Monthly Archives: December 2013

December 31, 2013

EU Auditor Rotation Becomes Mandatory

Davis Polk’s Ning Chiu blogs:

A preliminary agreement reached between the European Parliament and EU Member States will require audit firms to rotate every 10 years, with extensions for up to 14 additional years if there is a joint audit, which is required in some EU nations and not uncommon in others, or 10 more years if the work is put out for bid. The original proposal sought mandatory rotation every six years. Listed companies, banks and insurance companies will reportedly be affected.

Other reforms are expected, including prohibition of certain non-audit services such as tax advice and services linked to the financial and investment strategy of the audit clients. A cap of 70% on fees generated for non-audit services based on a three-year average will also be imposed. Audit reports are expected to contain more information although the details were not clear, and third parties can no longer require that only the “Big Four” be used.

The text is subject to final approval and a reasonable transitional period, six years according to some accounts, is expected. One article argues that with the transition time period and the allowable extensions, it may be as long as 30 years before some companies will be required to switch auditors.

SEC Removes References to Rating Agencies in Bunch of Rules

Last week, the SEC finally removed references to credit ratings from a bunch of SEC rules, as mandated by Section 939A of Dodd-Frank. SEC Commissioner Gallagher issued this statement praising the action – and bemoaning that it took so long…

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:

– Glencore Xstrata: Wild Results from an Annual Meeting
– Reviewing Key ESG Shareholder Proposals in 2013
– Interview with Amalgamated Bank: Shareholder Proposals & Communications
– Director Elections & Contests in 2013
– Does Compliance with Proxy Advisors’ Recommendations Decrease Shareholder Value?
– You Can’t Shoot Zombie Directors!

– Broc Romanek

December 30, 2013

Is ‘The Wolf of Wall Street’ Real? My Stratton Oakmont Story

In this “Take Two Video,” I spend 40 seconds telling my own firsthand account of the boiler room operations of Stratton Oakmont from back in ’97. This was a time when I served as a SEC Staffer. Pretty funny story (from a lawyer’s perspective)…

Here is an interesting review of “The Wolf of Wall Street” from someone who used to be a boiler room broker…

Best Movies in 2013? My Take

Here’s the best movies list from the Washington Post – and here are reviews from Nell Minow (who doubles as ‘Movie Mom’ when she isn’t a governance guru). I didn’t see all that many movies this year as I am picky about what I see. But I do think that “The Way Way Back” should be on the “best of” lists and that “Dallas Buyer’s Club” and “Mud” should have been near the top. “Frances Ha” and “Nebraska” were fine – but both were not “Top 20” worthy. And something about “Her” scares me and you couldn’t pay me to go…

– Broc Romanek

December 23, 2013

An Early Christmas Present: Corp Fin’s Regulation S-K Study

Every year, I try not to blog during the week of Christmas. And it never happens. On Friday, the SEC released Corp Fin’s Study on Regulation S-K. This report to Congress was mandated by Section 108 of the JOBS Act. It’s 106 pages – but double-spaced.

Comprising nearly a third of the Study, I loved reading the history section of the Study. It’s like your life flashing before your eyes. Memories of learning about the Wheat Report and the expansion of the availability of Form S-7 (which was the first streamlined registration statement). Hard to believe that the initial version of Reg S-K only called for a “Description of Business” and “Description of Property.” It’s hard to believe it’s been nearly 20 years since the Task Force on Disclosure Simplification made its recommendations.

The next section of the Study provides the history of each Item in Reg S-K, along with a brief description of comments submitted on each item through the SEC’s JOBS Act page. Only 5 comment letters were submitted.

Starting on page 92, the final 15 pages of the Study is the section that everyone should read – about possible next steps & the Staff’s preliminary suggestions for further study. The study notes there are two approaches to disclosure reform: a broad comprehensive review of disclosures or a more targeted review topic by topic. The former approach would obviously be a bigger project that would take longer. The study identifies these 4 issues that should be addressed during a reform project: principles-based disclosure requirements; scalability for different types of companies; how disclosure is delivered & presented; and readability & navigability of disclosure.

