Recently, Meredith Cross delivered these heartfelt remarks at Paula Dubberly’s going-away party and it reminded me of why working at the SEC is such a special experience. And I thought I would try to explain it to those that have never had the opportunity. [Note that Paula technically retired but she is young and will resurface soon enough with a private sector job.]
Although some aspects of a going-away party of the SEC varies depending on the circumstances, the constant is that a supervisor (or others) makes some kind remarks – and then the person leaving speaks. That alone is quite powerful and something that I haven’t experienced among my numerous jobs during my career. These are not big drinking events. In fact, they traditionally are done on the SEC’s premises at the end of the workday and end by 6 pm. So they are short and simple – but they are a stark reminder that everyone that works at the SEC is on the same team…
Remember “Mr. SEC”?
Here’s some good SEC history. Somebody that was way before my time. Orval L. DuBois (pronounced “Duboise”) joined the SEC Staff when it was organized in 1934 and served as Secretary of the agency from 1942 until he retired in 1971 (and he passed away in ’94). He was widely known as “Mr. SEC.” He served as the SEC’s Secretary even longer than Jack Katz!
In 1931, Orval moved to Washington and went to work at the Federal Trade Commission as a stenographer. He later was secretary to James Landis, an FTC official who helped draft the ’34 Act establishing the SEC and then became one of the founding Commissioners.
If you know any anecdotes about Orval, please share! It’s scary how much of this origin stuff is being lost. I just found a reference that only exchange-listed companies in the early ’60s had to file 10-Ks with SEC – and they also had to file semi-annual reports on Form 9-K…
Can you believe the SEC used to put out an annual report listing all the changes in its rules and regulations, enforcement actions and even stock market stats? There’s even stats about how many broker registrations were made effective, denied, suspended, etc.! Here is the 1954 annual report containing 170 pages…
More on “The Mentor Blog”
We 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:
– California Legislature Passes Resolution to Encourage Board Diversity
– FASB Standard-Setting Update
– FINRA Proposes Amending Spinning Rule on Written Representation Procedures
– The Need to Diligence CFOs & Controllers Before Hiring
– FINRA Files Amendment to Spinning Rule on Written Representation Procedures
Good news! According to this article, Twitter may add a woman for its board soon after its IPO. On my various blogs, I’ve provided news about board diversity numerous times – about how gender diversity has flatlined this decade in the US, the growing push for it, proposals for minimum levels of female directors and for at least interviewing a woman when a board seat is open. Plugging “diversity” into my various blogs retrieves a few dozen results (and admittedly they often deal with gender diversity – not racial or other diversity problems that loom even larger).
With the topic increasingly in the news – the latest being the flap about Twitter’s all-male board – I’m not sure I’ve ever done the topic the justice it deserves like this Huffington Post piece (also see this blog by Akin Gump’s Kerry Berchem, Fortune article, DealBook article and Forbes one). The purpose of diversity is not for diversity’s sake. It’s because it produces a better board – and hence a better company…
I’ve read – and heard – a lot of folks that were quite angry at Twitter. And they were reaching out to Twitter in different ways. Here’s an example from Sara Hanks’ blog….
BoardProspects: A New Director Recruiting Tool
In this podcast, Mark Rogers discusses his new service, BoardProspects, including:
– How does BoardProspects compare to traditional director recruiting?
– How does it work for those seeking director candidates?
– How does it work for those seeking to become a director?
Particularly if you are in NYC, SF and LA, check out “SweatGuru,” which launches today and was voted San Francisco’s hottest startup. Our very own Alyse Mason Brill is a co-founder. The site helps you manage reservations in fitness classes – and helps those running classes to communicate easily with their clients (including collecting fees) – learn more in this article. Great site and coming to your city soon!
Corp Fin Updates Financial Reporting Manual (Again)
Yesterday, Corp Fin indicated that it has updated its Financial Reporting Manual for issues related to FRM guidance for the JOBS Act – and issues related to Form 8-K age of interim financial statements, acquisitions of selected parts of an entity that may result in less than full financial statements, Form 8-K requirements in reporting a disposition, the effect of retrospectively applied changes in accounting principles on the significance test for equity method investees, and registrations on Form S-8 for a new employee benefit plan.
