Monthly Archives: May 2014

May 30, 2014

Conflict Minerals: What Exhibit Number to Use for Reports?

With over 140 Form SDs now on file (and even two amendments), we continue to get a trickle of conflict minerals-related queries in our “Q&A Forum.” Here is one that Dave Lynn answered yesterday:

Question: “We have heard from our printer that we can’t file our Conflict Minerals Report as an exhibit to our Form SD as Exhibit 1.01 because Exhibit 1.01 is reserved XBRL filings. The printer suggests that we file the CMR as Exhibit 1.02. Have others experienced this problem?”

Dave: “Yes, this issue has just come up this week as companies try to file their first Form SD. It seems that most are following the printer’s advice and submitting the Conflict Minerals Report as Exhibit 1.02 to the Form SD.”

Personally, I wonder if anyone will ever read these things and care besides the compliance folks who draft them. My guess is only us, unless there is a scandal in years from now where the company or auditors falsify the report…

Cybersecurity: Securities Class Actions are Coming

Yesterday, the NY Times reported that ISS recommended against most of Target’s board “directly linking what it said was a lack of adequate oversight by the board to the extensive breach of customer data late last year.”

Meanwhile, this interesting blog by Doug Greene of Lane & Powell will scare you. It should. And the time to be thinking about cybersecurity liability due to deficient disclosures is now. Here’s an excerpt from the blog:

In this post, I’d like to focus on cybersecurity disclosure and the inevitable advent of securities class actions following cybersecurity breaches. In all but one instance (Heartland Payment Systems), cybersecurity breaches, even the largest, have not caused a stock drop big enough to trigger a securities class action. But there appears to be a growing consensus that stock drops are inevitable when the market better understands cybersecurity threats, the cost of breaches, and the impact of threats and breaches on companies’ business models. When the market is better able to analyze these matters, there will be stock drops. When there are stock drops, the plaintiffs’ bar will be there.

And when plaintiffs’ lawyers arrive, what will they find? They will find companies grappling with cybersecurity disclosure. Understandably, most of the discussion about cybersecurity disclosure focuses on the SEC’s October 13, 2011 “CF Disclosure Guidance: Topic No. 2” (“Guidance”) and the notorious failure of companies to disclose much about cybersecurity, which has resulted in a call for further SEC action by Senator Rockefeller and follow-up by the SEC, including an SEC Cybersecurity Roundtable on March 24, 2014. But, as the SEC noted in the Guidance, and Chair White reiterated in October 2013, the Guidance does not define companies’ disclosure obligations. Instead, disclosure is governed by the general duty not to mislead, along with more specific disclosure obligations that apply to specific types of required disclosures.

Indeed, plaintiffs’ lawyers will not even need to mention the Guidance to challenge statements allegedly made false or misleading by cybersecurity problems. Various types of statements – from statements about the company’s business operations (which could be imperiled by inadequate cybersecurity), to statements about the company’s financial metrics (which could be rendered false or misleading by lower revenues and higher costs associated with cybersecurity problems), to internal controls and related CEO and CFO certifications, to risk factors themselves (which could warn against risks that have already materialized) – could be subject to challenge in the wake of a cybersecurity breach.

Plaintiffs will allege that the challenged statements were misleading because they omitted facts about cybersecurity (whether or not subject to disclosure under the Guidance). In some cases, this allegation will require little more than coupling a statement with the omitted facts. In cybersecurity cases, plaintiffs will have greater ability to learn the omitted facts than in other cases, as a result of breach notification requirements, privacy litigation, and government scrutiny, to name a few avenues. The law, of course, requires more than simply coupling the statement and omitted facts; plaintiffs must explain in detail why the challenged statement was misleading, not just incomplete, and companies can defend the statement in the context of all of their disclosures. But in cybersecurity cases, plaintiffs will have more to work with than in many other types of cases.

Pleading scienter likely will be easier for plaintiffs as well. With increased emphasis on cybersecurity oversight at the senior officer (and board) level, a CEO or CFO will have difficulty (factually and in terms of good governance) suggesting that she or he didn’t know, at some level, about the omitted facts that made the challenged statements misleading. That doesn’t mean that companies won’t be able to contest scienter. Knowledge of omitted facts isn’t the test for scienter; the test is intent to mislead purchasers of securities. However, this important distinction is often overlooked in practice. Companies will also be able to argue that they didn’t disclose certain cybersecurity matters because, as the Guidance contemplates, some cybersecurity disclosures can compromise cybersecurity. This is a proper argument for a motion to dismiss, as an innocent inference under Tellabs, but it may feel too “factual” for some judges to credit at the motion to dismiss stage.

