With another tragedy hanging over us, I have decided to break with tradition and not blog about community news. Rather, I want to focus on the positive. One of my favorite movies of all-time. Based on a true story, “The Sapphires” has it all. Set in 1968, four musically talented Australian Aboriginal women overcome the odds and get picked to entertain the troops in Vietnam. Like the new Jackie Robinson movie, overcoming racial prejudice makes for a powerful movie. [Did you know that light-skinned Aboriginal children were stolen from their parents and institutionalized or taught “white ways”? Known as the “Stolen Generation.”]
But that is just the backdrop. The real power of this movie is the relationships between the four women – and with their flawed Irish manager. The war setting then adds another dimension. And finally, the singing. I’m not one to see a movie for the music, but the women in this movie are unbelievable – and they sing the best of ’60s soul music. Their version of “Sugar Pie, Honey Bunch” is the best. Jessica Mauboy is a modern day Diana Ross.
My wife and I left the movie both wondering the same thing. Should we go back in and watch it a second time in a row? I haven’t had that feeling since I was a kid. It’s in limited release and hopefully playing near you. Here is group of clips showing the songs they sing:
This new study about sell-side equity research analysts entitled “Inside the ‘Black Box’ of Sell-Side Financial Analysts” by Profs. Brown, Call, Clement & Sharp may surprise you – or it may not given all that is wrong with this world. The findings are disturbing, including:
– Analyst compensation – 44% of the analysts surveyed indicate that their success at generating underwriting business or trading commissions is very important to their compensation (see page 43).
– Private communication with management – Analysts rated private phone calls with management as the most useful form of direct contact with management of the companies they follow. Further, the analysts specifically responded that private communication with management is very useful for determining their earnings forecasts and stock recommendations. In interviews, analysts said their private phone calls with management provide color and granularity and that management is more candid on private calls than public calls. Analysts said they get to check their model assumptions on private calls, and that management goes into details on private calls that they aren’t willing to discuss on public calls (see discussion from pages 23-25). Thus, the analysts appear to be receiving private information (from these calls) that benefits them directly in terms of their performance.
Meanwhile, in this survey of hedge fund professionals – commissioned by Labaton Sucharow, HedgeWorld and the Hedge Fund Association – 46% said they believe that their competitors engage in illegal activity, 35% have personally felt pressure to break the rules, and 30% have witnessed misconduct in the workplace. When asked if they would blow the whistle or report the misconduct, 87% of respondents said they would report wrongdoing given the protections and incentives such as those offered by the SEC Whistleblower Program.
The Debate Over Audits Signed by Audit Partners
Last week, the SEC brought an enforcement action against a former KPMG partner for insider trading seems to have renewed calls to have individual audit partners identified as part of audit reports. This garden variety case has brought a flurry of interest by the media into a 2011 PCAOB proposal that would require to disclose the names of audit partners on financials, rather than just the firm name. The idea is that this requirement would allow investors and companies to know who is responsible for audit work – particularly useful if a specific individual gets into trouble like this. As noted in this WSJ blog, the PCAOB is expected to act on this proposal in the next few months – but is facing opposition from auditors who are concerned about increased liability for audit partners.
Meanwhile, this WSJ blog notes that Hallador Energy already publishes the names and ages of its lead and concurring audit partners for its financials. And this article discusses a new Cornerstone study showing that accounting class-action lawsuit filings declined sharply last year after a spike in 2011 – but settlement amounts in such cases have grown since 2011.
SEC Announces EDGAR Update for XBRL 2013 US GAAP Taxonomy
As noted in this memo, the SEC recently announced that, if approved by the Commission, the EDGAR system would begin accepting submissions with XBRL exhibits based on the 2013 US GAAP taxonomy on April 29th (and no longer accept submissions with XBRL exhibits based on the 2011 GAAP taxonomy).
By the way, this news of third parties funding the plaintiff’s bar is scary given the recent uptick in M&A litigation, etc. Gheesh…
Senator Rockefeller Asks SEC to Step Up Cybersecurity Disclosures
As noted in this article from “The Hill,” Senator Rockefeller has continued his campaign to elicit more cybersecurity disclosures by calling on the new SEC Chair to do something on her first day in office…
Will the New SEC Chair Tackle “Neither Admit Nor Deny” Debate?
