Monthly Archives: January 2013

January 31, 2013

Which Way is Up? Describing the Economy in Risk Factors and MD&A

One of the perennial challenges arising this time of year is trying to update Form 10-K disclosure about the state of the economy and the impact on a company’s business, results of operation and financial condition. While your 10-K is by no means meant to be a version of The Kiplinger Letter, some discussion of present, past and future economic conditions is usually necessary, particularly in the context of the MD&A and Risk Factors sections of the 10-K.

As we discussed in November-December 2008 issue of The Corporate Counsel, the SEC is of the view that required disclosure need not be firm-specific or not otherwise publicly available; therefore, disclosure about matters such as the economy, industry-specific trends and financing conditions are fair game, even if you would have to be living under a rock not to know that trends in these areas are having an impact on the overall business climate and the business of individual issuers.

The disclosure challenges with regard to these matters became readily apparent in 2008 and 2009, as rapidly deteriorating financial markets and the onset of a severe economic recession caused many issuers to revisit what they said in their periodic reports and registration statements about the economy and their access to capital, and the resulting effect of trends in those areas on their business. A challenge since that time has been what to say in MD&A and Risk Factors in particular about the aftermath of those events, as the economy and financial markets have improved, but underlying concerns remain.

This topic has remained of interest to the SEC Staff in the post-financial crises era, as we continue to see comments from the Staff requesting that issuers address macroeconomic or financing conditions as part of their MD&A. A representative comment that we see from time to time is:

Please consider expanding your overview in future filings to provide insight into material opportunities, challenges and risks, such as those presented by known material trends and uncertainties, on which the company’s executives are most focused for both the short and long term. Refer to Section III.A of SEC Release 33-8350. For example, please tell us what consideration you gave to discussing in your overview the impact on your financial condition of the continued weakness in the macro economy and the expansion of your international operations.

The particular challenge that issuers are facing this year is the fact that while the economic recession has ended, the economy remains weak and we are still plagued with high unemployment, shaky consumer confidence and diminished consumer spending. At the same time, we see improvements in the housing sector that run counter to this trends. On the financing front, we are now roughly four years past the financial crisis, and arguably markets have settled for now into what seems like a “new normal.” All that said, the macroeconomic and financial markets still seem quite fragile, so significant optimism in disclosures may be going too far. With all of that in mind, here are some tips for revisiting MD&A and risk factors this 10-K season:

1. Are you still describing the financial crisis as if it just happened yesterday? Improvements have occurred since 2008-2009, although access to capital remains a concern. If anything, the financial crisis demonstrated that financing alternatives can be cut off in the blink of an eye, so that is something that remains worth talking about.

2. Are you still describing the macro economy as experiencing a recession? In some cases we have seen disclosure that has not kept pace with the turnaround in the economy, although it should be noted that recent economic data has suggested a contracting economy again (although not long enough to be considered a recession). Given the uncertainty as to the direction of the economy, it is best to balance the discussion of the post-recessionary economy with a description of the uncertainty as to continued economic growth and the possibility of another recession, including a discussion of the potential impact of these trends on the issuer.

3. Are you adequately addressing the potential trends in the global economy? Given the potential impact of the global economy and world market conditions on issuers (including those whose business is principally in the US), it may be appropriate to address conditions abroad, including the continued impact of European debt concerns.

4. As you overemphasizing economic or market trends? As noted in the November-December 2008 issue of The Corporate Counsel, one particular concern is the potential for overemphasis on external economic, market and credit conditions as a source for adverse business trends specific to an issuer. In some instances, issuers may be tempted by the fact that it is much easier to blame or credit the economy than analyze the underlying business considerations. Given this concern, issuers need to strike a balance in discussing both company-specific and macro-economic trends and uncertainties and the potential impact of those trends and uncertainties on the issuer.

An Iran Sanctions Disclosure Risk Factor?