For stats on how various shareholder proposals fared this year, see the entry I just posted on the “Proxy Season Blog“…
Transcript: “The Shareholder Proposal Process: Practice Pointers”
We have posted the transcript for the webcast: “The Shareholder Proposal Process: Practice Pointers.”
Webcast: “Tender Offers Under the New Delaware Law”
Tune in tomorrow for the DealLawyers.com webcast – “Tender Offers Under the New Delaware Law” – during which the primary drafters of the new Delaware law that facilitates the use of more efficient tender offer structures – Potter Anderson’s Mark Morton and Morris Nichols’ Eric Klinger-Wilensky – along with Latham & Watkins’ Brad Faris will help us understand how it should be best interpreted as well as describe the early experience under the new statute.
I’m excited to announce a new blog on this site: “Mike Gettelman’s Blog.” Until recently, Mike was one of the primary authors for our pair of popular print newsletters – The Corporate Counsel & The Corporate Executive – for decades. His style will be “long form” blogging, just like he used to write for the newsletters.
Ahead of the news that the case voluntarily dismissed on appeal (see this blog – also see Wachtell’s Ted Mirvis’ blog about it), I ran a survey on what companies are doing pending news of an appeal in the area of exclusive forum by-laws. Here are the results:
1. In light of Chancellor Strine’s opinion in Boilermakers vs. Chevron, should Delaware corporations:
– Adopt a forum selection bylaw soon – 53%
– Defer considering adoption of a forum selection bylaw until the Delaware Supreme Court rules on the issue – 46%
– Never adopt a forum selection bylaw – 1%
2. Does your answer above change if the company is not incorporated in Delaware:
– Yes – 41%
– No – 29%
– I don’t know – 30%
After deliberation since the NYSE revised its proposed changes to the proxy distribution fee framework back in February, the SEC approved a new proxy distribution fee framework earlier this week. The result should be lower reimbursement costs for companies, depending on their circumstances (Broadridge estimates 4% savings on average – fees for smaller companies with fewer than 300k beneficial owners may see their fees actually increase). As you may recall, the NYSE’s revised proposal was based on recommendations by its Proxy Fee Advisory Committee, which spent three years contemplating changes. Going forward, the NYSE has to come up with an implementation plan – I’m not sure when that will happen.
Here’s an excerpt from the Society of Corporate Secretaries‘ weekly newsletter with more details:
The changes include for a five-year test period a one-time, supplemental fee of 99¢ for each new account that elects, and each full package recipient among a brokerage firm’s accounts that converts to, electronic delivery while having access to an enhanced brokers’ internet platform (EBIP). Proponents hope that retail investors may be encouraged to vote if they receive notices of corporate votes and can access proxy materials through their own broker’s web site, which the EBIP fee will support.
The new structure eliminates fees for managed accounts that hold five or fewer shares of an issuer’s securities, and reduces the incentive fee for suppression of print material in managed accounts (now to be called a “preference management fee”) to half the rate charged for other accounts. There will be no fee distinction based on whether or not a managed account is referred to as a “wrap account.”
The new structure takes more account of economies of scale, with tiered rates for basic mailing/processing fees, and more tiers for supplemental intermediary fees (for coordination of proxy distribution for multiple nominees), replacing a poorly structured cliff structure for that element of the fees at present. Broadridge estimates that fixed costs – not dependent on distribution volume – conservatively represent 25% of total costs. The NYSE says the proposed fee schedule still does not fully reflect the benefits of economies of scale to large issuers, as the exchange seeks to limit impact of fees on small issuers.
The fee structure codifies current notice and access fees based on a tiered structure, but with one clarification.
For the most part, the new structure follows the recommendations of the PFAC, chaired by Time Warner Corporate Secretary Paul Washington, a former chairman of the Society. The SEC acted after extended review under an Order Instituting Proceedings, and observers had some doubts on whether the SEC would move ahead. The SEC found that the proposed rule change is consistent with Section 6(b)(4) of the Securities Exchange Act of 1934, which requires that exchange rules “provide for the equitable allocation of reasonable dues, fees and other charges among its members, issuers and other persons using its facilities.”
