TheCorporateCounsel.net

Monthly Archives: October 2014

October 3, 2014

Audit Committee Transparency Continues to Trend Upward

Continuing a several year trend, this EY report shows that an increasing number of Fortune 100 companies are providing non-required and increasingly robust disclosure in their proxy statements about their audit committees and audit committee oversight practices.

The report, the latest in a several year series, notes that increased transparency is being driven by a number of factors and constituencies in the interest of – among other objectives – enhancing investor confidence in audit committee oversight work; improving communication with investors about audit committee responsibilities (including external auditor oversight); and better informing shareholders in their consideration of auditor ratification proposals.

Among the highlighted dislosure practices are:

– Centralization of audit committee-related disclosures in an “audit-related” section of the proxy statement or the audit committee report

– Improved accessibility of the audit committee charter via a direct link

– Increased transparency about external auditor oversight practices, for example:

 Auditor selection

  • 46% of companies explicitly state their belief that their selection of the external auditor is in the best interest of the company and/or shareholders, up from 4% in 2012
  • 44% of companies disclosed that the audit committee was involved in the selection of the audit firm’s lead engagement partner – compared to 1% in 2012
  • 31% of companies explained the rationale for appointing their auditor, including the factors used in assessing the auditor’s quality and qualifications, compared to 16% in 2012

    

Approval of engagement fees and terms

  • 80% of companies noted that they consider non-audit services and fees when assessing the independence of the external auditor.
  • 19% of companies disclosed that the audit committee was involved in the auditor’s fee negotiations, up from just 1% in 2012

    

Auditor Tenure

  • Auditor tenure was disclosed by 50% of companies – up from 26% in 2012
  • 28% of companies disclosed that the audit committee considers what the impact would be of rotating their auditor – up from 3% in 2012

A table on page 3 of the report shows three-year comparisons for these and additional audit committee-related disclosures.

Prior year reports and additional resources about audit committee disclosure are available in our “Audit Committees” Practice Area.

Podcast: Audit Committee Disclosure

In this podcast, Allie Rutherford discusses audit committee disclosure trends based on EY’s review of 2014 Fortune 100 proxy statements, including:

 

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:

– PSLRA: Ineffective Motions to Dismiss
– Top Ten List of D&O Coverage Questions for Directors
– Bylaws Mandatory Arbitration Clauses Gaining Ground
– Survey: Board Tenure & Governance
– Weighing Pros & Cons of a Dual-Class Structure

 

– by Randi Val Morrison

October 2, 2014

Wayward Whistleblowers

Call me naive, but I was surprised and disappointed to read in this blog that, not only had a dispute arisen among three “joint” whistleblowers about splitting the proceeds of an SEC whistleblower award, but that the dispute among two of the three has now manifested itself in the form of litigation.

As noted, the complaint alleges that three people jointly developed information about a fraud committed in conjunction with an investment scheme. As the story goes, they initially planned to apply for a whistleblower award with the SEC on behalf of an entity in which they all had an interest. However, upon learning that the SEC rules require whistleblower award applications be submitted by individuals (not companies or other entities), they allegedly agreed that one of them (the defendant) would submit the application in his name, with the understanding that – upon receipt of any whistleblower award – all three would share in the proceeds.

To make a long story short, the SEC granted a $14.7 million award, which the defendant then refused to share with the other joint whistleblowers. The defendant allegedly settled with one of the two other whistleblowers, and the other then filed this suit.  In response, the defendant filed this motion for a more definite statement or dismissal, which indicates:

“Plaintiff’s Complaint is an unintelligible assortment of confusing statements. While ostensibly bringing a claim for breach of contract, Plaintiff dedicates his complaint to unrelated allegations. The claims sounds like the claims of co-workers who are trying to claim a portion of a co-workers lottery winnings because they work together.”

What next?  Particularly given this litigation; the recent, very arguably excessive $30 million award to a foreign whistleblower; and my own in-house experience (wherein whistleblowers played a memorable role), I am inclined to believe that the UK’s assessment and rejection of the US whistleblower bounty scheme, which I blogged about previously, has some merit.

See also this recent Speechly Bircham memo about the SEC’s $30 million award, and the UK’s contrasting approach.

What Does It Take to Incentivize a Whistleblower?

As noted in this Venable alert, now outgoing Attorney General Eric Holder is seeking an increase to the $1.6 million cap on whistleblower awards available for financial fraud under FIRREA (Financial Institutions Reform, Recovery and Enforcement Act) – akin to those available under the False Claims Act (i.e., 25-30% of the amount the government recovers). FIRREA was rarely used until the aftermath of the 2008 financial crisis, when it was used for recent, significant actions against, e.g., JP Morgan, Citigroup and Bank of America.

Holder apparently believes that the $1.6 million cap isn’t sufficient to incentivize would-be whistleblowers to come forward – thereby tempering the DOJ’s ability to learn about, investigate and stop misconduct before it evolves into a crisis. It’s difficult to know whether that’s the case given FIRREA’s historically low profile (and, accordingly, perhaps, low level of awareness), and the fact that, according to this WSJ article, there have been no known whisteblower awards to date made under FIRREA.

