Monthly Archives: June 2015

June 16, 2015

Restatements: Frequency Steady & Severity Low (But Class Actions Increasing)

Here’s some thoughts from Baker & McKenzie’s Dan Goelzer: Recently, Audit Analytics released its annual report on financial restatement trends, “Financial Restatements 2014–A Fourteen Year Comparison.” The study concludes that the absolute number of restatements is constant and the severity of restatements is relatively low, although there is a trend toward more restatements by large public companies. According to the report synopsis and AA’s blog:

– During the last five years, the number of public company restatements has remained essentially flat. Restatements peaked at 1,842 in 2006. By 2009, restatements had fallen to 761. Restatements rose to 836 in 2010 and have remained near that number through 2014.
– While the overall number of restatements is relatively constant, the number of accelerated filers – the largest public companies – announcing restatements is rising. In 2009 and 2010, 171 accelerated filers restated. That number has increased each year since 2010. In 2014, 309 accelerated filers restated.
– The severity of restatements remained low in 2014, consistent with AA’s findings during the past several years. In 2014, the average public company restatement resulted in an income adjustment of $1.9 million, the lowest adjustment amount in eight years. In addition, AA’s blog states that “virtually all” of the severity indicators tracked by Audit Analytics remained low in 2014. The severity indicators are negative impact on net income; average cumulative impact on net income per restatement; percentage of restatements with no impact on income statement; average number of days restated; and average number of issues identified in restatement.

A somewhat different perspective emerges from a report released by Cornerstone Research. That report, entitled “Accounting Class Action Filings and Settlements—2014 Review and Analysis,” finds that securities class actions with accounting-related allegations increased in 2014; 69 new accounting cases were filed, an increase of 47 percent over 2013. (Cases are considered “accounting cases” if they involve allegations related to Generally Accepted Accounting Principles (GAAP) violations, auditing violations, or weaknesses in internal control over financial reporting.) Other highlights of the Cornerstone report include:

– More than one in four of the accounting class action complaints referred to an SEC inquiry or action. This is the highest level of private accounting suits that parallel SEC enforcement cases since Cornerstone began tracking this variable in 2010.
– Accounting cases involving restatements increased to the highest level in seven years – both in terms of the number of cases filed (29) and as a percentage of total accounting cases (42 percent).
– Since 2010, the majority of accounting cases have included allegations of internal control weaknesses. In 2014, 60 percent of cases filed involved internal control weaknesses.
– The “Disclosure Dollar Loss Index” for accounting cases involving restatements increased to its highest level since 2005. The Disclosure Dollar Loss Index is a measure of the decline in market capitalization at the end of the class period.

In Cornerstone’s press release, Dr. Elaine Harwood, a Cornerstone Research vice president and head of the firm’s accounting practice, offered this explanation for the increase in class action litigation alleging accounting violations: “The increase appears to be, at least in part, a result of the SEC’s heightened focus on accounting-related fraud as demonstrated by the substantial growth in accounting case filings that refer to inquiries or actions by the SEC.” As to the reasons why more class actions relating to restatements were filed in 2014, Dr. Laura Simmons, a Cornerstone Research senior advisor, observed: “The increase in filings of cases involving restatements is consistent with our finding of a relative increase in negative stock price movements surrounding restatement announcements in 2014 as compared to recent years.”

Comment: The Audit Analytics study is consistent with other research indicating that the reliability of financial reporting has increased post-Sarbanes-Oxley. However, as Cornerstone’s research indicates, market-moving restatements, while rarer than in earlier years, still can have severe consequences, both in terms of SEC action and private litigation.

Here’s a blog by Chevron’s Rick Hansen entitled “Audit Committees: 2015 Mid-Year Issues Update.”

IFRS: Reports of US Death Exaggerated?