Understanding the NIST Cybersecurity Framework

In this podcast, Revelle Gwyn of Bradley Arant Boult Cummings addresses cybersecurity in the context of the recently issued NIST Framework – and the implications of the Framework for all companies, including:

– Can you explain the NIST Framework and how it is intended to be used?
– Why is it important for companies outside critical infrastructure industries to be aware of the Framework, and how its use and content evolves?
– Has there been discussion of cost containment or incentives to defray companies’ costs of implementing and adhering to the Framework?

– Broc Romanek

May 29, 2014

Fee-Shifting Bylaws: Delaware Might Change Statute In Wake of Court Decision

Recently, I blogged about how the Delaware Supreme Court decided that fee-shifting bylaws were permissible in ATP Tour v. Deutscher Tennis Bund (see these memos posted in the “Securities Litigation” Practice Area). Now Francis Pileggi of Eckert Seamans blogs this news:

A proposed new addition and amendments to the Delaware General Corporation Law would limit the impact of a recent Delaware Supreme Court decision in ATP Tours, Inc. v. Deutscher Tennis Bund,(No. 534, 2013, May 8, 2014), highlighted on these pages, regarding the ability of a corporation to provide in its bylaws for a stockholder to pay the legal fees of a suit against the corporation when the stockholder loses that suit. The intent of the new statute would be to restrict the ability of a corporation to include such a provision in its bylaws.

The public policy reasoning behind the proposed statute is that such a provision would chill the willingness of a stockholder to file claims in order to enforce the fiduciary duties of directors, especially a stockholder who might have only a modest holding of stock. Though I’m sure there are those who might see such a provision as a cure for what some regard as an excess number of stockholder suits, “throwing the baby out with the bathwater” would discourage inappropriately the function of meritorious stockholder suits as the only means to hold fiduciaries accountable for not fulfilling their fiduciary duties.

The proposed legislation is expected to be presented to the Delaware General Assembly for passage prior to the end of the current legislative session on June 30, with a proposed effective date of August 1, 2014.

Exclusive Forum Bylaws: Chart of Companies That Have Adopted Them

You must see this Sullivan & Cromwell memo that not only analyzes four non-Delaware cases in the wake of Boilermakers that have enforced exclusive forum bylaws in favor of the Delaware courts, but provides sample language (pg. 10) and provides a nifty chart of some of the companies that have adopted them (pgs. 13-28)…

Meanwhile, Keith Bishop of Allen Matkins blogs about how a Delaware court rules that Nevada law governs – but applies Delaware law.

SEC Approves Significant Amendments to FINRA Rules 5110 & 5121

As noted in this Latham & Watkins memo, the SEC recently approved FINRA’s amendments to Rules 5110 (the Corporate Financing Rule) and 5121 (the Conflict of Interest Rule) that should facilitate participating in public offerings by:

– Excluding from the Corporate Financing Rule’s definition of “participation or participating in a public offering” a FINRA member that acts exclusively as an “independent financial adviser”
– Excluding from the current lock-up restrictions of the Corporate Financing Rule certain securities acquired by a participating member (as defined in Rule 5110) as a result of an issuer reorganization or conversion to prevent dilution
– Limiting the Corporate Financing Rule’s affiliation disclosure requirements to apply only to relationships with “participating” members (rather than any FINRA members)
– Narrowing the scope of the definition of “control” in the Conflict of Interest Rule
– Expanding the circumstances under which participating members may receive termination fees and rights of first refusal
– Exempting from the Corporate Financing Rule’s filing requirements certain ETFs

May-June Issue: Deal Lawyers Print Newsletter

This May-June Issue of the Deal Lawyers print newsletter includes:

– Prospective Bidders: Will the Pershing Square/Valeant Accumulation of Allergan Lead to Regulatory Reform?
– Proposed Amendments to the Delaware General Corporation Law: Section 251(h) Mergers & More
– The Evolving Face of Deal Litigation
– Rural Metro: Potential Practice Implications Going Forward
– New Urgency for Corporate Inversion Transactions

If you’re not yet a subscriber, try a Half-Price for Rest of ’14 no-risk trial to get a non-blurred version of this issue on a complimentary basis.

