential companies that ISS can choose from under this method and the use of what they term “manual judgment” in the selection process. It appears that again companies will not know who they are being measured against until they receive the ISS report.
For those companies that may have faced a say-on-pay issue last year because of perceived faulty peer groups used by ISS, note that in back-testing this new method against their analysis applied in 2012, ISS indicates that more than 95% of companies would have received the same pay-for-performance analysis.
Everybody Into the Pool! SEC’s General Counsel and Trading & Markets Director to Leave
How Common Are All These SEC Departures After an Election?
I got crushed in the wake of this news by queries from members about whether this mass exodus is typical (guess I should be tapped for the director of the SEC Historical Society someday). For starters, I can’t recall three senior Staffers announcing departures within a 48 hour span. That certainly is unique (although it’s not unusual for turnover among Division Directors under a new SEC Chair). This tweet of mine was quite popular yesterday:
If the SEC’s remaining Division Directors quit tomorrow (eg. Enforcement, IM), can we hold our class outside?
So why are people leaving before the new SEC Chair settles in? It’s just a guess – but the change in the nature of working at the SEC might well be a part of it. The SEC is constantly blasted in the press, harassed by Congress and treated like dirt by the courts. And compared to private practice, the pay is a fraction. What would you do?
The other question I fielded was whether it was unusual for a SEC Chair to step down after a Presidential election. The answer is certainly not.
Here is the math: Elisse will be the 30th SEC Chair. Backing out the first Chair – Joe Kennedy – because his appointment was tied to the statute creating the SEC, there are 29 Chairs that have been appointed and 16 of those have been confirmed within 12 months of a Presidential election. That’s 55% of the time (and I didn’t even account for new Chairs because someone stepped down due to death, illness or controversy). And it’s even more pronounced of a trend if you just analyze the last 50 years – 12 out of 17 Chairs during that period were confirmed within 12 months of an election – for a whopping 71%. Here’s a list of the SEC Chairs if you want to do the math yourself.
Yesterday, the SEC announced that Meredith Cross would be leaving as Corp Fin Director at the end of the year. During her three and a half year tenure, Meredith accomplished an amazing array of rulemaking – having had to navigate both Dodd-Frank and the JOBS Act. I worked under Meredith during her earlier stint in Corp Fin and can attest to her remarkable acumen and practical approach to solving problems. As gleaned from our list, Meredith served at the 16th Director of the Division – and is only the second woman in that position. So who’s next? That is a tough one to guess…
Tune in tomorrow for the webcast – “How the SEC Really Works” – to navigate the lore – and detect the myths – of how the SEC works. There are many more Offices and Divisions than most realize. Join SEC Secretary Betsy Murphy and a group of experts that have worked at high levels within the SEC – Latham & Watkin’s Alex Cohen (former Deputy Chief of Staff for SEC Chair Chris Cox) and Hunton & Williams Scott Kimpel (former Counsel to Commissioner Troy Paredes).
Among the topics of this program are:
– What the SEC Commissioners actually do and how they fit into the SEC’s org chart
– Overview of the Sunshine Act, which bears on how the Commission meets – and how to communicate with SEC Commissioners
– How Enforcement cases are deliberated
– How rulemakings come together, from kernel of an idea to proposal to adoption
– What are the Offices of General Counsel, Secretary, Legislative Affairs, Public Affairs, etc.
As noted in this WSJ article, the SEC brought administrative proceedings against the foreign affiliates of five auditors yesterday – the five biggest firms – alleging they refused to hand over documents sought in investigations of alleged accounting frauds at 9 Chinese companies.
This issue is not new. Auditor have refused to turn over the work papers of their foreign affiliates to the SEC for decades. Meanwhile, the markets have become much more global with many foreign companies now seeking cash and capital from the US capital markets, based upon audited financial statements audited by foreign affiliates of the Big 4. Yet the auditors have steadfastly refused to grant access to foreign work papers when questions about a lack of proper auditing have been raised. As a result, Sarbanes-Oxley included a Section 106 to remedy this problem. And now Section 106 is being used…
Meanwhile, in what is by far the largest settlement in the current wave of securities litigation involving Chinese companies, Ernst &Young, which served as the auditor for Sino-Forest, has agreed to pay $117 million to settle the securities suit that investors filed in Ontario against the accounting firm, as noted in the “D&O Diary Blog.”
Europe Seems to Be Moving Forward with Audit Firm Rotation
As noted in Jim Hamilton’s blog, a European Commission Official recently told a PCAOB Roundtable that the EU is moving forward with legislation mandating auditor rotation.
HP, Autonomy and IFRS vs US GAAP
Here’s some insight from Lynn Turner: “There has been much discussion of HP’s Autonomy transaction since the HP announcement of last week. The former Autonomy management has said the disagreement is apparently due to HP, and its experts, not adequately considering the differences in International and US Accounting standards. That seems to be unlikely as HP said their information was being supplied to both the US’s SEC and UK regulators who will be reviewing it.
Here is an article that discusses the two different accounting standards. As the article notes, IFRS is very, very general with little – if any – guidance. It has in essence been such a poor standard, that it may result in companies not following its basic principles as written and intended. If adopted for US reporting by the SEC, this is a prime example of what US investors can expect in financial statements using International Accounting Standards – unreliable information.”
As noted in this WSJ article, roughly half of the 1000 foreign companies listed on a US exchange still submit filings using U.S. standards. The SEC allows US-listed foreign companies to use IFRS standards for 5 years.
The Battle Over Access to Pre-IPO Correspondence: Are Response Letters Part of Your Disclosure Stream?
Recently, this Market Watch article concluded it was unlikely the SEC would release its pre-IPO correspondence with issuers prior to an offering’s effective date. Some investors have argued that Corp Fin comment letters would assist them in their investment analysis – perhaps misunderstanding the nature of the comment letter process.
That said, companies may need to start considering their responses to comments as part of their public disclosure record – and thus be more careful about what they say in response to a comment…
More Examples of How “Journalism” Has Fallen Off a Cliff
Recently, I decried the state of reporting by the mass media. A while back, I got a chuckle out of this Businessweek article entitled “Facebook Fought SEC to Keep Mobile Risks Hidden Before IPO” because the reporters read so much more into the Corp Fin comment process than might really be there. And this Cooley news brief and Bloomberg article about Manchester U’s IPO comments provide more in the way of a cautionary tale about how you respond to comments…
But this crappy Business Insider article really takes the cake, even going so far to claim that long-time Corp Fin Assistant Director Barbara Jacobs is a Professor for PLI. Just because you speak on a panel doesn’t make you a “Professor”…