As I noted in yesterday’s blog, the opinion of the U.S. Court of Appeals for the District of Columbia Circuit in the appeal of National Association of Manufacturers, et al., v. Securities and Exchange Commission upheld the U.S. District Court’s judgment with respect to the Administrative Procedures Act and Exchange Act claims raised by the plaintiffs/appellants. This outcome was particularly notable given the hostility that this Court has shown to the SEC’s rulemaking efforts over the years, including in 2011 when the Court invalidated the SEC’s proxy access rule (Rule 14a-11).
As for the conflict minerals rulemaking, the Court could find no fault with the SEC’s process and with the cost-benefit analysis, and thus could not hold that the SEC’s action was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law[, or] in excess of statutory jurisdiction.” The Court analyzed the claims made by the plaintiffs/appellants regarding the lack of any de minimis exception, the due diligence threshold, the “persons described” provision with respect to persons who contract to manufacture, and the length of the “DRC conflict undeterminable” temporary phase-in period, and found that the SEC was not arbitrary and capricious in the judgments that were made in adopting the final rule.
With regard to the cost-benefit analysis, the Court noted that “the Commission exhaustively analyzed the final rule’s costs . . . [and] [i]t considered its own data as well and cost estimates submitted during the comment period . . . and arrived at a large bottom line figure that the Association does not challenge.” On the benefit side of the equation, the Court stated “we find it difficult to see what the Commission could have done better,” noting that the SEC determined that Congress intended the rule to achieve “compelling social benefits” which the agency was “unable to readily quantify” due to a lack of data about the rule’s effects. The Court noted that the SEC had to promulgate the rule based on the statute, and thus necessarily relied on Congress’s determination that the costs were necessary for achieving the goals.
With this outcome, the rule writers at the SEC are no doubt breathing a sigh of relief, as they still have a relatively full plate of Dodd-Frank Act and JOBS Act mandated rulemakings that continue to percolate. After a string of high profile losses in this Court and the U.S. District Court for the District of Columbia, this outcome is probably the best that the SEC and the Staff could have hoped for and may serve to pave the way for moving forward with the rest of the rulemaking agenda.
More on the SEC’s Disclosure Reform Project
At the ABA Spring Meeting last Friday, Corp Fin Director Keith Higgins broke the mold of the tried and true “Dialogue with the Director” program and took part of the time to deliver a speech outlining the SEC’s efforts on disclosure reform. In the speech, he noted that efforts to reduce the volume of disclosure is not the sole end game, particularly given that many investors have expressed an appetite for more information, not less. The SEC has now launched a spotlight page on sec.gov where the public can provide input on how the SEC can make disclosure more effective.
In terms of priorities, the Staff has started reviewing the business and financial disclosures in current and periodic reports and transactional filings, considering, among other things, whether disclosures should be scaled for certain types of issuers like smaller reporting companies and emerging growth companies. In a later phase of the project, the Staff will consider ways to update and modernize proxy disclosures.
As examples of potentially outdated disclosures that might be revisited, he noted the ratio of earnings to fixed charges and the table of historical stock prices. The Staff will also be looking for disclosure requirements that result in redundancy or duplicative disclosures, as well as looking at whether a more principles-based approach (such as in MD&A) would be better for certain disclosure items.
The Staff is also looking at Regulation S-X requirements, including requirements to include financial statements of entities other than the registrant, such as acquired businesses, equity method investees and guarantors. The Staff will also examine differences in disclosure requirements under the 1933 Act and 1934 Act, as well as potential areas of overlap between GAAP requirements for footnote disclosure and the SEC’s other disclosure requirements.
Also on the agenda will be efforts to improve the navigability of disclosure documents and whether the long-standing notions of “company disclosure” or “core disclosure” should be implemented.
Obviously this project is going to be a huge undertaking by the Division, and notably this effort has been started before, but always overtaken by events. We will see if this latest effort will actually yield any tangible results.
Engagement as a Household Word: The New IRRC Institute/ISS Study
A new study by the IRRC Institute and ISS finds that the level of engagement between investors and public companies is at an all time high, and that both investors and corporate officials surveyed believe that the increased level of engagement is successful. The study, which follows up on an initial study done on the topic in 2011, concludes that the most significant factor driving high levels of engagement is mandatory say-on-pay votes at U.S. public companies. The study is worth reviewing, because it provides some useful insights on how engagement is being initiated and conducted and what is being talked about in the course of engagements.