– Broc Romanek

May 28, 2014

The SEC’s 80th Birthday: The Ice Cream Social Treatment

On June 5th, the 80th anniversary of the creation of the SEC will be celebrated with an ice cream social following the 15th Annual program hosted by the SEC Historical Society. The program is about “Corporate Governance in the New Century” and will be held from noon to 1:30 pm (and will also be webcast for those that can’t attend live). To attend live in person at the SEC’s DC HQ, RSVPs are due by this Friday, May 30th to

Given the grander – but also expensive – celebrations of SEC milestones in the past (loved the 60th anniversary celebration at the National Building Museum; skipped the 75th at the same location due to a high price tag of $250), I’m both grateful and curious that the SEC’s 80th will be celebrated with an ice cream social. Sign of the times, perhaps both in terms of budget and the SEC’s stature? For the 100th, maybe it’s gonna be a slow clap

Will the SEC Breathe Life Into The Defunct Resource Extraction Rules?

Here’s news from this blog by Davis Polk’s Ning Chiu:

While the battle over the SEC’s conflict minerals reporting rules have been the subject of much attention, less focus has fallen on the SEC’s defunct resource extraction rules. Since those rules were struck down in July 2013 as we previously discussed, the SEC has made no attempt, at least known publicly, to promulgate revised rulemaking in compliance with the Dodd-Frank statutory mandate.

While that may appear to be an ideal situation in some sense for companies, recently, Exxon Mobil and Royal Dutch Shell sent a letter to Chair White urging the SEC to provide some indication of the “probable direction” of SEC rulemaking.

As the letter explains, the companies are facing similar requirements under EU Accounting & Transparency Directives, which must be implemented by legislation adopted individually in each EU Member State by June 2015. The Directives would compel companies in the extraction industry to disclose payments totaling more than €100,000 that they have made to governments on a per-country and per-project basis, which resembles the requirements under Section 1504 of the Dodd-Frank Act that companies engaged in the commercial development of oil, natural gas or other minerals disclose the type and total amount of payments made, if over $100,000, to a foreign government or the U.S. federal government for each project and each government in order to further the commercial development of oil, natural gas or minerals.

The U.K. has publicly committed to be the first to implement the Directives, and has already issued draft legislation for public comment with the goal of adopting by October 2014. The two companies believe that if the SEC were willing to consider proposing new rules before this timeframe, the U.K. government could take the SEC approach into account in its own initiatives or defer implementation until 2015. Since the U.K. will be the first EU Member State to implement the Directives, it would set a precedent for other member states. The companies note that this would be important for purposes of “equivalency” between the EU and U.S. reporting requirements, which they deem critical in order to avoid an outcome under which multinational companies are required to file multiple reports in different jurisdictions providing essentially the same information but in different forms. They suggest that “an ideal solution” may be that compliance with reporting rules in one country would suffice for other countries. The letter urges the SEC to work toward publishing proposed rules in 2014.

Disclosure Reform: Separate Financials for Acquired Companies, Investees & Guarantors

Here’s some good info in this blog by Morgan Lewis’ Linda Griggs & Sean Donahue about the SEC’s review of the rules requiring separate financial statements or separate financial information under certain circumstances for acquired companies, investees, and guarantors as part of its disclosure reform project. In addition, as noted in FEI blog and Morgan Lewis blog, Chair White recently gave a speech indicating that the audit committee report was being evaluated for change…

For simplicity’s sake, I will continue to call Corp Fin’s project “disclosure reform” – rather than the new moniker assigned to it: “disclosure effectiveness.” It’s just much easier to say…

– Broc Romanek

May 27, 2014

House Committee Passes Slew of JOBS Act-Related Bills

As noted in this blog by Morrison & Foerster’s Anna Pinedo, the House Financial Services Committee recently passed these 9 different bills designed to promote capital formation (also see this blog about flailing US market competitiveness):

– HR 4200, the Small Business Investment Companies (SBICs) Advisers Relief Act, introduced by Rep. Blaine Luetkemeyer (R-MO). The bill was approved 56-0.

