Monthly Archives: July 2013

July 17, 2013

Webcast: “The NYSE Speaks ’13: Latest Developments and Interpretations”

Tune in tomorrow for the webcast – “The NYSE Speaks ’13: Latest Developments and Interpretations” – to hear from senior staffers John Carey and Carol Hoover of the NYSE discuss all the latest from the exchange.

I’m sure this will be raised among many other topics – the NYSE’s rule change amending Section 312.07 of the Listed Company Manual to remove the 50% quorum requirement and add certain clarifying language that just became effective last Thursday.

Corp Fin’s Back in the CF Disclosure Topic Business, Baby!

It’s been over a year since Corp Fin issued its last guidance in the form of “CF Disclosure Topics” – there were a total of five of them in six months after the first one was issued in the fall of 2011. Yesterday, Corp Fin issued “CF Disclosure Guidance Topics: Topic No. 6 – Staff Observations Regarding Disclosures of Non-Traded REITs.” Maybe there will be flurry of activity along these lines now that there is a new sheriff, er, Director in town…

Corp Fin Updates Financial Reporting Manual (Again)

Yesterday, Corp Fin indicated that it has updated its Financial Reporting Manual for issues related to real estate acquisitions, determining significance for equity method investees, and non-GAAP measures.

Here’s a transcript of SEC Chair White’s remarks on CNBC’s “Closing Bell” from yesterday…

– Broc Romanek

July 16, 2013

JOBS Act: A Bust?

This Cooley news brief from Cydney Posner probably doesn’t tell many in our community anything that wasn’t predictable:

In this article from the Wall Street Journal, Bankers: The JOBS Act Isn’t Doing its Job, the author contends that if “you ask investment bankers, most of them will say the JOBS Act has fallen flat.” According to the article, “only 14% of bankers polled said they felt the JOBS Act was boosting the number of initial public offerings, according to a survey of 101 capital markets executives at large investment banks released by BDO USA LLP this week. That’s half the level who said the law was having a positive impact last winter, and down sharply from 55% who said so last year, according to BDO. The SEC is set to vote on some aspects of the JOBS Act on Wednesday morning, including proposed rules to eliminate the prohibition on general solicitation.”

Even though many of the rules implementing the JOBS Act remain to be adopted, “more than two-thirds of the bankers polled predicted the law will never achieve its goals of increasing the number of companies that go public. ‘There has clearly not been double or triple the amount of IPOs,'” according to the Director of SEC Services for BDO.

However, the new confidential filing process has been widely adopted, with estimates of 150 companies that have filed confidentially under the rule. “Nevertheless, bankers have complained the confidentiality granted by the JOBS Act has obscured the pipeline, making it more difficult to pinpoint windows in the market.” Some companies are also taking advantage of the ability to file just two years of audited financials rather than three. The article reports that this aspect of the rules has been helpful primarily to companies that changed auditors or did an acquisition and may not have three years of audited financials readily available.

The article reports that there were “95 IPOs in the first half of the year, up from 74 in the first half of last year. Excluding Facebook ‘s large $16 billion IPO last year, IPO proceeds from the first half of the year are up 66% from 2012, according to BDO, but most bankers attributed the increase to an increase in deals by private equity firms.”

Reg D: SEC Posts Adopting & Proposing Releases (Plus An Updated Study)

The SEC has posted its two adopting releases – elimination of general solicitation ban and Reg D disqualifications – as well as its new proposing release. The adopting release cites an updated study entitled “Capital Raising in the U.S.: An Analysis of Unregistered Offerings Using the Regulation D Exemption, 2009-2012” that updates RiskFin’s 2012 study on exempt offerings. And here are the memos we have posted in our “Regulation D” Practice Area

Tune in to our upcoming webcast – “Reg D Offerings: What Is Happening Now” – that will provide a variety of perspectives on how to implement the new rules…

Transcript: “A Proxy Season Post-Mortem: Lessons Learned”

We have posted the transcript for our recent webcast: “A Proxy Season Post-Mortem: Lessons Learned.”

– Broc Romanek

July 15, 2013

Senate Banking Committee to Consider SEC Nominations

Tomorrow, the Senate Committee on Banking, Housing and Urban Affairs will take up the nominations of Kara Stein and Michael Piwowar to the Commission in an executive session. It has been unclear as to how quickly the Senate would act on these nominations, which were advanced by the Administration back in May. Once these nominations make it of the Committee, the full Senate can then consider them. At the same meeting, the Committee will consider extending Mary Jo White’s term so that it would expire on June 5, 2019.