Even though this is just a Staff study, the study’s preliminary suggestions may present some tea leaves about how SEC Chair White wants to pursue disclosure reform (eg. reconsider lengthy & technical executive pay disclosures on page 100). As noted in the SEC’s press release, Chair White has “directed the staff to develop specific recommendations for updating the rules that dictate what a company must disclose in its filings. We will seek input from companies about how we can make our disclosure rules work better for them and will solicit the views of investors about what type of information they want and how it can be best presented.” Once the inevitable slew of memos are out, I’ll be posting them in our “Regulation S-K” Practice Area.

Wachtell Lipton v. Carl Icahn

This Forbes article notes a lawsuit filed by Wachtell Lipton against Carl Icahn over a fee dispute…

Exchange-Traded Notes: Corp Fin May Seek Better Disclosure

This Bloomberg article indicates that Corp Fin’s Amy Starr may seek better disclosure from lenders about how they value exchanged-traded notes…

– Broc Romanek

December 20, 2013

The World’s Largest Holiday Disclaimer: 2013 Version

In what has become an annual tradition, Cary Klafter of Intel again shares what I imagine has to be the world’s largest holiday disclaimer, running for 19 pages – nearly 25% greater than the last one

Let It Snow, Make It So

Maybe you have to be a “Star Trek-Next Generation” fan to enjoy this video, but I found it hilarious:

Shareholder on a Shelf: An Earnings Tradition

And then Sharon Merrill’s Dennis Walsh gives us this hilarious holiday poem. Here’s an excerpt:

Have you ever wondered how the SEC could know;
If you’re naughty or nice in making your reported revenues and margins grow;
For 79 years it’s been a big secret;
Which now can be shared, if you promise to keep it.

At reporting time the SEC sends me to you;
I sit in the shadows to watch and report on all that you do;
My job is an assignment from Ms. Mary Jo White herself;
I am her helper, a friendly scout shareholder that sits on a shelf.

– Broc Romanek

December 19, 2013

SEC Proposes Long-Awaited Regulation A+ Rules

At an open meeting yesterday, the SEC voted to propose the exempt public offering rules mandated by Title IV of the JOBS Act. The proposals have been much-anticipated, because the possibility of offering up to $50 million of securities within a 12-month period without going through the full-blown registration process has been seen as a promising way to revive the smaller IPO market. Over the past decade, the infrastructure for conducting IPOs by companies raising less than $50 million has all but disappeared, and existing exemptions like Regulation A have proven to be a poor alternative given the $5 million offering limit and the lack of state preemption.

The SEC’s proposal seeks to create a workable exempt public offering regime that will hopefully not fall into disuse like current Regulation A. The SEC proposes to amend Regulation A to create two tiers of offerings: Tier 1, for offerings of up to $5 million in a twelve-month period, and Tier 2, for offerings of up to $50 million in a twelve-month period. Both of these tiers would be subject to basic requirements concerning issuer eligibility, disclosure, and other matters, building on the current provisions of Regulation A while in some cases modernizing existing provisions to make Regulation A consistent with current practice for registered offerings. Tier 2 offerings would be subject to additional requirements, such as the provision of audited financial statements, ongoing reporting obligations, and certain limitations on sales, reflecting the directives in Title IV of the JOBS Act and the additional investor protection concerns associated with larger exempt public offerings.

The offering documents used in Regulation A as proposed to be amended would be filed with the SEC and subject to a review and qualification process, as has been the case with current Regulation A.

Ongoing Reporting Obligations Proposed

One aspect of the proposed Regulation A amendments that will no doubt draw a lot of interest from commenters is the ongoing reporting scheme that issuers using Regulation A will become subject to when they conduct a Regulation A offering. The SEC has proposed to:

1. require issuers that conduct a Tier 1 offering to electronically file a Form 1-Z exit report with the SEC not later than 30 calendar days after termination or completion of a qualified Regulation A offering to provide information about sales in such offering and to update certain issuer information;

2. require issuers that conduct a Tier 2 offering to electronically file with the Commission annual and semiannual reports, as well as current event updates, similar to the way an issuer is required to file periodic and current reports when it conducts a registered offering and becomes subject to Exchange Act reporting requirements pursuant to Section 15(d);

3. require issuers that conduct a Tier 2 offering to, where applicable, provide special financial reports to provide information to investors in between the time the financial statements are included in Form 1-A and the issuer’s first periodic report due after qualification of the offering statement;

4. require issuers that conduct a Tier 2 offering to include in their first annual report after termination or completion of a qualified Regulation A offering, or in their Form 1-Z exit report, information about sales in the terminated or completed offering and to update certain issuer information; and

5. eliminate the requirement that issuers file a Form 2-A with the SEC to report sales and the termination of sales made under Regulation A every six months after qualification and within 30 calendar days after the termination, completion, or final sale of securities in the offering.