Yesterday, the U.S. Court of Appeals for the District of Columbia Circuit issued its opinion in the appeal of National Association of Manufacturers, et al., v. Securities and Exchange Commission. The National Association of Manufacturers had challenged the SEC’s conflict minerals disclosure rule, raising Administrative Procedures Act, Exchange Act and First Amendment claims. Last year, the U.S. District Court for the District of Columbia had rejected all of the Association’s claims and granted summary judgment for the SEC and intervenor Amnesty International.
On appeal, the Court of Appeals upheld most aspects of the rules and statute, but held that the statute and rule violate the First Amendment only “to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have ‘not been found to be “DRC conflict free.”‘” (In footnote 14 of the Opinion, the Court stated that to the extent that the requirement to use the particular descriptor “not been found to be ‘DRC conflict free'” arises solely as a result of the SEC’s rule rather than the statute, then only the rule and not the statute is unconstitutional.)
More specifically, the Court found that the rule violates the prohibition against compelled speech. The Court held that “[b]y compelling an issuer to confess blood on its hands, the statute interferes with that exercise of freedom of speech under the First Amendment.” This sort of disclosure, the Court reasoned, was similar to requiring issuers to “disclose the labor conditions of their factories abroad or the political ideologies of their board members” which would be “obviously repugnant to the First Amendment” and should not face a relaxed standard for review just because Congress used the “securities” label.
In a separate opinion concurring in part, Judge Srinivasan did not join the court’s opinion with respect to the First Amendment claim, noting that a central issue with regard to the standard for review in this type of case is awaiting an en banc decision of the Court in another case, American Meat Institute v. United States Department of Agriculture. Judge Srinivasan would have preferred to hold in abeyance the consideration of the First Amendment issue in the conflict minerals case, so as not to risk being undercut by the decision of the en banc court in the American Meat Institute case.
The fact that the Court of Appeals reversed the District Court decision on the First Amendment claim was a surprise to some, given that the First Amendment claim was always talked about as a bit of a long shot. The fact that the Court of Appeals did not invalidate the conflict minerals disclosure rule on the APA or Exchange Act grounds was a disappointment to many, because with this opinion the rule will live on, but perhaps in a slightly modified form.
What’s Next for the Conflict Minerals Disclosure Rule?
Does yesterday’s decision mean “pencils down” for those preparing their first Form SD? Unfortunately, the answer to that seems to be “no.” The outcome of the opinion is that the Court remanded the case “for further proceedings consistent with this opinion,” so more work will now have to be done by the District Court once the appellate decision is final.
Further, while the Court issued its opinion and judgment today, that decision has no binding legal effect on the parties until the Court issues its “mandate.” In a separate order issued concurrently with the opinion, the Court ordered that issuance of the mandate be withheld until seven days after the Court disposes of any petition for rehearing. The government’s petition for rehearing is not due until 45 days after the Court’s decision, which is May 29. So, unless there is further action by the Court, the earliest that the mandate would issue and the decision could have binding legal effect would be sometime in June, after the June 2, 2014 deadline by which Form SDs are required to be filed. The Court could of course change its mind and decide to issue the mandate earlier–the separate order issued today specifically contemplates that a party may ask for the mandate to be issued earlier for good cause.
It is also possible that the SEC may take some sort of action with regard to the upcoming filing deadline in light of the legal limbo that the Court’s decision creates, although the SEC’s decision to take any such action would undoubtedly be wrapped up with its overall litigation strategy with respect to the case.
Will the SEC Seek Rehearing?
While it is always speculative to try to predict what the government will do, a petition for rehearing en banc seems likely in this case. The question of what level of scrutiny is to be used to decide the First Amendment question is already at issue in another case in which the Court has granted en banc review, as discussed above. In footnote 10 of the opinion, the Court as much as invited an en banc review, noting that “issuing an opinion now provides an opportunity for the parties in this case to participate in the court’s en banc consideration of this important First Amendment question.” At the very least, the government would likely file a petition for rehearing en banc asking the Court to vacate the panel’s opinion in the event that the en banc Court changes the applicable level of scrutiny in the American Meat Institute case.