Meanwhile, in the House last week, Rep. Michael Fitzpatrick (R-PA) re-introduced a bill that would change the definition of “accelerated filer” so that more companies could qualify for the SOX Section 404(b) relief available to non-accelerated filers. H.R. 2629, the Fostering Innovation Act, which was first introduced last year, would increase the market capitalization component of the accelerated filer definition from $75 to $250 million, while also adding in a maximum revenue measure of $100 million in annual revenue. The GAO also recently issued a report recommending an SEC requirement that non-accelerated filers disclose if they have received and auditor’s attestation on internal control, even if they qualify for the Section 404(b) exemption.

FINRA Authorizes Crowdfunding Rule Proposal

At a meeting of its Board of Governors last week, FINRA was authorized to publish a Regulatory Notice to solicit comment on proposed rules and related forms governing funding portals pursuant to Title III of the JOBS Act. The proposed rules address, among other things, the membership application process for funding portals, fraud and manipulation, just and equitable principles of trade, communications with the public, supervision and anti-money laundering. FINRA expects to publish this Regulatory Notice when the SEC proposes its Title III rules. It is unclear whether this FINRA action should be construed as indicating that SEC action on Title III rules might be imminent.

FINRA has also moved forward with a rule proposal to make Rule 144A transactions subject to dissemination under FINRA rules, now that the SEC rules have been amended to eliminate general solicitation concerns.

Transcript: “Proxy Season Post-Mortem: The Latest Compensation Disclosures”

We have posted the transcript for our recent webcast: “Proxy Season Post-Mortem: The Latest Compensation Disclosures.”

– Dave Lynn

July 12, 2013

House Passes Bill Banning Mandatory Auditor Rotation Rules

Earlier this week, Broc blogged about a bill that was unanimously approved by the House Financial Services Committee and which targets the PCAOB’s ability to adopt rules mandating auditor rotation. That bill, H.R. 1564, the “Audit Integrity and Job Protection Act,” passed in the House on Monday evening by a vote of 321-62. The bill would prohibit the PCAOB from requiring companies to use specific auditors or require the use of different auditors on a rotating basis. The bill now will be taken up by the Senate Committee on Banking, Housing, and Urban Affairs. In addition to seeking to prevent the PCAOB from adopting mandatory auditor rotation rules, the bill would direct the GAO to revisit a 2003 study of the potential effects, including costs and benefits, of mandatory audit firm rotation.

For the life of me, I can’t figure out what sort of job protection this bill is providing, as implied by its title. Much like the JOBS Act (which included its own swipe at mandatory auditor rotation), this bill doesn’t really seem to have much to do with preserving jobs, other than perhaps for lobbyists.

NYSE Proposes 1-Year Transition Period for Internal Audit Function

From Jay Knight of Bass, Berry & Sims: Last week, the NYSE filed a proposal with the SEC to amend Section 303A.00 of its Listed Company Manual to provide a one-year transition period to comply with the internal audit requirement of Section 303A.07(c) for companies listing in connection with an IPO, as new registrants or a carve-out or spin-off. Section 303A.07(c) requires that listed companies – which are subject to Section 303A.07 – must have an internal audit function to provide management and the audit committee with ongoing assessments of their risk management and internal control processes. Companies may choose to outsource this function to a third party other than its independent auditor. The proposal should take effect within 45 days of the date of publication in the Federal Register (or a longer period as the SEC may designate up to 90 days).

Earlier this year, Nasdaq proposed a rule that would have required Nasdaq-listed companies to establish and maintain an internal audit function, similar to the present NYSE requirement. However, Nasdaq withdrew that proposal citing comments from issuers and to allow more time to consider the issue. The NYSE highlights the different exchange standards in its rule proposal when it states: “Moreover, given that any company which would be able to avail itself of the proposed transition could list on Nasdaq without ever having to comply with an internal audit requirement, the Exchange believes that investors would be at least as well protected by having these companies listed on the [NYSE], where they would be subject to such a requirement after the transition period.”

Tune in next Thursday, July 18th for the webcast – “The NYSE Speaks ’13: Latest Developments and Interpretations” – to hear from senior staffers John Carey and Carol Hoover of the NYSE discuss all the latest from the exchange.