A few months ago, I blogged an excerpt from an article that quoted the SEC’s Chief Accountant Jim Schnurr as saying that “there is virtually no support to have the SEC mandate IFRS for all registrants.” Now, a few weeks ago, Jim gave a speech in which he seemed to disagree that IFRS is dead in the US (as noted in this article). Here’s an excerpt from his speech:

As I mentioned publicly last month, the staff has recently heard from a number of different constituents about IFRS: preparers, investors, auditors, regulators and standard-setters. We heard three key themes through those discussions: There is virtually no support to have the SEC mandate IFRS for all registrants. There is little support for the SEC to provide an option allowing domestic registrants to prepare their financial statements under IFRS. There is continued support for the objective of a single set of high-quality, globally accepted accounting standards. So, while full-scale adoption or an option does not appear to have support, it does not mean we ‘bury’ the underlying objective of a single set of high-quality, globally accepted accounting standards. On the contrary, constituents continue to support that idea. So, the real questions are: what is the path to achieve that objective and how do we get there?

Delaware House Approves Curb on Fee-Shifting Bylaws

Here’s news from the Delaware Law Weekly (also see this memo):

The state House of Representatives on Thursday unanimously approved SB 75, the annual package of amendments to the Delaware General Corporation Law, which included a measure that would prevent stock corporations from enacting bylaws that impose attorney fees and costs on plaintiffs who lose after filing lawsuits alleging corporate waste or wrongdoing. The measure now goes to the desk of Gov. Jack Markell, who is expected to sign it into law.

“SB 75 helps preserve the balance between shareholders and management and ensures that shareholders in Delaware corporations have access to the Court of Chancery,” said Kelly Bachman, Markell’s press secretary. “The governor would like to thank the Corporation Law Council for its continued efforts to improve Delaware law and preserve Delaware’s place as the leading state of incorporation.”

Approval—which required a two-thirds vote—came on a 40-0 vote with one state representative absent.

Chief Deputy Secretary of State Richard J. Geisenberger came to the chamber before the vote to answer lawmakers’ questions and said its drafters were confident that the bill would maintain the delicate balance of Delaware’s franchise in corporate regulation, which he said is worth $1.1 billion annually to the First State. The state should aim, Geisenberger said, “to strike a balance between the attractiveness of our corporate statute to managers and [the needs of] raising capital from shareholders.”

He added that he did not think banning stock corporations from adopting fee-shifting bylaws posed a risk to Delaware’s attractiveness as a state of choice for incorporation. He stressed that another key provision of the act allows corporations to state in their bylaws that claims under the DGCL be brought only in the courts of Delaware.

– Broc Romanek

June 15, 2015

Corp Fin: “No Review” Status of Registration Statements Now Publicly Available

Recently, Corp Fin announced a new policy that the Staff will publicly release “no review” letters for registration statements that are not selected for review. These “no review” letters will be posted on Edgar in a company’s “correspondence” stream. A company and its advisors would already know about a registration statement not being selected for review – so this move really only benefits third parties who wanted to know.

Some folks want Corp Fin to issue “no review” letters for preliminary proxy statements since the existing practice is that companies can presume that no comments from Corp Fin are forthcoming if they don’t hear from the Staff within 10 calendar days of filing, per Rule 14a(6)(a). Learn more about this process in our “Preliminary Proxy Statements Handbook.”

On the other hand, most folks like the fact that the Staff is silent and doesn’t issue a “no comments” letter if its ’34 Act filings are reviewed and the Staff has no comments. In other words, it’s possible that your 10-K was reviewed but the Staff had no comments – but you wouldn’t know that since they never contacted you. Typically, the ’34 Act review is only of the company’s financials, conducted by Corp Fin’s accounting staff. This review is necessitated by Section 408 of Sarbanes-Oxley, which mandates that every company’s periodic disclosures must be reviewed at least once every 3 years.

The rationale for not wanting a “no comments” letter is that you don’t want the CFO and Controller’s office getting excited and thinking they are doing a great job because Corp Fin didn’t issue any comments. Better to keep them on their toes…

Court Finds SEC’s Use of ALJ Likely Unconstitutional

The debate over whether the SEC’s use of administrative law judges in enforcement proceedings has ratcheted up a few notches. Last week, in Hill v. SEC, the US District Court for the Northern District of Georgia preliminarily enjoined the SEC from conducting the administrative proceeding brought against an alleged insider trader, finding a substantial likelihood that he will succeed on the merits of his claim that the SEC has violated the Appointments Clause of Article II of the US Constitution.