With the clock ticking on issuers trying to determine whether they have to disclose any covered activities involving Iran under new Exchange Act Section 13(r) (see, e.g., the November-December 2012 issue of The Corporate Counsel and Broc’s latest blog on the topic), we understand some issuers have been considering whether to add a new risk factor into this year’s 10-K about the possibility of having to disclose this information, even if no particular disclosure is required under Exchange Act Section 13(r) after the February 6th effective date. At this point, there doesn’t appear to be a one-size-fits-all approach to this sort of risk factor disclosure, although I would suspect that it would only be relevant for those issuers who consider themselves at risk of having their activities (or the activities of affiliates) subject to the disclosure and notice provisions specified in Section 13(r).

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– CAQ Issues Guide on PCAOB Inspections
– Do LLC Managers and Controlling Members Have Default Fiduciary Duties? Maybe.
– Proposed EU Board Gender Quotas Delayed
– Analysis: Supreme Court Arguments in Amgen Case
– Chamber of Commerce Attacks PCAOB, Asking SEC to Reject Auditor-Audit Committee Rulemaking

– Dave Lynn

January 30, 2013

Supreme Court Will Review Scope of Federal Preclusion of State Securities Claims

As noted in this Dechert update, the Supreme Court granted certiorari last week to resolve a circuit split concerning the extent to which the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) preempts state law claims that indirectly arise out of securities claims. The case could have important implications for investor suits against hedge funds and other investment funds that are not themselves covered by SLUSA, but that are set up for the purpose of investing in equities, options, and other covered securities.

Meanwhile, the briefs are pouring in on the Gabelli v. SEC case before the Supreme Court, including this brief from the SEC. Here is the page containing all the proceedings, orders and filings related to that case…

Webcast: “Activist Profiles and Playbooks”

Tune in tomorrow for the webcast – “Activist Profiles and Playbooks” – to hear Bruce Goldfarb of Okapi Partners, Dan Katcher of Joele Frank Wilkinson Brimmer Katcher, Chuck Nathan of RLM Finsbury and Damien Park of Hedge Fund Solutions identify who the activists are – and what makes them tick.

Transcript: “Pat McGurn’s Forecast for 2013 Proxy Season: Wild and Woolly”

We have posted the transcript for the webcast: “Pat McGurn’s Forecast for 2013 Proxy Season: Wild and Woolly.”

– Broc Romanek

January 29, 2013

ISS’ New “QuickScore”: Companies Should Verify Data by February 15th

I know. Probably the last thing you want to be doing during proxy season. As I blogged recently, ISS has changed its governance rating service from “GRId” to “QuickScore” (the upshot is that it’s more like the predecessor CGQ now).

And now ISS is in the process of getting its data verified, with a deadline of input from companies by February 15th – but the real deadline is February 8th because any verification after that won’t get ISS feedback til some later date (whereas verification by 2/8 will get you feedback by 2/15). The 44-page technical document is now available – albeit a little dense – and it applies globally so only certain questions apply to US companies, as noted by Davis Polk’s Ning Chiu in this blog.

“Whistleblower!: The Movie

Gotta love this brief movie from David Smyth of the “Cady Bar the Door” blog. Love the use of air quotes…

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

Tune in tomorrow for the webcast – “Alan Dye on the Latest Section 16 Developments” – to hear Alan Dye of and Hogan Lovells discuss the most recent updates on Section 16, including new SEC Staff interpretations and Section 16(b) litigation.

– Broc Romanek

January 28, 2013

NYSE Revises Its Proxy Distribution Fee Proposal

Last week, the NYSE revised its proxy distribution fee proposal. The revised proposal is intended to move forward the NYSE Proxy Fee Advisory Committee’s recommendations and address certain technical changes that were made to the NYSE’s initial filing based on comments provided by the SEC.

The new proposal also addresses two Committee recommendations that were not included in the NYSE’s initial filing:

1. The NYSE proposes a new “success fee” to encourage brokers to adopt an investor mailbox/enhanced broker internet platform (EBIP). The Committee recommended the NYSE further explore this idea as a possible means to increase voting participation by retail shareholders.

2. The NYSE proposes a new rule related to issuer requests for record date-related NOBO lists where positions above or below a certain level can be eliminated at no extra charge and issuers would only be charged for the positions requested. The NYSE will also codify certain fees already in place in the industry for NOBO list requests.