Catch Up Now: “Latest Corp Fin Comment Letter Trends” Spreecast
Here’s news from Dave and Anna Pinedo in this MoFo blog:
On October 24th, the House Subcommittee on Capital Markets and GSEs will hold a hearing on “Legislative Proposals to Reduce Barriers to Capital Formation.” The hearing was originally scheduled for earlier in the month and was cancelled due to the government shutdown. As discussed in the Subcommittee memo, various bills will be considered that address somewhat disparate issues, from BDCs to M&A broker-dealers, to tick size, that affect capital formation. Perhaps the hearing will lead to a broader discussion of additional measures beyond those addressed by the proposed bills that would facilitate capital raising. SEC Chair White in a recent speech commented on the Commission’s intention to review disclosure requirements with a view to modernizing and streamlining these. If we had our own JOBS 2.0 “wish list,” in addition to modernizing disclosure requirements and modernizing the requirements applicable to offerings by BDCs, we might add the following (and then some):
– Reviewing the accommodations made available to smaller public companies;
– Adding knowledgeable employees to the definition of accredited investor;
– Acting on the JOBS Act mandate to implement rules under Title IV for “Reg A+”;
– Conducting a study of equity research;
– Eliminating the IPO quiet period;
– Reviewing existing communications safe harbors in order to modernize these and make available safe harbors for a broader array of companies;
– Address CFTC “general solicitation” issues;
– Revisit the WKSI standard in order to see if similar measures can be made available to a broader universe of companies;
– Work with the securities exchanges to review their “20% Rules” (requiring a shareholder vote for private placements completed at a discount that will result in an issuance or potential issuance of securities greater than 20% of the pre-transaction total shares outstanding); and
– Review the 1/3 limit applicable to primary issuances off of a shelf for companies under $75 million in public float.
As I blogged a few days ago, the SEC calendared an open Commission meeting on short notice to propose “Regulation Crowdfunding” – the overdue crowdfunding rules under Title III the JOBS Act, which was proposed yesterday by a unanimous vote. There is a 90-day comment period.
Here’s some initial analysis of the SEC’s proposal from Hunton & Williams Scott Kimpel:
Crowdfunding is a subset of the crowdsourcing movement. At a typical crowdsourcing website, the party seeking financing typically posts a project proposal online and states a funding goal. Potential contributors then visit the website and donate funds to support the project. Sometimes, but not always, the patrons get free samples of the entrepreneurs’ products in exchange for their donations. Proposals have included everything from funding books to movies to mechanical inventions to software apps to charities.
If and when projects meet their funding goals, the websites takes a small percentage of the funds generated and transfer the balance to the projects’ creators. Some popular crowdsourcing websites include Kickstarter, IndieGoGo, GoFundMe and SoMoLend. At this time, these sites generally prohibit the offer or sale of securities, and they thus do not run afoul of the securities laws.
Some features of the SEC’s proposal, which tracks Title III of the JOBS Act, include the following:
– The total amount sold by the issuer to all investors, including amounts sold in reliance on this crowdfunding exemption, during the preceding 12 months may not exceed $1 million. There is no limit on the number of unaccredited investors that may participate.
– The total amount sold to any single investor by the issuer, including amounts sold in reliance on this crowdfunding exemption, during the preceding 12 months may not exceed:
o If either the annual income or net worth of the investor is below $100,000, the greater of $2,000 or 5% of the annual income or net worth of that investor.
o If either the annual income or net worth of the investor is $100,000 or more, 10% of the annual income or net worth of the investor (up to a maximum aggregate amount sold of $100,000).
– The transaction must be conducted through a broker or a new kind of intermediary known as a “funding portal”. The SEC and Finra will be proposing rules that govern these new funding portals.
– Depending on the size of the offering, issuers must provide financial disclosures to potential purchasers. For offerings that, together with all other crowdfunding offerings by the issuer in the past 12 months, have, in the aggregate, target offering amounts of:
o $100,000 or less: the issuer must provide income tax returns for its most recently completed year and financial statements certified by the principal executive officer;
o More than $100,000 but less than $500,000: the issuer must provide financial statements reviewed by a public accountant that is independent of the issuer; and
o More than $500,000 (or such other amount as the SEC establishes by rule): the issuer must provide audited financial statements.
– Issuers must also provide investors a host of other mandatory disclosures, including information about its capital structure and the intended use of proceeds.