– H.R. 4200 amends the Investment Advisers Act of 1940 to reduce unnecessary regulatory costs and eliminate duplicative regulation of advisers to SBICs. Eliminating duplicative regulation will allow the private equity fund money that currently goes to pay for regulatory compliance and fees to flow directly to job-creating small businesses.

– H.R. 4554, the Restricted Securities Relief Act, introduced by Rep. Mick Mulvaney (R-SC). The bill was approved 29-28. H.R. 4554 would streamline the process for reselling restricted securities to the public under a Securities and Exchange Commission (SEC) rule in order to increase liquidity in the private securities markets and the availability of capital for small companies and to reduce its cost. By reducing the regulatory burdens surrounding the offering and resale of private securities offerings by small issuers, this bill will help enhance the liquidity in this space, making it easier for issuers to access capital.

– H.R. 4568 would simplify the SEC registration form for new securities offerings. Simplifying this disclosure regime will lower compliance costs associated with filing redundant paperwork, allowing eligible companies to direct more resources to growing their business.

– H.R. 4571, the Encouraging Employee Ownership Act of 2014, introduced by Rep. Randy Hultgren (R-IL). The bill was approved 36-23. H.R. 4571 modernizes SEC Rule 701, which was last updated in 1996. Updating this rule gives private companies more flexibility to reward employees with a company’s securities and thereby retain valuable employees without having to use other methods to compensate them, such as borrowing money or selling securities.

– H.R. 4569, the Disclosure Modernization and Simplification Act, introduced by Rep. Scott Garrett (R-NJ). The bill was approved 59-0. H.R. 4569 would direct the SEC to simplify its disclosure regime for issuers and help investors more easily navigate very lengthy and cumbersome public company disclosures. Permitting issuers to submit a summary page would enable companies to concisely disclose pertinent information to investors without exposing them to liability. This summary page would also enable investors to more easily access the most relevant information about a company.

– H.R. 4570, the Private Placement Improvement Act, introduced by Rep. Garrett. The bill was approved 31-28.

– H.R. 4570 would amend the Federal securities laws to ensure that small businesses do not face complicated and unnecessary regulatory burdens when attempting to raise capital through private securities offerings issued under SEC Regulation D.

– H.R. 4565, the Startup Capital Modernization Act of 2014, introduced by Rep. Patrick McHenry (R-NC). The bill was approved 31-28. H.R. 4565 would make it easier for issuers to take advantage of registration exemptions under SEC Regulation A to increase capital formation to grow the economy and create jobs.

Also note this Mofo blog summarizing recent remarks by Corp Fin’s Small Business Policy Chief Sebastian Gomez Abero…

Conflict Minerals: More Form SDs Filed

Since I blogged last Thursday about the 3rd & 4th Form SD being filed, these new ones have been filed:

Himax Technologies
Unisys Corp.
Smith & Nephew PLC
FMC Corp.
Royal Dutch Shell
Eltek LTD
Hill-Rom Holdings

SCOTUS: Awaiting the Halliburton v. Erica P. John Fund Decision

As we await the important fraud standard decision of Halliburton v. Erica P. John Fund from the Supreme Court – expected any day now – check out this Reuters article entitled “Behind major US case against shareholder suits, a tale of two professors.” Here’s an excerpt from the opening:

For two months last summer, Stanford Law School professor Joseph Grundfest locked himself away in his home office in California’s Portola Valley. Grundfest’s house overlooks the Santa Cruz Mountains, but his attention was fixed on the piles of paper – mostly U.S. Supreme Court opinions and Congressional reports from the 1930s – stacked on his desk and the surrounding floor. Grundfest researched and wrote for weeks with monastic obsessiveness, speaking to hardly anyone but his research assistants and his wife, who made sure he was eating.

When he emerged in August, Grundfest – an influential former Commissioner at the U.S. Securities and Exchange Commission who now sits on the board of the private equity firm KKR & Co – had in hand a 78-page paper larded with more than 400 footnotes. His aim was nothing less than to destroy securities fraud class action lawsuits by shareholders, which have been the bane of many businesses in the U.S. since the Supreme Court endorsed the cases 26 years ago.