The revised proposal is subject to further review and comment by the SEC and other interested parties. If the revised proposal was approved by the SEC, the net effect of these proposed changes will result in a modest decrease in overall proxy distribution fees of approximately 4%, with the impact varying depending on your circumstances.

Our Pair of Popular Executive Pay Conferences: A 33% Early Bird Discount

We are excited to announce that we have just posted the registration information for our popular conferences – “Tackling Your 2014 Compensation Disclosures: The Proxy Disclosure Conference” & “Say-on-Pay Workshop: 10th Annual Executive Compensation Conference” – to be held September 23-24th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas for the Conferences.

Early Bird Rates – Act by March 8th: Huge changes are afoot for executive compensation practices and the related disclosures – that will impact every public company. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by March 8th to take advantage of the 33% discount.

FINRA Updates Private Placement FAQs

As noted by Nilene Evans of Morrison & Foerster in the “MoFo JumpStarter Blog“:

FINRA recently posted two updates to its Private Placement Filing Requirements FAQs. In the first update, FINRA clarified that the Rule 5123 filing obligation applies to private placements to any individual accredited investor, which includes officers, directors and general partners of the issuer (Rule 510(a)(4)) and entities in which all the equity owners are individual accredited investors (Rule 501(a)(8)).

In the other update, it stated that private placements sold solely to accredited investors that satisfy the Regulation D four categories of accredited investors that are not natural persons (Rule 501(a)(1), (2), (3) and (7) are exempt from the Rule 5123 filing requirements. Those categories include the following:

– bank, insurance company, registered investment company, employee benefit plan or small business investment company;
– private business development company;
– charitable organization, corporation or partnership with assets exceeding $5 million; or
– trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

– Broc Romanek

January 25, 2013

Obama Taps a New SEC Chair: Mary Jo White

Yesterday, President Obama named Mary Jo White as the new SEC Chair. Mary Jo served for nearly a decade as the US Attorney for the Southern District of New York, the first woman to hold that post – and more recently has served as the head of Debevoise & Plimpton’s litigation practice. It’s been a while since a “cop” has been the SEC Chair (maybe ever, as this NPR piece says she is the first former prosecutor to be the Chair) so it should be interesting to see how her tenure might differ from recent Chairs. The confirmation hearings could be interesting due to revolving door concerns, as noted in this article – but also see this article that praises her from all corners. Note that Mary Jo is married to Cravath’s John White, who was Corp Fin Director not all that long ago…

When Mary Jo is confirmed, Elisse will go back to her Commissioner job. During her short tenure, Elisse began to lay out her priorities, as noted in this article and this article.

By the way, former SEC General Counsel Dan Goelzer – who was a founding member of the PCAOB (and a long-serving member) – is rejoining Baker & McKenzie in Washington.

The SEC at a Crossroads: Can Things Be Turned Around?

I’m a guest blogger on Columbia Law School’s new blog – called “The CLS Blue Sky Blog” – with an entry entitled “The SEC at a Crossroads: Can Things Be Turned Around?” Check it out!

Meanwhile, Keith Bishop weighs in on legal issues he’s detected about how the Investor Advisory Committee has functioned so far…

January-February Issue: Deal Lawyers Print Newsletter

This January-February issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:

– Billion Dollar Companies: Not Too Big for Hostile Shareholder Activism
– News from the SEC: Tender Offer Funding Conditions & Dual Track Processes
– Runaway MAC Carve-Outs
– Delaware Enjoins “Don’t Ask, Don’t Waive” Standstill Provision & Holds Not Per Se Unenforceable (But Use & Effect Should Be Disclosed)

If you’re not yet a subscriber, try a 2013 no-risk trial to get a non-blurred version of this issue on a complimentary basis.

– Broc Romanek

January 24, 2013

Checklists: Conflict Minerals Step One

As the Chamber’s lawsuit against the SEC’s conflict minerals rulemaking remains pending – with briefs being filed recently – companies need to continue gearing up for compliance. We continue to post many resources in our “Conflict Minerals” Practice Area, including this Checklist for Step One

Court Rules for CFTC & Against ICI & the Chamber of Commerce

Speaking of Chamber lawsuits, the US District Court for DC delivered this decision last month arising from the Chamber of Commerce and Investment Companies Institute (the trade organization for the mutual fund business) suing the CFTC to stop Dodd-Frank rulemaking involving commodity pool operators. The decision has been appealed, along with a motion for expedited consideration of the appeal.