This Bloomberg article entitled “‘Neither Admit nor Deny’ Lives on at SEC, Even for Felons” starts off with this paragraph:
The Securities and Exchange Commission made a big fuss last year when it changed the settlement language it uses for defendants convicted of crimes in parallel proceedings. The New York Times called this “a fundamental policy shift.” Looking back, it turns out the changes were purely cosmetic.
Given Mary Jo White’s background, I imagine this controversy is one that she will tackle soon enough – this memo talks about her “bold vision” for Enforcement…
Meanwhile, this Reuters article notes that another federal district court judge has questioned a proposed securities fraud settlement – but unlike the other cases, this one involves a private shareholder lawsuit, not a SEC enforcement action. And this ProPublica blog discusses the opinion that started this trend, Judge Rakoff’s refusal to approve the SEC’s proposed settlement of its lawsuit against Citigroup…
Given all the excitement over the SEC’s Section 21(a) report regarding Netflix and social media, I have calendared this May 8th webcast – “Social Media: Parsing the Hypos” – during which two legal pros (Dave Lynn & Davis Polk’s Joe Hall) and two IR pros (Q4’s Darrell Heaps & IR Web Report’s Dominic Jones) will parse a group of hypotheticals to determine what is feasible – and what is not – under the SEC’s Regulation FD framework. The panel will also cover what are effective IR strategies to leverage social media and more. I have already drummed up a set of hypos for the panel to consider – but I would like to crowdsource and get your ideas. Shoot me an email with your own hypos.
Meanwhile, Netflix became the first company yesterday to file a Form 8-K listing the five social media channels by which it may disseminate company information – a theme of the SEC’s recent Section 21(a) report. In addition, the company posted this note on their IR web page listing the channels. Whether the company really intends to use all five channels for corporate announcements (or is just covering its “behind” in case newsworthy info is accidentally revealed on them) – and whether that is a good idea – are topics for our upcoming webcast. Hat tip to Dominic for noticing this development!
I continue to post oodles of memos on the SEC’s new report in our “Social Media” Practice Area. And don’t forget my extensive checklist on how to make the business case for investor & analyst engagement via social media. There are 16 factors in my checklist to consider for starters and much more.
And if you are finally ready to give Twitter a try, I have written this “How to” Handbook that is easy-to-understand, providing each step about how to sign up for Twitter, the basics of Twitter etiquette and more. It was written with the person scared to try Twitter in mind…
Poll: Are Companies Adopting Board Approval Policies for the End-User Exception of the Derivative Rules?
Cravath’s John White noted in this blog excerpt: “Companies that anticipate relying on the end-user exception should develop and implement board approval policies so that they are in place before the need to rely on the exception arises. Similarly, companies may also wish to consider making the annual filing described below in advance of the need to rely on the exception to expedite the documentation of their first swap transaction under the end-user exception.” I have posted this “Quick Survey on End-User Exception for Swaps to see if companies are indeed taking these actions – with the looming deadline recently delayed (this WSJ article notes that few companies have acted – ISDA estimates that about 80% of companies that have traded swaps in the past haven’t completed the new registration process).
More on “The Mentor Blog”
I continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net 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:
– A Record Year for Corporate Criminal Fines
– Study: Excessive Optimism in Earnings Releases Can Backfire
– NY State Comptroller Sues Over Political Spending Disclosure
– US-China Audit Spat May Spill Over
– The 2012 US Technology/Silicon Valley Board Index
Great practical guidance on a challenging topic. In this podcast, Alan Rudnick of Masters-Rudnick provides some insight into how general counsels should handle director conflicts of interest, including:
– If conflict arises on the board, what role does the general counsel or corporate secretary have?
– What if the conflict involves the CEO?
– Does that put the general counsel/secretary in an awkward position?
– What if it does appear that the GC/secretary could lose his job?
– If there is major conflict among directors – or between CEO and directors – what can the GC/secretary do?