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:

– Should Startups Announce Their Funding?
– EU Touts Regulatory Pressure in Improving Board Gender Balance
– Does the Media Provide Certain Investors With News Seconds Faster?
– Moving On Up: The Art of Becoming a Director
– Response to “Inside Straight: Stop The Audit Letter Lunacy!”
– Inside Straight: Stop The Audit Letter Lunacy!
– Indemnify Me, Maybe

– Dave Lynn

July 11, 2013

SEC Adopts JOBS Act Title II Rules

July 4th fireworks came a week late to 100 F Street yesterday, as the SEC adopted the changes to Rule 506 of Regulation D mandated by Title II of the JOBS Act, in what was sometimes a contentious open meeting. The changes to Rule 506–permitting the use of general solicitation and general advertising in a Rule 506 offering provided that the issuer takes reasonable steps to verify that purchasers are accredited investors–were over a year late, and generated a good bit of comment and criticism.

Ultimately, the Commission adopted the Rule 506 changes largely as proposed, noting that the determination of the reasonableness of the steps taken to verify that an investor is an accredited is an objective assessment by the issuer, based on the facts and circumstances of each purchaser and transaction. However, the Commission decided to provide in Regulation D a non-exclusive list of methods that the issuer could use to verify the accredited investor status of individuals, including reviewing copies of any IRS form that reports the income of the purchaser (along with a written representation that the purchaser will likely continue to earn that amount), reviewing bank statements, brokerage statements, CDs, tax assessments, appraisal reports and consumer reports with respect to net worth, or by receiving a written confirmation that a specified third party has taken reasonable steps to verify a purchaser’s accredited investor status, including a registered broker-dealer, SEC-registered investment adviser, licensed attorney or CPA.

The SEC also made the parallel changes to Rule 144A that were proposed last year, eliminating references to “offer” and “offeree,” and thus requiring only that the securities are sold to a QIB or to a purchaser that the seller and any person acting on behalf of the seller reasonably believe is a QIB in a Rule 144A transaction. Form D was also amended to add a separate checkbox for the new paragraph (c) of Rule 506.

The Commission helpfully reaffirmed in the adopting release that Title II of the JOBS Act did not represent a Congressional intent to eliminate the existing “reasonable belief” standard in Rule 501(a) or for Rule 506 offerings (thus the accredited investor determination is not subject to an absolute standard). The Commission also reiterated the interpretive guidance that the effect of Title II is “to permit private funds to engage in general solicitation in compliance with new Rule 506(c) without losing either of the exclusions [3(c)(1) and 3(c)(7) under the Investment Company Act.”

Commissioner Aguilar opposed the adoption of the amendments, noting in his statement that the process for adopting the amendments and the amendments “come at the expense of investors and place investors at greater risk.”

The amendments are effective 60 days after publication in the Federal Register. The SEC provided Fact Sheets for each piece of yesterday’s rulemaking package: the Rule 506 changes, the Regulation D proposal and the bad actor rules.

More Regulation D Changes Proposed

The SEC also proposed several changes to Regulation D that would help the Commission monitor the impact of Title II on the offering market and the offering practices which develop under the rule. This proposal addresses some of the concerns of commenter raised regarding the Rule 506 proposal. Under these proposals, issuers relying on Rule 506(c) to engage in general solicitation in connection with the offering would have to file a Form D 15 calendar days before commencing the offering, and file an update to the Form D information within 30 days of completing the offering. Additional information would also be required in the Form D about the issuer and the offering. If an issuer fails to file a Form D, the issuer and the issuer’s affiliates would be disqualified from using the Rule 506 exemption in any new offering for one year beginning after the required filings are made. Finally, these proposals would require that legends and cautionary statements be included on any written general solicitation material (including special rules for private funds), and that written general solicitation materials be submitted to the SEC, while the guidance in Securities Act Rule 156 would be extended to private funds. This proposal is out for a 60-day comment period.

This proposal drew sharp criticism from Commissioner Gallagher and Commissioner Paredes, who viewed the proposal as undermining what Title II was trying to accomplish.

A Blast from the Past: The Rule 506 Bad Actor Disqualification Provisions

As part of the overall package of rulemaking yesterday, the SEC followed the suggestion of some commenters on the Title II rules and adopted the Dodd-Frank Act mandated bad actor disqualification provisions. As noted by Anna Pinedo in this Morrison & Foerster blog, the final rules were largely adopted as proposed, except for modifications to the categories of persons covered; modifications to the types of actions that are covered; and modifications to the actions that are covered. The Commissioners unanimously approved these amendments, which were originally proposed back in May 2011.

Another thing that the Commissioners could all agree on yesterday was their praise for Gerry Laporte, who will be retiring from his position as Chief of Corp Fin’s Office of Small Business Policy. During the course of the open meeting, Gerry’s contributions over the years for small businesses and investors were repeatedly recognized.