– Issuers will have an ongoing requirement to provide a kind of annual report to the SEC (including financial statements) until the issuer becomes subject to a reporting obligation under the Exchange Act.
Given these onerous requirements, I and many observers have real doubts as to how vibrant a market will develop in the SEC crowdfunding space. An issuer seeking to raise funds by means of a general solicitation has a much simpler path under the new Rule 506(c) offering mechanism, so long as the universe of actual purchasers is limited to accredited investors. Nevertheless, quite a few businesses have sprung up in anticipation of the crowdfunding rules’ adoption and hope to capitalize on this new fundraising technique by offering their services to issuers and investors.
Because there has been some confusion in the marketplace, it is worth a reminder that an issuer may not conduct a crowdfunded securities offering to the masses until such time as the SEC adopts final rules. Simply put, a typical crowdfunding offering would include both a general solicitation and the participation of unaccredited investors, and there is likely to be no Section 5 or blue sky exemption for such an offering. (The SEC staff has given no action relief to certain crowdfunding portals that only target accredited investors, and these cites may currently operate because unaccredited investors are barred from investing.) in 2011, the SEC shut down “buyabeercompany.com” because in effect it was conducting an unregistered crowdfunded offering to the public.
I ran a trio of blogs last month that noted potential problems with crowdfunding, including the expenses involved…
Poll: How Long Will It Take to Read a 585-Page Release?
Here’s a poll about how you intend to read the SEC’s 585-page crowdfunding proposing release:
Last week, Andrea Electronics became the 62nd company to fail its say-on-pay in ’13 – see the Form 8-K – with 41% support. Hemispherx Biopharma became the 63rd with just 43% support (Form 8-K), a microcap that voluntarily put up its SOP for a vote the past 3 years (failing in both 2010 and 2011 but passing last year).
And the 64th failure is LookSmart, which received ZERO votes in support of its say-on-pay. You say “bull”? Take a look at the company’s Form 8-K. The company is a former search engine from the dot.com era that is now an online ad enterprise. As gleaned from the company’s proxy statement, the NEOs don’t own any stock in the company. Here’s the analysis:
Apparently, there was a complete board turnover in early 2013 (following a tender offer takeover), with the proxy explicitly stating that the former directors and executives were “terminated for cause or removed for cause or otherwise ceased to hold any office or position with the Company” (wow) – and the new board actually recommended AGAINST the company’s say on pay proposal. The proxy actually states “The current directors of the Company and the current compensation committee members believe that the executive compensation and the related practices of the former directors and former executive officers were ineffective and inappropriate and that the former directors and former executive officers consistently awarded themselves excessive compensation without regard to performance or what was in the best interests of the stockholders.” (double wow)
With 64 failures, this year now surpasses last year’s 61 failures. And we had three failures later in the year than at this time in 2012, so stay tuned. Thanks to Karla Bos of ING for the heads up on these!
Tomorrow’s Webcast: “Drilling Down: Statistical Sampling for Pay Ratios”
Tune in tomorrow, Thursday, October 24th for the CompensationStandards.com webcast – “Drilling Down: Statistical Sampling for Pay Ratios” – so you can hear Pearl Meyer’s Jan Koors, Towers Watson’s Rich Luss and Frederic Cook’s Mike Marino get into the nitty gritty about how to conduct statistical sampling under the SEC’s pay ratio proposal. This program will not be an overview of the SEC’s new proposal on pay ratio disclosures; we have posted plenty of memos to get you up-to-speed. Among other topics, this program will cover:
1. When sampling makes sense (large dispersed workforce, multiple pay databases, etc.)
2. What might be unintended consequences of identifying a “median employee” using pay definition different than ultimate SCT-based calculation of that person’s compensation for use in ratio
3. Selecting a sampling technique, which is best
– Random sampling? Stratified sampling? Other?
– Ability to provide explanation of process chosen and implications of decisions (eg. stratified sampling may produce more reliable or valid answers but may also involve quite a few decisions of where/who to oversample)
4. Determining sample size, how much precision is required
– The square root of n+1? Other?
– Data availability or comparability issues for global firms?