Grundfest sent the draft around to several other law professors, including the University of Michigan’s Adam Pritchard, another favorite of pro-business groups. Pritchard read Grundfest’s paper with a sense of familiarity: Five years earlier, in a study for the Cato Institute, he had pinpointed the same obscure provision of a 1934 securities law as the means to curtail big settlements in securities fraud class actions. He sent Grundfest an email: “I see you’ve put a new twist on things.”

– Broc Romanek

May 23, 2014

Study: Mutual Funds Voting Less Frequently With Management

Here’s food for thought as we await SEC action on the proxy advisor piece of the outstanding proxy plumbing project. This new study by Professors Aggarwal, Erel & Starks entitled “Influence of Public Opinion on Investor Voting & Proxy Advisors” finds that mutual funds voted with management only 54% of the time in 2010 – down from 74% in 2006. The other big finding is that mutual funds are also becoming more independent from ISS recommendations – dropping from a 78% rate in 2006 down to 59% in 2010.

Landmark FCPA Ruling Defining the Term “Instrumentality”

Here’s news from this Morrison & Foerster memo (there are many memos in our “FCPA” Practice Area):

Federal appellate court decisions interpreting the Foreign Corrupt Practices Act (FCPA) are rare. Very rare. Indeed, in the statute’s 36-year history there have been barely more than a handful of appellate court decisions analyzing the meaning of the different provisions of this complex statute with which multinational corporations and scores of business executives must grapple on a daily basis. On Friday, May 16, 2014, the Eleventh Circuit Court of Appeals issued a landmark ruling addressing for the first time the definition of the term “instrumentality” as it appears in the FCPA. That case, captioned United States v. Joel Esquenazi and Carlos Rodriguez, affirmed the convictions and sentences of both defendants, and in so doing, upheld the longest sentence in the FCPA’s history, Esquenazi’s 15-year sentence.

The Department of Justice and the Securities and Exchange Commission understandably view this decision as validating their broad interpretation of who qualifies as a “foreign official” under the FCPA. At a compliance conference held just after the release of this decision, the heads of the FCPA Units at both the DOJ and SEC, Patrick Stokes and Kara Brockmeyer, respectively, described the ruling as an “important,” “seminal” decision on a critical issue and said that they drew comfort from the appellate court embracing the DOJ and SEC’s approach to this issue.

While this is the first time an appellate court has defined the term “instrumentality,” companies hoping for additional clarity through the creation of either a bright-line rule or a clearly defined test will be disappointed, as the Esquenazi court embraced the non-exhaustive multi-factor test endorsed by the government and adopted by a number of district courts that faced the same issue.

PCAOB Staff Guidance: Economic Analysis in Standard-Setting

Recently, the PCAOB issued this Staff Guidance that outlines how it will conduct economic analysis in its standard-setting. The guidance sets forth 4 elements of economic analysis: describing the need for a rule; developing a baseline for measuring the effects of a rule; considering reasonable alternatives to the rule; and analyzing the economic impacts of the rule (and alternatives to the rule), including the benefits and costs. The PCAOB follows the SEC and other federal agencies who have publicly issued this type of guidance in the wake of the proxy access court decision that led us down this path…

– Broc Romanek

May 22, 2014

Conflict Minerals: Share Your Wealth (of Knowledge)

As we careen towards the June 2nd deadline for filing Form SDs, I’ll probably be blogging more about conflict minerals than I care to. But it’s the topic of the day. Here are three new items:

1. Share Guidance You Receive from Corp Fin – If you have an interpretive question for Corp Fin and receive a response, please share it with me. I will then share it on this site without naming you and your company. At this point, I don’t believe that Corp Fin will issue more interpretive guidance – so if you receive any guidance on a one-to-one basis, please share it with me in case that may useful to others.

2. Two More Form SDs Filed – The third & fourth Form SDs have been filed: Intel has filed a great one – and here’s this one by CAE Inc. Thanks to Intelligize for the heads up!

3. Companies Still Struggling with Supply Chain – This WSJ article entitled “Companies Unearth Few Answers on ‘Conflict Minerals’” indicates that many companies have spent years trying to determine if their suppliers use conflict minerals but still don’t know…

Proxy Season Trivia: It’s Peak Day for Annual Shareholder Meetings!