Meanwhile, as noted in this Reuters article, House Oversight Chair Darrell Issa and Rep. McHenry have written to the PCAOB as part of its probe into whether sufficient cost-benefit analysis is being conducted by the PCAOB…

SEC Staff Developing “Accounting Quality Model”

Here’s news from Tom White of WilmerHale in his new “Focus on Audit Committees, Accounting & the Law Blog“:

In a recent speech, Craig Lewis, the SEC’s Chief Economist and Director of its Division of Risk, Strategy and Financial Innovation, described an initiative to develop an “Accounting Quality Model.” According to Mr. Lewis, the model will seek “to provide a set of quantitative analytics that could be used across the SEC to assess the degree to which registrants’ financial statements appear anomalous.”

The model will be designed to identify possible instances of “earnings management,” though Mr. Lewis is quick to say that earnings management (as he defines it) is not necessarily indicative of fraud but may reflect permissible applications of GAAP. Without delving too much into the technicalities, the model will identify “total accruals” (difference between cash flow and income before extraordinary items), and then seek to determine, based on a large set of factors, which of those accruals are discretionary and which are non-discretionary. If the discretionary accruals are out of line compared to peer companies, then the company may be flagged for further analysis.

Mr. Lewis indicates that the model’s analytics can be used for various purposes, including informing the Division of Corporation Finance’s filing review process, use by the Enforcement Division to focus its investigative process, and evaluating claims by tipsters. For most companies, this new model is unlikely to have much impact. But the fact that the Commission staff is developing this model illustrates the SEC’s continuing efforts to enhance its ability to carry out its regulatory objectives by “integrat[ing] rigorous data analytics into the core mission of the SEC.”

– Broc Romanek

January 23, 2013

Governance Ratings: ISS Changes “GRId” to “QuickScore”

One of the greater challenges last proxy season was ISS rolling out an updated governance ratings service – GRId 2.0 – in the late stages of the proxy season. Last week, ISS sent out the letter below to companies explaining how GRId is changing – including its name – along with a timeline of the new QuickScore launch (it seems there is potential for another “midst of the proxy season” surprise; I’ll ask Pat about this during tomorrow’s webcast):

Most public companies in established markets worldwide are familiar with Institutional Shareholder Services (ISS) and the corporate governance research and proxy voting services we provide to global investors. One of those services is our Governance Risk Indicators (GRId) database, which was designed to assess companies’ governance practices, assigning low, medium and high risk concern levels across practices related to board, executive compensation/remuneration, audit and shareholder rights.

Effective late February/early March 2013, ISS will replace GRId with ISS Governance QuickScore™, which is the first in a suite of ISS QuickScore solutions designed to identify risk within portfolio companies. The ISS Governance QuickScore, which identifies governance risk within a company, will be made available to institutional investors and companies in late February.

Although similar to GRId in concept, ISS Governance QuickScore™ differs in the following ways:

– Methodology – ISS Governance QuickScore uses a quantitatively-driven methodology that looks for correlations between governance factors and key financial metrics, with a secondary policy-based overlay that aligns the qualitative aspect of governance with ISS policy. The methodology is based on best practices across various governance factors, with the number of factors applied varying by region. Details regarding regional factors will be included in a forthcoming technical document.

– Scoring – Moving away from GRId’s color-coded concern levels, ISS Governance QuickScore uses a numeric, decile-based score that indicates a company’s rank relative to region. Companies will still be assessed on four independent dimensions: board, compensation/remuneration, shareholder rights, and audit, and will also receive an overall Governance QuickScore and assessment. In the latter half of the year, scores relative to industry sector will be introduced.

– Coverage – Initially, ISS QuickScore coverage will encompass 4,100 companies in 25 markets, including the largest 3000 U.S. companies by market cap, the largest 250 Canadian companies by market cap and UK, Europe, Japan and Asia Pacific companies in the MSCI-EAFE index.