5. Reliability & validity, how are they relevant
– Constant results
– Accurate results
Transcript Posted: “Doing Your Pay Ratio Homework Now: A Roadmap”
I have posted the transcript for the recent CompensationStandards.com webcast: “Doing Your Pay Ratio Homework Now: A Roadmap.”
ISS Releases Draft 2014 Policy Updates for Comment
Yesterday, ISS posted its draft 2014 Policy Updates, with a comment deadline of November 4th. That’s just two weeks – so no time to procrastinate. There are two proposed changes – changes to the pay-for-performance quantitative screen and board responsiveness to majority-supported shareholder proposals, as noted in Ning Chiu’s blog.
Ahem. I stand corrected. I took to Twitter yesterday to tweet about how some mass media outlets got it wrong last week when they reported that the SEC would hold an open Commission meeting on October 23rd to propose crowdfunding rules as required under the JOBS Act. I figured that since it was Monday and the SEC hadn’t yet posted a notice about the open meeting, it must not be happening on Wednesday.
I was wrong. Last night, the SEC did indeed post a Sunshine Act notice about an October 23rd meeting. Less than 48 hours before the meeting. I’ve blogged before that as noted in Section (e)(1) of that Act, the notice must be announced at least one week before the meeting.
But there is an exception to the one week period if “a majority of the members of the agency determines by a recorded vote that agency business requires that such meeting be called at an earlier date.” So the agency likely has a recorded vote of this expedited matter somewhere. I recall that the SEC’s pay ratio meeting also was held less than one week after the notice. So this might be a new trend for the SEC.
As noted in this WSJ article, 8 Senators sent a letter to the SEC yesterday asking why the crowdfunding proposal is late…
Why Might the SEC Provide Short Notice for an Open Commission Meeting?
You are wondering why – given that the crowdfunding rule proposal is significantly behind schedule – the SEC would provide such a short notice period for this open Commission meeting, particularly when the media knew last week on which date the meeting date was set? Getting beyond that the purpose of a one week notice period has been negated by the fact that open meetings are now video webcast – so there is no reason to make travel plans to come to DC to see the meeting – here is my guess:
This sort of delay is extreme, but not unprecedented. Sometimes, delaying a meeting is a tactic used to extract last minute concessions on a rule. The Commission’s duty officer must approve the Sunshine Act notice – and a duty officer with a beef can hold up the seriatim until they get what they want. Particularly on something that was up against a likely 3-2 vote, one of the minority Commissioners could wield some power if one happened to be the duty officer (and a swing vote Commissioner could wield lots of power). The SEC’s Secretary and Office of General Counsel could then certify that exigent circumstances necessitated the delay and a majority of the Commissioners would approve the duty officer action seriatim.
I’m not sure that any of this is what’s going on here – it’s a total guess – but the Republican commissioners have been critical of the SEC’s anticipated approach to crowdfunding.
Open Commission meeting days are set internally in advance to coordinate across all five Commissioner calendars. It’s not as easy to find a date that works for all five Commissioners as you would think. Learn more about how the SEC works from last year’s webcast on the topic…
Today’s Spreecast: “Latest Corp Fin Comment Letter Trends”
Here are FAQs about how spreecasts work – but the upshot is you have to register for Spreecast first (although it’s possible to watch without registering if you close a prompt). Simply sign up by using an email address by clicking the “Or sign up via email” link in the upper right hand side of the site (it’s in small print under the “Connect with Facebook” logo).
Recently, SEC Chair Mary Jo White delivered this speech about the importance of independence for the SEC. Mary Jo reviewed the history of the agency’s independence from political influence, including more recent intrusions (think Dodd-Frank and conflict minerals). Not surprisingly, Mary Jo’s bottom line is that politics should not be a factor at an independent agency.
Given her interest in enforcement, it’s not surprising that her speech also focused on the sensitive topic of settlements with guilt admissions and possible judicial interference with the SEC’s decisions in that area, stating: “A court reviewing a consent judgment in one of our cases has a narrower focus – making sure that the settlement is not ambiguous and that it does not affirmatively harm third parties or impose an undue burden on the court’s own resources. But, the core decision as to whether to seek admissions is a decision for the Commission to make in its best, independent judgment of what should be required.”