The article notes this reaction by former DOJ lawyer Andrew Schilling to the suggested increase:

Mr. Schilling said the attorney general’s proposal “raises the question whether the Firrea bounties are too low or whether those others [e.g., False Claims Act, Dodd-Frank Act] are too high. A lot of people would say you don’t need a $500 million reward to incentivize someone to come forward. You’d have to worry about the credibility of a whistleblower who would come forward only if they’re offered $50 million.”

As the WSJ article indicates, senior DOJ officials Marshall Miller and Leslie Caldwell also made notable speeches the same day as Attorney General Holder’s (but to different lawyer audiences) encouraging whistleblowing on white-collar crime. See also this DealBook post, which addresses the DOJ’s focus in these speeches on pursuing individual – not just corporate – culpability.

Transcript: “Cybersecurity Role-Play: What to Do & Who Does What, When”

We have posted the transcript for the recent webcast: “Cybersecurity Role-Play: What to Do & Who Does What, When.”

 

– by Randi Val Morrison

October 1, 2014

Coca-Cola’s New “Equity Stewardship Guidelines”

Back in May, I blogged about a flap over Coca-Cola’s equity compensation plan. Showing how shareholder engagement works, the company announced this morning that its Compensation Committee has adopted “Equity Stewardship Guidelines” for the company’s equity plan.

Perhaps just as interesting is that the Compensation Committee Chair pushed out a blog on the company’s “Unbottled” blog about the announcement.

This looks to be a pretty innovative approach to explaining how shares under the equity plan will be used responsibly, while addressing the criticism about the plan. In addition to including a burn rate commitment that is expected to make the plan last its full term of 10 years, the Guidelines provide that Coca-Cola will include information on actual dilution, burn rate and overhang in their proxy statement each year. Plus they will continue to minimize dilution through share repurchases and encourage an open dialogue with shareholders about compensation. I look forward to seeing what they do in their next proxy statement…

All of the video archives from our two days of executive pay conferences are now posted…

Bad Actors: SEC Grants Waivers to Citigroup

In this WSJ article, Andrew Ackerman writes about these Citigroup “bad actor” waivers (here’s the 2nd one):

U.S. securities regulators quietly granted Citigroup waivers from restrictions that would have crimped a range of the bank’s activities, including selling investments in hedge funds to individuals, following a recent securities-fraud settlement. The Securities and Exchange Commission, which in August completed a $285 million settlement with Citigroup over allegations related to complex debt instruments, granted the waivers late Friday.

The relief allows Citigroup to resume selling investments in hedge funds and private-equity funds to wealthy clients. The bank also retains its special status as a “well-known seasoned issuer,” or WKSI, which allows large companies to quickly issue stocks or bonds without the speed bump of an SEC review of their offerings. Kara Stein, a Democratic commissioner, dissented on granting Citigroup the expedited filing status, according to a person familiar with the matter.

Citigroup became subject to new restrictions in August, after a federal judge approved the SEC’s 2011 settlement with Citigroup over the sale of certain collateralized debt obligations to clients in late 2006 and early 2007. Under the SEC’s bad actor rule, parties with a “a relevant criminal conviction, regulatory or court order, or other disqualifying event” are restricted from participating in a private offering. The rule, adopted last year, is part of the 2010 Dodd-Frank regulatory overhaul.

Citigroup told clients in August it was working with the SEC to resolve the restrictions over the bank’s sale of hedge funds. The five-member SEC unanimously granted Citigroup its request for a waiver to resume selling so-called private fund investments, accepting the bank’s arguments that its $285 million settlement didn’t involve intentional misconduct or a large number of employees. The SEC grants waivers to let firms conduct normal business, as long as the waiver is seen as being in the public’s interest. The SEC also allowed Citigroup to retain its “WSKI” status, removing a restriction that applied to the bank given the SEC’s finding that Citigroup violated antifraud provisions of U.S. securities laws. Firms found to have violated those laws typically have their special status revoked for three years but are granted the option of appealing the decision.

The agency was divided that waiver, however, with Ms. Stein dissenting. She has repeatedly argued the agency has been too lenient on the largest financial institutions and voted against providing a well-known seasoned issuer waiver for the Royal Bank of Scotland Group PLC earlier this year after the firm reached a $612 million settlement with U.S. and U.K. regulators over allegations that traders at the bank tried to rig interbank lending rates. “Our website is replete with waiver after waiver for the largest financial institutions,” Ms. Stein said at the time, warning the commission’s decision to overturn RBS’s disqualification “may have enshrined a new policy—that some firms are just too big to bar.”

As with the hedge-fund waiver, the SEC granted the expedited filing waiver because the bank’s misconduct was limited in scope and confined to a small group of employees, a person familiar with the matter said. The SEC and Citigroup reached a $285 million settlement in 2011, but U.S. District Judge Jed Rakoff rejected it, saying the terms were “pocket change to any entity as large as Citigroup.” On Aug. 5, following a reversal of that ruling by an appellate court, Judge Rakoff approved the settlement.

Our October Eminders is Posted!

We have posted the October issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!

– Broc Romanek