– What are techniques that the GC/secretary can suggest if asked for advice?
– What advice do you have for the GC/secretary?
You should also read Alan’s checklist on this topic. If you want to contribute a short checklist to this site, just let me know…
IPOs & the JOBS Act: One Year Later
After reviewing 184 IPOs by emerging growth companies from the past year (completed or in registration), Latham & Watkins put together this “IPO Playbook” on the 1st anniversary of the JOBS Act last week, including finding:
– Title I has changed the IPO process. Over 90 percent of EGCs that publicly filed their first registration statement after April 5, 2012 elected at least one accommodation offered by the JOBS Act.
– EGCs are found across many industries, with technology companies representing the largest group of EGC IPO issuers. After technology, the top five industries were energy, healthcare, financial services, real estate and pharmaceuticals.
– Confidential submission is particularly popular. Approximately 65 percent of EGCs that publicly filed their first registration statement after April 5, 2012 submitted at least one draft registration statement for review by the SEC prior to public filing.
– Disclosure about EGC status has become standard. EGCs include standard disclosure in their IPO registration statements about their EGC status and the IPO on-ramp accommodations they are using.
– Testing-the-waters practices are still evolving. The decision of whether, when and how to test the waters with potential institutional investors to gauge their interest in a contemplated offering is made by issuers and their underwriters on a case-by-case basis.
– Foreign private issuers are taking advantage of Title I. They comprised almost 10 percent of US IPOs completed by EGCs since April 5, 2012.
– The pipeline for EGC IPOs remains robust. There are currently 65 EGCs in registration that have publicly filed a registration statement.
Yesterday, the Senate confirmed Mary Jo White as the next SEC Chair by unanimous consent, with no roll-call vote. Meanwhile, this WSJ article and BusinessWeek article note that former SEC Chair Mary Schapiro has found full-time work as a consultant for Promontory in Washington, serving as a managing director leading the firm’s governance and markets practice.
Here are rumors from DealBook about who will be the next Enforcement Director (ie. Andrew Ceresney). I haven’t heard any rumors about who might serve as the next Corp Fin Director…
The Revolving Door Debate Continues
When SEC Chair White went before the Senate Banking Committee, she was asked “revolving door” questions as noted in this blog. This is a topic that I have blogged about quite a few times as I think the concerns are overblown; here is my latest. This debate will continue as reflected in these recent articles:
When Mary Schapiro announced she was stepping down, I ran a blog poll asking you to guess the next SEC Chair. These were the findings:
– Ann Yerger – 32%
– Huckleberry Finn – 27%
– Robert Khuzami – 12%
– Elisse Walter – 10%
– Nell Minow – 9%
– Sallie Krawcheck – 8%
– Richard Ketchum – 5%
– Mary John Miller – 5%
– William Brodsky – 3%
– Damon Silvers – 1%
Webcast: “D&O Insurance Today”
Tune in tomorrow for the webcast – “D&O Insurance Today” – to hear Tom Bentz of Holland & Knight, Peter Critchell of AIG Property Casualty, Heather Fox of ARC Excess & Surplus and Thomas McCormack of AIG Property Casualty discuss the issues of the day for D&O insurance including practice tips about what coverage you should seek – and how to negotiate with insurers. Here’s the Course Materials that you should print out in advance…
Last week, the GAO issued this report about the value of political intelligence and the cottage industry that it has spawned, providing “inside baseball” about the potential effects of legislative and executive branch actions. The report discusses the GAO’s findings – but makes no recommendations. This Legal Times article notes that Sen. Grassley and Rep. Slaughter will introduce a bill requiring political intelligence disclosure.
Meanwhile, this Washington Post article explores the gridlock cause by different philosophies held by the two new leaders of the House Financial Services Committee, Chair Jeb Hensarling and Ranking Member Maxine Waters.
SEC Files Initial Brief in Conflict Minerals Case
As noted in this blog, the SEC has filed its initial brief in the Chambers lawsuit against the conflict minerals rules.