Companies within this QuickScore coverage universe will have access to ISS’ free data verification site, beginning Monday January 28. At that time, companies can begin to review the data ISS has collected on the QuickScore factors. Note that during this period, only the governance profile for your company will be available for review until Governance QuickScores are published in late February/early March. If you need a log-in ID to the free data verification site, please email us.

ISS Governance QuickScore Implementation Timeline

– January 24 – QuickScore Technical Document and FAQ available for download

– Today through January 25 – GRId data and concern levels remain in effect and are displayed through all current distribution channels.

– January 28 – Data review and verification site opens for companies to review their data against the Governance QuickScore factors. GRId data and concern levels are unavailable.

– February 15 – Data review and verification site closes (although the site will open again and remain open after QuickScores are calculated and released in late February/early March)

– Late Feb/early Mar – ISS Governance QuickScore launches. Governance QuickScores are applied to all 4,100 companies in the coverage universe. GRId is retired. We anticipate a Governance QuickScore launch date on or around February 25, but will confirm/update that date in subsequent communications.

For all covered companies, the ISS Governance QuickScore will be displayed on ISS’ proxy research reports beginning with the late February/early March launch.

Over the coming weeks, you will receive a series of informative communications providing additional details about ISS Governance QuickScore that should answer most of your questions. Look for communications next week that will include access to the ISS Governance QuickScore Technical Document, FAQs and sample reports. If you still have questions after receiving these materials next week, you can email us.

Starting in late February/early March, GRId subscribers will see their current GRId view within ICS’ Governance Analytics platform replaced with modeling and analytical tools based on the new ISS Governance QuickScore methodology.

ISS Updates P4P Methodology Whitepaper

Hat tip to Ed Hauder of Exequity for notifying us of this development: ISS recently posted its whitepaper detailing its pay for performance (P4P) methodology:

The Evaluating Pay for Performance white paper provides an overview of ISS’ approach in evaluating Pay for Performance alignment. Originally published prior to the 2012 proxy season [Note: a revised version of the whitepaper was published in February 2012], the document incorporates further updates for 2013 that describe ISS’ new peer selection methodology and approach to measuring realizable pay.

Webcast: “Pat McGurn’s Forecast for 2013 Proxy Season: Wild and Woolly”

Tune in tomorrow for the always entertaining webcast – “Pat McGurn’s Forecast for 2013 Proxy Season: Wild and Woolly” – Pat McGurn of ISS and the proxy season expert, will recap what transpired during the 2012 proxy season and what to expect for 2013. Please print off these “Course Materials” in advance.

– Broc Romanek

January 22, 2013

Battle Lines Being Drawn: Political Spending Disclosures

Despite the Presidential Election now far behind us, interest in disclosure of political spending continues to be very high by a group of investors. Recently, I blogged about how the number of comments on the rulemaking petition seeking political spending disclosures is now up to 320,000. I also blogged about the likelihood of the SEC proposing rules in this area by sometime in April, as blogged about by Prof. Lucian Bebchuk. The prospect of a rulemaking drew great interest in the media, with over 20 newspapers carrying the story a few weeks back (here is a list of links to those stories). And on “The Mentor Blog,” I noted New York State Comptroller has filed a Section 220 books & records lawsuit in Delaware against Qualcomm a few weeks ago. So investors are pressing for more disclosure on numerous fronts.

Now, the Chamber of Commerce has fired back by submitting this 30-page comment letter on the rulemaking petition. As noted by Ning Chiu in this blog, the Chamber’s response sounds the alarm by noting that: “A number of recent Commission regulations have been set aside by the courts for failing to satisfy this standard–the Commission should not waste precious public resources on a rulemaking exercise that is similarly doomed to failure.” Perhaps some of the Chamber’s concerns would be addressed if the DISCLOSE Act (“Disclosure of Information on Spending on Campaigns Leads to Open and Secure Elections Act of 2013”) were enacted. Rep. Chris Van Hollen (D-MD) reintroduced the bill – HR 148 – just after the New Year. This battle likely has just begun (although the war has spanned decades)…

Here’s an example illustrating the methods being used to attract so many comment letters on this petition. Credo uses this page to facilitate the submission of a form comment letter. Online campaigning continues to grow as I have predicted for years…although I thought it would happen in the annual shareholder meeting context…

Political Spending: What Can You Do Now? Our Checklists & Samples

In our “Political Contributions” Practice Area, I have posted a number of items that can help you navigate this hot topic, including three checklists and a sample monitoring memo. Check them out!