Here’s a 2-minute video about the 27 great ways that Intel enhances the usability of its 2014 proxy statement (78 pages, with assistance from Addison):
Spring Break: What DC Tourism Looks Like
I’ve headed out on spring break vaca and Dave will run this blog for the remainder of the week. Here’s a 1-minute video that is my slide show of DC tourists enjoying the cherry blossoms & other popular landmarks:
Yesterday, Corp Fin issued 2 new CDIs – and one revised CDI – on instrastate offerings. As Joe Wallin blogged, they are important because they relate to state-level equity crowdfunding, and how to conduct a state-level equity crowdfunding offering without falling into federal law. Here they are:
Meanwhile, SEC Commissioners Aguilar and Stein each delivered a speech at the NASAA’s annual conference this week…
Drafting Disclosure: Can a Robot Do Your Job?
I like the idea of Rosie from the Jetson’s banging out a prospectus. Except perhaps when it’s real. The consulting arm of Seyfarth Shaw has announced “Disclosure Dragon” software that “automates, expedites and standardizes the development of a private placement memorandum (or other required disclosure documents depending on the type of offering) and supporting exhibits.” The announcement notes that further legal review is required – but that it could save up to 80% of the costs involved.
I’m not convinced there is much in the way of costs for creating crowdfunding documents anyways. From what I hear, under many state crowdfunding statutes, out-of-pocket legal costs will be less expensive than a what a SCOR costs today. Thoughts?
State Crowdfunding Laws: If You Build It…
Hat’s off to Davis Wright Tremaine’s Joe Wallin who drafted a crowdfunding bill on his own and blogged about it – and before you know it, Washington State’s Governor was signing it into law! Here are some FAQs on Washington’s new law – and Bill Carleton maintains this web page with many state laws on crowdfunding…
A lot of attention was paid to this Bloomberg article covering a long-time SEC trial lawyer’s speech at his retirement party (also see this American Lawyer story, which might have been the first). That article spawned others (here is one, another – and another) – which caused even my wife to ask me questions.
Here are five things I wondered when I read it:
1. Who is Jim Kidney? – I never heard of him nor did other old-time alumni that I spoke to. I know Stephen Crimmins is cited in the article, speaking highly of him – but the name still draws a blank.
2. How Did Bloomberg Get the Remarks? – The typical farewell party is a fun occasion – and often sad too if the person is well-liked. I have never seen an actual speech reduced to writing until I obtained Meredith Cross’ remarks delivered at Paula Dubberly’s farewell party that I blogged about a few months ago. I actually got my hands on the text of Jim’s speech too!
3. Why Did Bloomberg Bother With the Story? – In my opinion, these type of speeches never are newsworthy. Except perhaps in trade blogs like this. But I guess we live in a different era of journalism now (some of the reporting was over-the-top, reading much more into the speech than the Bloomberg piece). I note that the remarks are from someone who spent 30 years on the staff but was never promoted to a senior manager position. So it’s kinda funny that this is news on the scale of a speech by the SEC Chair.
4. Does the SEC Still Have a Reputation Problem? – The meat is what James said, not who he is. Clearly, more enforcement cases should have – and still should be – brought in the wake of the ’08 financial crisis. So I can see how this minor thing becomes big news. And many people are applauding James for being frank. But we don’t know all the facts, that’s for sure. There are reasons that cases aren’t brought aggressively, typically because of bad law. Here’s the latest interview with SEC Chair White about her new vision for Enforcement, including the news that she only sleep four hours per night…
5. How Come I Didn’t Get the Scoop? – I need to work harder…
Of course, the best farewell speech stories are the ones that don’t deal with any substance. Like the time the guy got so drunk he could hardly speak. That might happen occasionally when someone retires from a private sector job, but I’ve only seen it once at a SEC party (and I’ve been to over 100). They typically are a “low flow” affair…
NYSE Proposal: Relaxation of Director Independence for Spin-Offs
In this blog, Oliver Rust of Duane Morris explains how the NYSE has proposed to relax its bright line director independence tests in limited circumstances, so that “a director may be deemed independent of a company that has been the subject of a spin-off transaction regardless of the fact that such director or his employer had a relationship with the former parent of such spun-off company.”
European Commission Proposes Revised Shareholder Rights Directive
Yesterday, the European Commission proposed a revised shareholder rights directive. It’s a biggie that has something in there for everyone, including binding say-on-pay and proxy advisory firm reform. We’ll be posting memos in our “Europe” Practice Area.