Corp Fin Updates Financial Reporting Manual (Again)
Last Thursday, Corp Fin indicated that it has updated its Financial Reporting Manual for issues related to age of financial statements in foreign private issuer IPOs, Regulation S-X requirements for foreign private issuers, financial statement requirements for foreign incorporated acquirees or investees that do not qualify as a foreign business, and other changes.
PCAOB Proposes Reorganization of Auditing Standards
A few weeks ago, the PCAOB proposed a reorganized framework for existing auditing standards – categorized by topics. Currently, existing standards consist of “AS Standards” (new or amended standards adopted by the PCAOB) or “AU Sections” (interim auditing standards from the AICPA that the PCAOB adopted in ’03). Comments are due by the end of May.
Peggy Foran and her team at Prudential have filed the company’s proxy statement including another letter to shareholders from the board.
Shareholder Proposals: Goldman Sachs for President!
Over on our “Proxy Season Blog,” I have been blogging about recent shareholder proposal trends & developments (a topic to be covered in our upcoming proxy season post-mortem webcast). Meanwhile, Bloomberg reports that a shareholder proposal asking Goldman Sachs to run for office – rather than fund political contributions – has been permitted to be excluded by Corp Fin. You read that right – the proposal said Goldman itself should explore running for office, not an employee of Goldman. The proposal was ironic, piggybacking on the Citizens United decision in which the Supreme Court found that corporations have similar political rights to individuals. Thanks to Lois Yurow for pointing this out!
Risks of Inspectors of Election Being Sued
All of the players involved in an annual meeting can be sued, including the proxy solicitor (eg. see this SNL article). In this podcast, Carl Hagberg provides his thoughts about the risks of inspectors being sued, including:
– How do these lawsuits arise?
– What can companies do to protect themselves in the event of a lawsuit?
As Dave Lynn notes in this Morrison & Foerster blog, the SEC’s Division of Trading & Markets has granted no-action relief to a site that helps start-ups raise funds. In this blog, Steve Quinlivan of Leonard Street notes:
TheFundersClub.com operates a really cool website. The publicly available page advertises “The best way to invest in startups. Insider access to pre-vetted startups. Low minimum investment sizes. Free membership. Join today.” Another publicly available page states “Investments are made in venture funds set up for the startups, and therefore, the minimum check sizes are 10-20 times smaller than typical angel investments – $1K-$5K typically, vs. $25K-$100K.” It’s a little hard to tell though whether the site is operational or in test mode, but I wasn’t going to part with money to find out. Footnote 19 to the incoming SEC letter says the first multi-company fund has closed, though, and single fund companies are possible.
You would almost think it was illegal, but the SEC just issued a no-action letter. A little further clicking indicates you have to certify you are an accredited investor before working your way into the site.
The no-action letter doesn’t address general solicitation issues, but instead addresses whether the TheFundersClub.com is a broker dealer. They don’t earn commissions on the sale of securities, but apparently do take a carried interest. The carried interest only pays out if a fund returns its capital contributions. They also don’t propose to take a management fee. The SEC apparently blesses the argument that TheFundersClub.com only receives money if they are successful in creating value. Or otherwise stated, traditional investment adviser compensation is not transaction based compensation earned by a broker-dealer.
With the JOBS Act having its first birthday tomorrow, crowdfunding remains a popular topic for the mass media and bloggers alike. Here is a sampling of pieces from over the past few months:
A few months ago, a Forbes columnist touted the “Whistleblower Forensic Opportunity Trust,” which is his RocketHub crowdfunding site seeking investors to support financial fraud whistleblowers.
What Might a Crowdfunding Ad Look Like?
More than a year ago, I blogged about the ability of federal agencies to remove comment letters that are offensive or otherwise problematic from their websites. As noted in this Bloomberg article from way back when, the SEC did so when it removed a comment letter that touted a “can’t miss investment” in its JOB’s Act comment portal. Here’s an excerpt from that removed comment letter:
Make 100 times your investment in 1-to-3 years and 1,000 times by holding
for 3-to-10 years by ending the Energy Industry and starting a Free Energy Era with
economy-changing proprietary advancements. Also, save total bubble losses from all
energy and energy-related investments.