– Dave Lynn

July 10, 2013

Survey Results: Lead Directors

Here are the latest survey results about lead directors:

1. Our board has a term limit for the Lead/Presiding Director:
– Yes – 20%
– No – 80%

2. The term limit length is:
– 2 years or less – 17%
– 3 years or less – 13%
– 5 years or less – 9%
– Only limited by director’s age – 61%

3. We rotate the Lead/Presiding Director role among independent directors:
– Yes – 26%
– No – 74%

4. When we rotate the role, we do it:
– More frequently than annually – 4%
– Annually – 4%
– No set schedule – 92%

5. Our Lead/Presiding Director receives additional director compensation:
– Yes – 84%
– No – 16%

6. In addition to having a Lead/Presiding Director, we have a non-independent board chair who is not the CEO:
– Yes – 11%
– No – 89%

Please take a moment to participate in this “Quick Survey on Exclusive Forum Bylaws,” “Quick Survey on Annual Meeting Conduct,” and “Quick Survey on Loan Prohibitions & Cashless Exercises.”

Understanding Hedge Fund Governance

Professor Houman Shadab recently published the first comprehensive academic analysis about the governance practices of hedge funds. Here is an excerpt:

“Hedge fund investors are not being systematically ripped off by managers. …. Investors have hedge fund managers on a much shorter leash than managers of public corporations and other types of investment funds. … The oversight role played by hedge fund directors is not substantial. Hedge fund investors are often better off with less transparency, higher fees, and less access to their capital. …. When the stock of public corporations rises by 1%, median CEO compensation rises by $200k, but for hedge fund managers, that number is $2 million.”

Liquidnet’s Approach to ATMs, Stock Buybacks & 10b5-1 Plans

In this podcast, Nicole Olson of Liquidnet explains how Liquidnet helps companies with their at-the-market offerings, stock buybacks and Rule 10b5-1 plans, including:

– For how long has Liquidnet been assisting companies with ATMs, buybacks and 10b5-1 sales?
– How does the matchmaking work between institutional buyers and companies raising capital with ATMs?
– What kind of companies are the best fit for an ATM and for Liquidnet?
– How do the buybacks work? Are companies obligated to exclusively work through Liquidnet?
– What precautions are built into your 10b5-1 plans to avoid negative media publicity?

– Broc Romanek

July 9, 2013

Take Two Video: “How to Attend Conferences”

Your time is too valuable to waste during a prime networking opportunity like a conference. Plan ahead to maximize your conference experience – and have more fun to boot! Below is my ten cents in this “Take Two Video” about “How to Attend Conferences.” I’m going to take my own advice and meet 10 new people during the Society of Corporate Secretaries Annual Conference that kicks off tomorrow:

One topic at the conference surely will be whether to adopt an exclusive forum bylaw now – here is a “Quick Survey of Exclusive Forum Bylaws” for you to weigh in anonymously…

California’s Department of Corporations Renamed: “Department of Business Oversight”

As noted in this blog by Keith Bishop, the California Department of Corporations and the Department of Financial Institutions have “merged” to form the Department of Business Oversight in accordance with the Governor’s reorganization of state departments.

Following up on yesterday’s blog about “Does Congress or the PCAOB Oversee the Auditors?,” the House passed a bill last night that would bar the PCAOB from mandating auditor rotation, as noted in FEI’s blog.

More on our “Proxy Season Blog”

We continue to post new items regularly on our “Proxy Season 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:

– Shareholder Proposals: Leadership Changes
– Proxy Access Proposal Barely Passes at Verizon
– Law Mandates CalPERS/CalSTRS Support Shareholder Proposals Supporting Religious Minorities
– Audit Committee Disclosure Trends
– European Commission Moves on ESG Reporting

– Broc Romanek

July 8, 2013

Does Congress or the PCAOB Oversee the Auditors?

Here’s a note from Lynn Turner: “Congress established the PCAOB to oversee and regulate the auditing profession. Now Congress is stepping in and limiting what the PCAOB can do. It perhaps is becoming clear the large audit firms have more clout with their checkbooks with Congress than does the PCAOB. Members of the PCOAB do not appear to have publicly pushed back against such efforts by Congress this year – or last year when limits were imposed on the PCAOB by the JOBS Act.

This story below how the GAO will be asked to study mandatory auditor rotation once again. However, the last study by the GAO was in fact not a study, but more of a survey of auditors and management of the companies they audit. There was limited surveying done of investors.”