This “Citizen’s Summary” is a unique concept – explaining the proposal for the masses. In particular, see the bottom of the page -they thought of everything except designating hashtags…
As someone with a job that is constantly trying to ensure diversity on my webcast panels, etc., I am keenly aware that we still have a long way to go in our profession. Racial diversity is woeful – I’m not sure if we’ve made much progress since SEC Chair Arthur Levitt highlighted this problem over 15 years ago. But even gender diversity is still an issue, including in the boardroom.
I am trying out a unique networking experience – “The Women’s 100 Conference” – that will be held in DC on Monday, June 2nd. Glad to say that it sold out without me having to market it – but I did recently have a handful of cancellations if you are interested (and I have a waiting list too in case others drop). Here’s the framework for how it will work & the agenda. The attendees are a good mix of law firm, in-house, investors and regulators.The cost is only $195. Email me if you are interested. And no, I won’t be in the room due to my maleness…
With the first annual disclosures due on June 2nd, many are scrambling to figure out how to best fill out their first Form SD, etc. – so we are hosting this special webcast – “Conflict Minerals: Tackling Your 1st Form SD” – at 1 pm eastern today, featuring WilmerHale’s Meredith Cross and Morrison & Foerster’s David Lynn. Tune in to get up-to-speed now…
The Corporate Counsel: Special “Salute to Women” Supplement
In connection with “The Women’s 100 Conference,” I had a group of respected and experience practitioners share their stories with me – and combined those stories in this special March-April Supplement to The Corporate Counsel. We are sharing this Supplement for free as part of our salute. The articles include:
– No More Masks – by Heidi Wilson
– A Fine Career: Becoming a Lawyer – by Prof. Roberta Karmel
– Where Are All the Women M&A Dealmakers? – by Diane Holt Frankle
– My Career Reflections – by Cheryl Sorokin
– Diversity One: One Step, One Action, One Impact – by Sylvia Groves
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:
– Political Contributions By the S&P 500: Stats
– Court: Form 8-K Is Not Exclusive Source of Disclosure Obligations
– SEC Drops Nearly 20% of Probes Against Individuals After Wells Notices
– FINRA Proposes Changes to Corporate Financing Rules
– Canada Proposes Broad Governance Reform
– Audit Committee Survey: Disclosure, Risk Oversight and Other Issues
Yesterday, Corp Fin issued 9 new FAQs, mainly dealing with obtaining an independent private sector audit (known as an “IPSA”) of the conflict minerals report. This is a second set of FAQs, that comes nearly one year after the first set of 12.
With the first annual disclosures due on June 2nd, many are scrambling to figure out how to best fill out their first Form SD, etc. – so we are hosting this special webcast – “Conflict Minerals: Tackling Your 1st Form SD” – at 1 pm eastern tomorrow, featuring WilmerHale’s Meredith Cross and Morrison & Foerster’s David Lynn. Tune in to get up-to-speed now…
Shareholder Proposals: Reform Debate Intensifies
Last week, I blogged about SEC Commissioner Gallagher’s speech wanting to reopen the can of worms that is the shareholder proposals rule. Then Nasdaq’s General Counsel – Ed Knight – weighed in with similar emotions in this WSJ op-ed. Now CII Director Ann Yerger has penned her own WSJ op-ed taking issue with Knight’s op-ed. And here is a piece from As You Sow…
Speaking of CII, it has sent its second letter to the SEC about interim vote tallies. This letter expresses a concern about Broadridge’s decision to not disclose interim voting tallies to shareholder proponents. Learn more in this Gibson Dunn blog – and this 4-minute video explains generally what this issue is all about…
Here’s a 2-minute video showing the 20 great ways that Western Union enhances the usability of its 2014 proxy statement (with assistance from DG3):
This Wednesday! Join Dave Lynn & Meredith Cross for this last minute webcast – “Conflict Minerals: Tackling Your 1st Form SD” – as folks are scrambling to figure out how to best fill out their first Form SD…
We continue to post new items regularly on our “Proxy Season 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:
– ISS Study Examines Voting In Europe
– Declassified Boards: Updated Shareholder Rights Project’s Results
– Shareholder Proposals: The Latest Stats
– ISS Releases 2013 Review of ESG Proposals
– Vanguard Sends Tailored Letters to 350 Companies
– Shareholder Proposals: Largest Companies Get More Than Fair Share
– Delaware: 10% Shareholder Requesting Shareholder Meeting – Who Has Burden of Persuasion?