The Big Deal: Federal Preemption is Proposed for Regulation A Offerings!

One of the biggest concerns with the implementation of Title IV of Regulation A has been whether the SEC would address the state blue sky issues that have historically made Regulation A less attractive as an offering alternative. In a surprise move, the SEC has proposed to provide for the preemption of state securities law registration and qualification requirements for securities offered or sold to “qualified purchasers,” which is defined to be all offerees of securities in a Regulation A offering and all purchasers in a Tier 2 offering. The SEC said that these federal preemption provisions are appropriate in light of the total package of investor protections proposed to be included in the implementing rules for Regulation A.

– Dave Lynn

December 18, 2013

“Buying” Your Favorite Athlete: The Securities Law Framework

I chuckled when I read this DealBook article about how Fantex Holdings intends to open an online marketplace for investors to buy and sell interests in professional athletes. I laughed because I had been involved with a few of these types of schemes when I worked at the SEC in the Chief Counsel’s office. Way back then, the issuers argued that interests in athletes were not “securities” and thus didn’t need to be registered. As I recall, those no-action requests went nowhere as the “not a security” arguments were not persuasive.

But Fantex is taking a different approach. On October 17th, it filed a Form S-1 (which has since been amended), for an IPO in the NFL player Arian Foster – with the intention of selling about $10.5 million worth of “tracking stock,” representing a 20% interest in his future brand income. In exchange, Arian would receive $10 million; the balance will cover the costs of the deal. In addition, five pieces of free writing prospectuses were filed – the components of Fantex’s site and other selling documents. The Fantex platform itself has filed as a broker-dealer. As noted in this DealBook article, a second Form S-1 has been filed by Fantex for another football player, Vernon Davis.

This NY Magazine piece is critical of these offerings. And this NY Magazine piece entitled “The IPO of You and Me: How Normal People Are Becoming Corporations” notes that the Foster IPO is dead for now since he got injured. I’m not sure how far along the Vernon Davis deal is – it appears it still is in the comment process…

What is a “Tracking Stock”? Is Securitization of Future Earnings Novel?

Okay, I need help since I’m not a securitization lawyer. Who out there knows how different this is than the securitizations of 15 years ago relating to David Bowie and others celebrities who monetized their future earnings? Is this Fantex stuff really a securitization? Or is this type of “tracking stock” something different? And how is this tracking stock different than the ones that a half dozen companies did in the late ’90s?

Poll: Who Would You Buy a Piece Of?

Please participate in this anonymous poll:


– Broc Romanek

December 17, 2013

The SEC Earns a “D” in Plain English

As noted in this Washington Post article, the Center for Plain Languages gave the SEC a grade of “D” when it comes to evaluating how well it communicates with the public. Things could be worse – the Treasury Department a received a “F.” Here’s the report card from the Center, which graded 20 federal agencies.

These grades were based on the “Plain Writing Act of 2010” – there is a bill called the “Plain Regulations Act of 2013,” which would require that all new and substantially revised federal regulations be written in plain language. I’m all in for that idea!

SEC to Propose Reg A+ Tomorrow!

Yesterday, the SEC surprised me with this Sunshine Act notice stating that Regulation A+ will be proposed at an open Commission meeting tomorrow. Another JOBS Act rulemaking proposal tucked in before the end of the year!