ISS informs us that today is the apex of the proxy season, with 237 companies scheduled to hold their annual shareholder meetings. The next biggest days for annual meetings are May 21 (197 meetings), May 20 (165), May 15 (157), May 13 (143)…

Thanks for the Gumball Mickey – Corp Fin Alumni: ’90s (Vol. 1)

Here’s the first installment of SEC alumni who have participated in one of my Gumball videos:

– Broc Romanek

May 21, 2014

Cap’n Cashbags: Recruiting Bill Clinton to Serve on Comp Committee

In this 20-second video, Cap’n Cashbags – a CEO – tries to recruit former President Bill Clinton, who would then serve on his company’s compensation committee – a subset of the board who sets his pay:

NYSE Withdraws Proposal to Relax Director Independence Requirements in Spin-Offs

Last month, I blogged that the NYSE has proposed to relax its bright line director independence tests in spin-offs. Weil Gotshal now reports: “Recently, however, the NYSE removed from its website the proposed rule filing for the change, and the NYSE has advised us that the proposal is no longer active. Additionally, the NYSE advised that it is not certain what, if any, rule filing on the subject may be proposed in the future.”

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 Chart: Exclusion Basis Breakdown
– Shareholder Engagement Codes: A Critique
– Uniform Sustainability Reporting: Ceres Leads Global Stock Exchance Campaign
– Does the Oath of Inspector Need to Be Notarized?
– Shareholder Proposals: Investor Backlash Against Litigation

– Broc Romanek

May 20, 2014

Should the General Counsel Also Serve as the Corporate Secretary?

Recently, I blogged about “No, GCs Should Not Be on the Board” and heard from many members in response. One response was from Zix Corp’s Jim Brashear who noted this recap of a recent Lead Directors Network meeting, highlighting this section that jumped out at him:

There were differing views in the meeting about whether GCs should also be the corporate secretary. Several GCs said that it was important for the GC to serve as corporate secretary: “Without that role, there’s a disconnect between the general counsel and the board,” one GC said. GCs agreed that if another individual was corporate secretary, even if they reported to the GC, that person would naturally spend more time with board directors than the GC.

However, other GCs noted the benefits of separating the two roles. At the meeting, a GC who is not corporate secretary said that the corporate secretary role “is very substantive and demanding if done properly. When someone else handles those responsibilities, it frees me up to be a better member of management.”

Jim gave his ten cents as follows: “I’ve been in situations where I have acted in different roles, such as corporate secretary but without the title; corporate secretary but with a separate GC; and both corporate secretary and GC. The GC should have plenty of engagement with the directors on legal issues even without having the corporate secretary role. The GC should be in the boardroom in that capacity, except during executive sessions. Same with the corporate secretary. It should not be a choose-one-or-the-other decision.

I completely agree with the quote about the corporate secretary role being substantive and it’s quite demanding if done properly. If the GC does not have the expertise to be the chief governance officer and someone else in the organization does, then the GC should not have the title or perform the function. Did you know that there are some highly esteemed folks that serve in the corporate secretary role who are not invited to their board meetings and must draft minutes using someone else’s notes, usually the GC’s? Crazy.

Whether the job should be split also depends in part on: size of the legal department, level of specialization within it and demands of the GC’s other roles in the organization (e.g., Chief Administration Officer, Chief Legal Officer, Chief Compliance Officer, Chief Privacy Officer).”

Webcast: “Big Changes Afoot: How to Handle a SEC Enforcement Inquiry Now”

Tune in tomorrow for the webcast – “Big Changes Afoot: How to Handle a SEC Enforcement Inquiry Now” – to hear Dixie Johnson of King & Spalding; Randall Lee of WilmerHale and Tom Newkirk of Jenner & Block get us up to speed on the latest about the SEC’s Enforcement Division and provide practice pointers on what approaches work for many different types of investigations that exist today. This is a hot topic. Just yesterday, SEC Chair White delivered this speech entitled “Three Key Pressure Points in the Current Enforcement Environment”…

Poll: Should the General Counsel Also Serve as the Corporate Secretary?

Please participate in this anonymous poll:

web survey

– Broc Romanek

May 19, 2014

Where Did “Form 10-K” Get That “10” & “K” From Anyways?