The House Financial Services Committee passed 52-0 a bill that would prohibit the PCOAB from dictating which auditor a company is audited by or requiring companies to adhere to mandatory auditor rotation. Republican and Democratic members of the committee agreed that mandating public companies to company with audit firm rotation was not good policy. The PCAOB, which Congress created in the 2002 Sarbanes-Oxley Act, floated the mandatory auditor rotation idea in an August 2011 concept release on auditor independence. The rotation is still under review, and the PCAOB has not issued a specific proposal for implementing it.

During today’s mark-up session, the committee agreed to an amendment offered by ranking member Maxine Waters to require the GAO to study the issue once again, including a cost-benefit analysis of mandatory rotation of auditors.

Study: How Auditors Miss Signs of Fraud

As noted in this Reuters article, this new study of 87 SEC enforcement actions against auditors over 13 years found that most common accounting mistakes involved failing to question documents which appeared to be fake and a lack of professional skepticism. Here’s the related press release.

Webcast: “Post-Closing Claims: What Really Happens”

Tune in tomorrow for the webcast – “Post-Closing Claims: What Really Happens” – to hear Goodwin Procter’s Larry Chu and Shareholder Representative Service’s Paul Koenig analyze what truly happens in deals – including practice tips to make your post-closing claim process go as smoothly as possible. Here are Course Materials to print out in advance…

– Broc Romanek

July 5, 2013

JOBS Act: SEC Schedules Open Meeting to Adopt Title II Rules

As noted in this Morrison & Foerster blog, the SEC has calendared an open Commission meeting for next Wednesday to finally adopt rules relating to Title II of the JOBS Act, which should facilitate the ability to conduct Rule 506 offerings as they include the elimination of the general solicitation bar for Reg D and Rule 144A offerings as well as other changes to Reg D (including the “bad actor” disqualification), Form D and Rule 156. Note that this doesn’t include the crowdfunding rules in Title III of Dodd-Frank…

New Type of Myanmar Disclosure Requirements Starts Monday

Hat tip to the Society of Corporate Secretaries for pointing out this NY Times article that describes a new annual disclosure requirement for US companies that invest a certain amount or way in Myanmar. This disclosure is not made through SEC filings – but rather through a report that eventually is made public on an embassy website. Bizarre stuff…

The Society’s alert also notes that there is a bipartisan bill pending in the House to require companies to disclose activities in North Korea: H.R. 1771: “North Korea Sanctions Enforcement Act of 2013.”

Ricky, The Honey Badger: Play That Thing!

ricky guitar.jpg

– Broc Romanek

July 3, 2013

Federal Court Vacates SEC’s Resource Extraction Rule: Ball in SEC’s Court Now

The SEC’s loooong losing streak in major cases continues. Yesterday, Judge John Bates of the US District Court for DC vacated the SEC’s resource extraction rules and remanded the case back to the SEC (just before he leaves for another job). This case was brought jointly by the Chamber and the American Petroleum Institute. Oxfam America had joined the SEC as a defendant to defend the rule.

Either the SEC will appeal or it will conduct new rulemaking which takes into account the Judge’s twin concerns of public disclosure of individual payments to foreign governments and lack of an exemption for countries that have laws that bar disclosure of payment information. If the agency goes the rulemaking route, it may simply revise its existing rules or go through an entirely new rulemaking process (bear in mind the SEC has a new Chair and two new Commissioners coming in). Either way, the deadline of reporting payments starting October 1st is bound to be substantially delayed. The SEC can’t simply drop the rulemaking since adopting a rule is mandated by Dodd-Frank.

This does not bode well for the future of the conflict minerals rules, since a similar case is pending before the same court with a decision expected soon (oral argument took place two days ago in that case, as noted in this article). Nor does it bode well for federal agencies in general trying to promulgate rules, even though the Chamber lost one of these “cost-benefit analysis” cases against the CFTC last week…

Here is a Davis Polk blog; Cooley news brief; Reuters article and WSJ article. As the flood of memos comes in, I will post them in our “Resource Extraction” Practice Area.

SEC Announces Three New Enforcement Initiatives

Yesterday, the SEC issued a press release to announce these three new initiatives:

– “Financial Reporting and Audit Task Force” dedicated to detecting fraudulent or improper financial reporting.

– “Microcap Fraud Task Force” targeting abusive trading and fraudulent conduct in securities issued by microcap companies, including social media & website use.

– “Center for Risk and Quantitative Analytics” employing quantitative data and analysis to profile high-risk behaviors and transactions and support initiatives to detect misconduct.

Happy 4th! Stay Hydrated My Friends…

Looking forward to the “most interesting woman in the world” campaign! My favorite fact: “He once had an awkward moment, just to see how it feels.”

most int man.jpg

– Broc Romanek