Agency independence is an important topic. And good timing as a self-funded agency would avoid the chaos of a government shutdown. Not to mention that the Chair is definitely facing a divided Commission…
Contemporaneously with lifting the ban on general solicitation, the SEC staff has undertaken an interdivisional effort designed to monitor how the ability to advertise and “generally solicit” is actually occurring – how companies and hedge funds are taking advantage of the new rule. It includes assessing the impact of general solicitation on the market for private securities and -importantly -on identifying fraud if it is occurring. If it is, we can seek to stop those in their tracks, who would inappropriately take advantage of this new more open environment.
The SEC’s bad actor rules are causing a great deal of consternation amongst lawyers who are being asked to give opinions that the offer and sale of securities do not require registration under the Securities Act of 1933. Historically, these opinions were usually based (albeit not always explicitly) on the non-exclusive safe harbor of Rule 506. The addition of bad actor disqualification in new Rule 506(d) is raising concerns for a number of reasons, including:
– The large number of potential covered persons;
– The unanswered interpretational questions, such as what it means for an officer to participate in an offering; and
– The fact that some covered persons (e.g., minority investors) may not cooperate in providing information.
To the extent that a lawyer is asked to opine that there are no “bad actors”, this would seem to be no opinion at all but a factual confirmation. Such a confirmation could be obtained from anyone who was willing to take the risk.
I expect that opinion givers will be tempted to assume in their opinions that no covered person is a “bad actor”. However, this assumption comes close to making the opinion worthless because it removes one of the key conditions to the exemption. In the old days (i.e., before September 23), this wouldn’t have been as great a problem because issuers could always fall back on Section 4(2) of the Securities Act and (hopefully) a corresponding state private placement exemption. Now, issuers are likely to be engaging in general solicitations in reliance on the SEC’s other amendment to Rule 506. If these issuers lose the Rule 506 safe harbor, they are likely to have lost the Section 4(2) exemption, federal preemption and equivalent state law exemptions.
Here’s news from this blog by Prof. Larry Hamermesh:
I woke up this morning to news from the ever-faithful and thorough Chancery Daily that the plaintiffs in the FedEx/Chevron exclusive forum provision litigation have voluntarily dismissed their appeal of Chancellor Strine’s June 25, 2013 opinion generally validating forum selection bylaw provisions.
Plaintiffs’ counsel could hardly have made a more tactically intelligent move. As persuasive as Chancellor Strine’s opinion is – most people I talk to in Delaware believe that it was a shoe-in for affirmance – taking away the possibility of an endorsing opinion from the Delaware Supreme Court leaves at least a residual crack of daylight for plaintiffs to argue, in cases brought outside of Delaware, that exclusive forum bylaw provisions are generally unenforceable. That crack of daylight can only assist plaintiffs’ counsel who, for tactical reasons, would rather not litigate class or derivative claims in Delaware due to a sense that at least in some cases those claims would have settlement value that they wouldn’t have if brought in Delaware.
As you might guess, I view the dismissal of the appeal with considerable disappointment. I was hoping for and expecting a strong affirmance of the Chancellor’s ruling. Moreover, I expect that other plaintiffs’ counsel will learn a lesson from the FedEx/Chevron plaintiffs and make defendants invoke exclusive forum bylaws in jurisdictions outside of Delaware, where the courts may be less sympathetic to them.
FASB: Disclosure Framework Project FAQs
Recently, the FASB published this set of FAQs about its disclosure framework project. In FEI’s “Financial Reporting Blog,” there is an explanation of the status of this project (“bifurcated”) – as well as a status report on the IASB’s Disclosure Initiative.
SCOTUS Considers Scope of Preclusion of State Law Securities Fraud Class Actions Under Federal Law
Here’s news excerpted from this Simpson Thacher memo: Last week, on the first day of the new term, the Supreme Court heard oral arguments in Chadbourne & Parke LLP v. Samuel Troice in which the Court is expected to clarify the scope of preclusion under the Securities Litigation Uniform Standards Act (“SLUSA”) of state-law securities fraud class actions. SLUSA precludes state-law fraud class actions to the extent they are “in connection with” SLUSA-covered securities. The Court will likely resolve a circuit split and determine when an alleged misrepresentation is sufficiently related to the purchase or sale of a covered security to satisfy the “in connection with” requirement for SLUSA to preclude state-law class actions.