Here are the comments received by the SEC on Title IV of the JOBS Act (including Section 3(b) of the ’33 Act). MoFo’s Anna Pinedo blogs about a second comment letter from NASAA on Reg A+ that was filed just last week (here’s the 1st comment letter)…

Meanwhile, the Supreme Court has picked up a securities law case for next term – this one relating to ERISA stock drops. Read Kevin LaCroix’s blog for more…

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:

– Survey: Board Activities
– Bylaw Amendment Could Deter Dissident Directors
– The Return of the Mini-Tender Offer?
– SCOTUS Oral Arguments: Whether SOX Protects Private Company Employees From Retaliation
– Study: Firms that “Cast” Earnings Calls Underperform

– Broc Romanek

December 16, 2013

Investor Thoughts on the SEC’s Coming Disclosure Reform

As I blogged last month, SEC Chair White delivered a speech on disclosure reform recently. There really is some interesting commentary from a variety of investors in this Fortune article about whether there is a “disclosure overload” in SEC filings. Most of them say “no”…

Meanwhile, SEC Commissioner Gallagher has weighed in with his thoughts on disclosure reform, as noted in this Davis Polk blog

Speaking of “what’s material?,” the U.S. Supreme Court has set oral argument for March 5th in Halliburton v. Erica P. John Fund (No. 13-317), the case that may upset the Basic v. Levinson (fraud-on-the-market) applecart…

Survey: Board-Shareholder Engagement

This recent investor survey by PwC presents some interesting findings, including that 45% of investors prefer engaging directly with directors (see pg. 11). In comparison, here are the key findings from this recent NIRI survey:

– Majority of survey respondents (60%) state that their companies do not permit board members to engage directly with shareholders (defined as in-person or via telephone).
– Within companies that do allow direct communication, 65% state that any board member may speak directly, while 35% state that only certain board members may speak directly to shareholders.
– Within companies that do allow direct communication, 57% indicate that a member of management is not required to be present during these discussions.
– In general, as market cap increases, so does the likelihood that only certain board members may speak with shareholders and that management’s presence is required.
– Companies are only slightly more likely (43%) to facilitate indirect communication between boards and shareholders (defined as e-mail responses to questions via a third-party, such as the IR department or corporate secretary’s office), than direct communication (40%).
– The most likely venues for direct interactions between board members and shareholders are annual meetings (49%), through the proxy voting arms of institutional shareholders (11%), during non-deal roadshows/one-on-one meetings (9%), and at analyst days (8%).
– For those that reported board-shareholder contact within the last two years, the average number of direct communications over this period was nearly five.
– On average, one out of every five of these communications within the last two years was a result of activist or shareholder proxy proposal activities.

In our “Shareholder Engagement” Practice Area, we have a host of resources on directors involvement in the shareholder engagement process – as well as shareholder engagement generally including these checklists

It’s Time is Now! IR Apps

Considering the popularity of apps, I have been surprised that few companies have apps for their investors. Now there is a simple solution that might make these omnipresent. In this podcast, Jeff Corbin of theIRapp explains how “theIRapp” works, including:

– What is the difference from an investor’s perspective of an IR app and IR web page?
– How much work is it for a company to keep an IR app updated with content?
– How much does your IR app cost?

– Broc Romanek

December 13, 2013

Nasdaq Comp Committee Independence Changes Effective Now

I thought that I should clarify my blog from last week – when Nasdaq filed the compensation committee independence proposed rule changes on November 26th, they were immediately effective. Two days ago, the SEC published the notice of filing and immediate effectiveness of the proposed rule change.

As noted in Section III of the notice (pp. 9-10), the rule change has a 30-day operative delay from the date of filing. That period will expire before companies are required to comply with Nasdaq’s compensation committee composition rules since the transition period for compliance is unchanged. Specifically, companies must comply by the earlier of: (i) their first annual meeting after January 15, 2014, or (ii) October 31, 2014.

In addition, at any time within 60 days of the filing of the proposed rule change, the SEC summarily may temporarily suspend such rule change if it appears to the SEC that such action is: (i) necessary or appropriate in the public interest; (ii) for the protection of investors; or (iii) otherwise in furtherance of the purposes of the Exchange Act. I have no expectation that they would take such action. I have posted memos on the Nasdaq’s changes in’s “Compensation Committee” Practice Area.

Corp Fin’s Focus on Segment Reporting

This WSJ article notes (as highlighted in this Cooley news brief) covers the recent AICPA’s conference and notes how Corp Fin’s Associate Chief Accountant Ryan Milne said that the Division was focusing on segment reporting. [The SEC Staff’s first few speeches from the conference are posted. More likely to come.]