As the proxy season ends for many, it’s time to unwind with some trivial pursuit in the “securities law” category. The full answer is probably lost to the bins of history, but a member recently asked the question in our “Q&A Forum” (#7837) about where do the “10” and “K” come from in “Form 10-K,” comparing the logic of the “Q” in “Form 10-Q”? Here is Dave’s answer:

Form 10-K was adopted shortly after the creation of the SEC in 1934. Form 10-Q was adopted many, many years after that in Release 34-9004 (October 28, 1970). When Form 10-Q was adopted, the SEC rescinded Form 9-K, which had required semi-annual reports. I think what happened is the SEC had adopted many reports with a “K” designation over the years, and then moved away from that with 10-Q and some other more recent vintage forms.

When to Register Under the ’34 Act? The Messy Test for # of Shareholders

As noted in this Conglomerate Blog, the Section 12(g) registration test continues to be a topic that is debated. It reminded me of this Keith Bishop blog about how messy the threshold is. And it also reminds me of this note from a member back when Congress was fast-tracking the JOBS Act without any analysis:

500, 1,000, 2,000 – pick a number, any number. I note that the 1964 Special Study conducted a comprehensive survey of companies that traded in the OTC market to support developing (1) what the measure should be and (2) what the threshold under that measure should be. And actually, based on the data, the Study recommended a threshold of 300 holders. Now maybe someone in Congress today could actually develop a basis for their figure, but that would be asking way too much. I think we need a new measure, but Congress seems hell-bent on # of holders. Oh well – lost opportunity.

History Lesson: ’34 Act Reporting Requirements

A member responded to my recent history blog by providing me some background on the Section 12 reporting requirements. This provides some background to my statement: “I just found a reference that only exchange-listed companies in the early ’60s had to file 10-Ks with SEC.” Here’s today’s history lesson:

– Section 12(g) didn’t exist prior to 1964, it was added to the ’34 Act in 1964 by Section 3(c) of the Securities Acts Amendments of 1964.
– The purpose was to bring OTC securities into the ’34 Act reporting regime and put them on same footing as exchange-listed securities.
– A report of the House Committee on Interstate and Foreign Commerce accompanying H.R. 6793, the version of the bill introduced in the House, stated that “Section 3(c) of the bill would .. . provide for registration of securities traded in the over- the-counter market and for disclosure by issuers thereof comparable to the registration and disclosures required in connection with listed securities.”
– A 1981 SEC release cited a report on its study that led to the 1964 Amendments, describing the scope of the registration and reporting provisions of Exchange Act as extending “to all issuers presumed to be the subject of active investor interest in the over-the-counter market.”
– A 1986 SEC release stated that the numerical thresholds contained in Section 12(g) were selected because it was believed “that issuers in these categories had sufficiently active trading markets and public interest and consequently were in need of mandatory disclosure to ensure the protection of investors.”

– Broc Romanek

May 16, 2014

Talk About Board Diversity! An Artificial Intelligence Director!

Danger, Will Robinson! I’ve heard of appointing someone who’s a “tool” or an “empty suit” to a board, but this takes the cake. Recently, I received an email entitled “Venture Capital Appoints Artificial Intelligence to Board,” with a press release that says:

Deep Knowledge Ventures announced today that it formally acknowledges the AI software known as VITAL (Validating Investment Tool for Advancing Life Sciences), an algorithm software focused on a subset of companies in the Regenerative Medical sector, as an equal member of its Board of Directors. VITAL was created by the Moscow Center for Biogerontology and Regenerative Medicine (CBRM) and is licensed by Aging Analytics. DKV considers VITAL such a crucial instrument for investment decision-making, that it has given it a seat at the table.

The press release doesn’t explain how the AI director would handle its fiduciary duties nor how this new director might be compensated. Just kidding. As I understand it, the headline is merely being cute and the “robot” is not actually on the board. Still, it’s bizarre (eg. why does the board need access to AI – shouldn’t management use it and then just report its results to the board?). Although anything is possible these days given the Citizens United’s “corporation as a person” decision. On the other hand, maybe an all-robotic board would solve some of the issues wrought by our existing governance framework…

Transcript: “Latest Developments in IPOs & Capital Raising”

I have posted the transcript for our recent webcast: “Latest Developments in IPOs & Capital Raising.”

Yesterday, the SEC announced that Chief Accountant Paul Beswick is leaving the agency to return to the private sector.

Poll: Your Opinion of an AI Director?

Which of the following best characterizes your reaction to a robot director:

survey software

– Broc Romanek