Use of video is growing like mad – and I believe the use of video in SEC filings will explode over the next decade as a disclosure tool. I’ve been surprised how many practitioners don’t realize that the SEC dealt with the issue of how to file video – and other forms of multimedia – on EDGAR nearly 20 years ago. Since EDGAR can’t directly accommodate multimedia, it’s a workaround solution – but the guidance does exist. In this 90-second video, I explain how multimedia can be filed on the SEC’s EDGAR as part of a SEC filing.
How Do You Make a SEC Filing That Has QR Codes?
A while back, I posted this podcast on how QR codes can be leveraged for shareholder communications. As noted during the podcast, QR codes have been used already in glossy annual reports and proxy statements – typically on the back cover (see an example in this video). A member asked how one goes about filing something with the SEC if it has a QR code? Here’s my ten cents:
When used, QR codes should be included in the glossy part of the annual report – not the part incorporated into the Form 10-K, so the QR code is “furnished,” not “filed” – to avoid the problems associated with Rules 106 (ie. Edgar submissions shouldn’t contain executable code unless only in PDFs) and 304 of Regulation S-T (ie. need to provide fair and accurate narrative description of any graphic or image when filed).
Preliminary Proxy Statements: Corp Fins Gives More Foreign Issuer Relief!
For the second time, Corp Fin has issued interpretative guidance under Rule 14a-6 based on foreign law. In this letter, Corp Fin states that Aon – and any other issuers organized in England and Wales – may file a definitive proxy statement without filing a preliminary proxy statement for certain matters subject to an annual stockholder vote under the laws of England and Wales. The first of these letters went out a few months ago relating to the laws of Curacao…
I just posted these recent survey results on D&O Questionnaires and director independence:
1. Regarding the level of information that we request from directors in connection with their professional and personal affiliations (excluding immediate family member information):
– We ask each director to submit a list (at least annually) of their professional and personal affiliations – 43%
– We do not request a list of their affiliations, but ask specific questions related to the NYSE/SEC independence rules and have them confirm that there are no related issues – 50%
– Other – 5%
2. Regarding the level of information that we request from directors for their immediate family members:
– We ask each director to submit a list (at least annually) of their entire immediate family – 8%
– We ask each director to submit a list (at least annually) of their entire immediate family, including certain other information (such as the place of employment and/or job title) – 23%
– We define “immediate family members” and provide a list of the company’s subsidiaries and then ask each director to list any immediate family members doing business with these entities – 14%
– We define “immediate family members” and provide a list of the company’s subsidiaries and then ask each director to confirm that there are no related issues – 19%
– We do not request a list related to the immediate family members, but ask specific questions related to the NYSE/SEC independence rules and have them confirm that there are no related issues – 37%
– Other – 0%
3. Regarding the method(s) of due diligence review that we perform for director independence:
– We rely solely on each director to alert us to any potential independence issues – 28%
– We conduct a review (at least annually) of our accounts payable and receivable for ALL professional/personal affiliations (excluding immediate family member relationships) provided by our directors – 9%
– We conduct a review (at least annually) of our accounts payable and receivable for ALL transactions related to professional/personal affiliations and immediate family member relationships provided by our directors – 21%
– We conduct a review (at least annually) of our accounts payable and receivable for certain transactions related to professional/personal affiliations and/or immediate family member relationships; however, we only perform such a review of selected affiliations/relationships (i.e., we may not conduct a detailed review of certain relationships, such as that in connection with an immediate family member who is employed by Wal-Mart and not in an executive position) – 12%
– All – or some combination – of the above – 29%
We have posted the DealLawyers.com transcript for the recent webcast: “The SEC Staff on M&A.”
Evaluating Your Board Evaluation Practices
In this podcast, Sylvia Groves of Governance Studio explains how corporate secretaries can evaluate their board, committee & director evaluation practices – and identify opportunities for improvement, including:
– Why should the board conduct an evaluation?
– What are the common components of an evaluation?
– What are some of the best practices in board evaluations?
– How can directors’ concerns about discoverability and liability be addressed?
– How can corporate secretaries ensure that the evaluation being used is really adding value – and not just wasting their directors’ time?
– How can you get a copy of Governance Studio’s tool to evaluate your board evaluation practices?