According to the article, segment reporting was “the third most common area discussed in SEC comment letters in the first three quarters of this year, following tax and goodwill accounting issues, according to Audit Analytics. In its regular review process, the agency addressed segment reporting issues in some 435 letters to 184 companies this year through Sept. 30, according to the firm.” An SEC representative stated that the SEC expects to “continue to focus on this area.”

By the way, the comment period for the PCAOB’s proposal on the audit report has closed – here are the comments that the PCAOB received…

SEC Task Force Probes Use of Non-GAAP Metrics

And this WSJ article notes (as highlighted in this Cooley news brief) that the SEC’s Enforcement Division – using its 12-member “Financial Reporting and Audit Task Force” created in July – is scrutinizing companies’ use of non-GAAP performance measures.

– Broc Romanek

December 12, 2013

The SEC’s Reg Flex Agenda: What Does It Really Mean?

Earlier this year, I blogged how the SEC’s Reg Flex Agenda is aspirational and not really a good roadmap for upcoming rulemakings. Apparently, some folks didn’t get the memo and continue to make the Reg Flex Agenda a newsworthy item after being completely ignored for decades. So I wasn’t surprised that we never saw a political contribution disclosure proposal from the SEC this year after the hubbub starting in January that it was coming soon. Nor am I surprised that the topic was left out of the latest Reg Flex Agenda (and here’s the “long-term” action items) posted by the SEC last week.

Here’s some examples of folks thinking that the Reg Flex Agenda actually does amount to something: this Washington Post article on that omission – and here’s a blog about it from Prof. Lucian Bebchuk. And the NY Times Editorial Board has even weighed in.

I disagree. I believe that the omission has as much meaning as it’s inclusion in the last Reg Flex Agenda. Which is nada. At least the Washington Post partially recognized this fact, with this sentence buried in its recent article: “The agency is not precluded from acting on a matter, even if it’s not on the formal agenda.” But why even bother to write an article about the Reg Flex Agenda in the first place…

Study: A 12-Year Comparison of Going Concerns

In a recent study, Audit Analytics looked back over 12 years of going concerns and, among other things, found:

– Fiscal year end 2012 is estimated to receive 2,517 going concerns, a decrease of 127 from the year prior, but this decrease is smaller than the 228 companies that ended up filing terminations with the SEC after disclosing a going concern in 2011.

– It is estimated that 17.5% of auditor opinions filed for fiscal year end 2012 will contain a qualification regarding the company’s ability to continue as a going concern. During the 13 years under review, the highest percentage, 21.1%, occurred in 2008 and the lowest, 14.1%, occurred in 2000. The last 6 years represent the worst 6 percentages under review.

– New going concerns (filed for this year, but not the prior year) is estimated to be 543, which is low compare to most years, but 35 more companies than experienced the year prior.

– Fiscal year 2012 saw the fewest number of companies that improved well enough to shed its going concern status. A multi-year analysis of the going concerns allows for an identification of companies that filed a going concern one year but not the following year. This cessation can occur for one of two reasons: (1) the company files a subsequent clean audit opinion (subsequent improvement) or (2) the company fails to file audit opinions altogether (subsequent disappearance). A review of companies that experienced a subsequent improvement reveals that only 140 companies that filed a going concern in 2011 were able to file a clean audit opinion in 2012. This figure represents the lowest for any year analyzed, since 2000.

This Reuters article noting that 40% of audit committee members have social ties to CEOs at the same company is alarming. It’s based on this upcoming study.

A Record $2.46 Billion Post-Verdict Judgment In a Securities Lawsuit!

Kevin LaCroix blogs about Northern District of Illinois Judge Guzman entering a post-verdict judgment in the long-running Household International securities class action lawsuit consisting of principal damages of $1,476,490,844.21 and prejudgment interest of $986,408,772, for a total judgment amount of $2,462,899,616.21, along with post-judgment interest and taxable costs. Wow…

Kevin also blogs about “Shareholders Obtain $882 Million Default Judgment in Longtop Financial Securities Suit.” And this blog by Kevin is also good: “First the Regulatory Investigation, Then the Securities Suit.”

– Broc Romanek