Last month, the SEC’s Division of Investment Management issued this guidance in an effort to clarify when mutual funds must file social media messaging with the SEC. The guidance provides 5 categories of communications that IM doesn’t believe needs to be filed – and examples of communications that do. [Not that it really matters, but why does IM bury the SEC logo on the bottom of its guidance? Probably just my pet peeve but it seems to be easily mistaken for a law firm memo.]
At the time, I thought Corp Fin might weigh in with its own social media guidance soon – particularly due to widespread criticism in the wake of news that Netflix had received a Wells Notice from the Division of Enforcement (see my own blog on this topic – and Prof. Joe Grundfest’s amicus curiae brief).
The answer is “yes, sort of.” Yesterday, the SEC issued this Section 21(a) Report of Investigation stating that Enforcement has decided not to go after Netflix – mostly because its 2008 “corporate use of website” guidance may not have been sufficiently clear about how it applies to social media (given that social media exploded onto the scene more recently). More importantly, the Report clarifies that the SEC’s ’08 framework is sufficiently flexible to accommodate new “push” technologies like Facebook and Twitter – so that companies should continue to apply their own facts against whether they have created a “recognized channel of distribution” using that framework.
Even though the SEC’s press release touts the new report as a greenlight for companies – the press release’s title is “SEC Says Social Media OK for Company Announcements If Investors Are Alerted” – I’m dubious that companies and their advisors will see it that way. For starters, the new guidance comes from an Enforcement report (here’s an explanation of what a Section 21(a) report is) – perhaps not the best vehicle to encourage new practices. [Not surprisingly, many mass media reporters were fooled by the SEC’s title and report that the SEC has “new” disclosure rules.]
And it doesn’t get into the nitty gritty like IM’s new guidance does. Given the slow adoption rate of social media by IR, finance and governance professionals – compared to the rest of the world – I’m not convinced this will be enough to get folks moving (for example, see this blog by Blank Rome’s Yelena Barychev; this blog by Leonard Street’s Steve Quinlivan and this Cooley news brief from Cydney Posner).
It will be interesting to compare what is said at the ABA meeting later this week – and compare that against what Dominic Jones & I say during this Shareholder Services Association webcast next week. I’ll report back (here’s a preview from Dominic, his first blog in 18 months – the dude is back!)…
Checklist: Social Media Business Case for Investor & Analyst Engagement
Every proxy season there are a few new social media developments that are unique. During the ’12 proxy season, for example, Yahoo! filed this additional soliciting material that includes a video – not just the transcript – in the filing as part of its coverage of strategic, governance and other initiatives.
Meanwhile, another embattled company – Chesapeake Energy – filed this additional soliciting material that disclosed the release of these two so-called “contextual tweets”:
– Tweet 1) Fact: 41% of S&P 500 companies have split the Chairman and CEO positions and only 21% have truly independent chairmen.
– Tweet 2) Companies that have recently split CEO/Chairman roles: Apple, Gannett, Avon, Moody’s. Only 21% of S&P 500 have truly independent Chairmen.
I imagine the purpose of filing these tweets was to ensure that all communications potentially relating to a solicitation are included as a 14A filing – but I’m not sure the content of these tweets rise to the level of a solicitation. One of those “better be safe than sorry” filings perhaps. What is your take?
Lastly, near the end of this additional soliciting material filed by Web.com, the company filed various tweets and Facebook postings relating to an earnings call. I haven’t checked the circumstances as to why additional soliciting material was filed in connection with an earnings call. I assume a solicitation was also in progress…
A while back, Dominic Jones shared this useful tweet that says “Can CEO tweets move markets? Decide for yourself” and links to a chart. Check it out. And this article notes that fraudsters now utilize Twitter to find victims…
5th Say-on-Pay Failure of the Year
As noted in its Form 8-K, Vermillion is the 5th company holding its annual meeting in 2013 to fail to gain majority support for its say-on-pay (44% support) – although the company’s recent annual meeting was for 2012. Hat tip to Karla Bos of ING Funds for pointing this out!