Corp Fin Updates Financial Reporting Manual (Again)

On Friday, Corp Fin indicated that it has updated its Financial Reporting Manual for for issues related to significance testing for related businesses, auditor responsibility for cumulative period from inception amounts, PCAOB requirements for auditors of non-issuer financial statements, and other changes.

– Broc Romanek

January 18, 2013

Meredith Cross to Return to WilmerHale – & the Latest SEC Chair Rumors

Recently departed Corp Fin Director Meredith Cross has decided to return to her old firm, WilmerHale. I’m sure they are very glad to have her back.

And the latest “next SEC Chair” rumors are circulating – although there is a good chance that Elisse Walter may keep the job in my opinion – with Mary Jo White, the former US attorney in Manhattan being reported as under consideration. My own poll of who might be tapped as the next Chair resulted in CII’s Ann Yerger getting the most votes (sadly, the poll results have vanished along with the web polling software I was using). I’m sure we will hear many more rumors as Elisse is likely to stay in the job at least through most of this year…

Meanwhile, the debate over crowdfunding continues. See this Huffington Post piece entitled “JOBS Act Rule Poses Early Test of SEC Chairman Walter’s Leadership.”

Draft Recommendations: Advisory Committee on Small and Emerging Companies

Recently, the Advisory Committee on Small and Emerging Companies posted its recommendations in draft form, including a number of interesting items (eg. setting up of a stock exchange for small companies). There will be a public meeting of the Advisory Committee on February 1st…

How to Do Board Succession Planning

In this podcast, Kris Veaco of the Veaco Group runs down some frequently-asked questions about how to conduct board succession, including:

– Why should boards be thinking about their own composition and succession planning?
– What are some ways boards go about this?
– Who does this work, the board itself?
– How are the results used?

– Broc Romanek

January 17, 2013

Done Deal: SEC Approves “Compensation Committees & Advisors” Listing Standards

Yesterday, the SEC finalized the NYSE & Nasdaq listing standards related to compensation committees and their advisors (here’s the NYSE order & Nasdaq order). Last Friday, both exchanges amended their listing standards, as noted in this blog. Here are the effectiveness timetables, as noted in this Cooley news brief:

– NYSE companies will have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the new standards for compensation committee director independence. All other provisions will become effective on July 1, 2013 for NYSE companies (e.g., provisions relating to the authority of a compensation committee to retain and fund compensation consultants, legal counsel and other compensation advisers and the responsibility of the committee to consider independence factors before selecting or receiving advice from these advisers).

– Nasdaq companies will be required to establish the committee’s authority and responsibility under Rule 5605(d)(3) in the committee charter, resolutions or other board action by July 1, 2013. Nasdaq companies will have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the remaining provisions (including a mandatory charter amendment to establish the authority noted above).

Tune in today for’s webcast – “The Latest Developments: Your Upcoming Proxy Disclosures – What You Need to Do Now!” – to hear what you should be doing now in the face of these new rules…

IASB, FASB Chairs Address Possible IFRS Option in US

In FEI’s “Financial Reporting Blog,” there is news about the latest thinking on the use of IFRS from the Chairs of the IASB and FASB…

More on “The Mentor Blog”

I continue to post new items daily on our blog – “The Mentor Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– SEC’s Enforcement Going to Trial More Frequently: Consequences?
– History Speaks: First LLC Registered with the SEC
– The SEC’s Role in Enforcing the Federal Securities Laws
– How Much Information Should you Give VCs for Due Diligence?
– Sample: Audit Committee Evaluation of Auditor (& It’s PCAOB Inspection)

– Broc Romanek