As noted in this blog, the Appointments Clause requires that “inferior officers” be appointed by the President, department heads or courts of law. SEC administrative law judges are not appointed by the SEC – they are hired by the SEC’s Office of Administrative Law Judges, with input from the Chief Administrative Law Judge, human resource functions and the Office of Personnel Management. The Court looked to the powers of the administrative law judge which are functionally comparable to that of a judge in making its decision.

As noted in this blog, this WSJ article indicated that the SEC will likely resolve this issue by having the Commissioners appoint its ALJs directly. But in the meantime the court’s ruling could spur similar challenges to the validity of current and past SEC proceedings – but the US government is fighting this new decision.

Tomorrow’s Webcast: “Proxy Season Post-Mortem – The Latest Compensation Disclosures”

Tune in tomorrow for the webcast – “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear Ken Bertsch of CamberView, Alan Dye of Hogan Lovells, Dave Lynn of and Morrison & Foerster and Ron Mueller of Gibson Dunn analyze what was (and what was not) disclosed this proxy season.

– Broc Romanek

June 12, 2015

House Committee Seeks to Freeze the SEC’s Budget

The SEC truly is getting it from all sides these days. As noted in this article, the House Appropriations Committee marked up a bill yesterday that would hold the SEC’s funding flat for the next fiscal year. The “2016 Financial Services and General Government Appropriations” bill would provide $1.5 billion for the SEC in fiscal 2016, the same budget level the agency is operating on this year. That number is $222 million less than what the Obama administration requested. The bill provides funding toward information technology projects at the agency – but prohibits the SEC from spending money out of a reserve fund established by Dodd-Frank…

Proxy Access: 5 Law Firm Comment Letter

A few days ago, five law firms – which handle the bulk of the Rule 14a-8 work out there – submitted this comment letter to the SEC regarding the agency’s ongoing review of the shareholder proposal process for no-action requests made under Rule 14a-8(i)(9) (ie. conflicting proposals).

There are 5 comment letters posted so far – including this one that includes a blog that I posted from an anonymous member as an attachment. Finding these comment letters can be tricky since there is no proposed rule – they are housed under the Corp Fin page, then head to the “Current Topics” box on the right side and you will see a link to “Share Your Views” on the Staff review of conflicting shareholder proposals – which has a link to “submitted comments” at the bottom…

Here’s the latest status check into how proxy access shareholder proposals fared during this proxy season.

Non-Partisan SEC Commissioners: Seeking Transfer Agent Update

A lot of ink has been spilled lately about the politicization of the SEC. But yesterday’s joint statement from short-timer Commissioners Aguilar & Gallagher – which was followed by a joint statement of support from Commissioners Stein & Piwowar! – do show that sometimes Commissioners from different political parties do work together. The Commissioners seek an overhaul of the transfer agent regulatory framework since that hasn’t been done in 30 years.

It’s amazing to me how often that individual SEC Commissioners put out their own statements – including dissents – these days. I wonder if that practice will continue beyond this current group of Commissioners…

Meanwhile, this WSJ article entitled “The SEC’s Recruiting Problem: Its Former Officials” talks about how former SEC Commissioners & Staffers are warning candidates for the upcoming two Commissioner slots that the job is full of dysfunction and that even the vetting process can be quite a challenge. Even with that as a backdrop, I’m pretty confident that a number of qualified individuals would be more than happy to become a Commissioner…

– Broc Romanek

June 11, 2015

It’s (Past) Time to Focus on Social Media Compliance

The average Fortune 100 firm has a staggering 320+ social media accounts with over 200,000 followers and 1500 employee participants who make over 500,000 posts to these accounts. Proofpoint Nexgate’s latest “State of the Social Media Infrastructure” report presents these (and other) concerning results of its analysis of 32,000+ social media accounts of Fortune 100 companies:


– The average company suffered from a total of 69 unmoderated compliance incidents during the study’s 12 month research window.
– Nine different U.S. regulatory standards triggered incidents, including rules and regulations of the SEC (e.g., Reg. FD), FINRA, FTC, FDA and the UK’s FCA.
– Financial Services Standards violations dominate the field. However, improper disclosure of confidential corporate activity accounted for 118 standalone incidents (i.e., 150 additional incidents crossed categories) – consisting of information regarding layoffs and restructurings, earnings and financial updates and M&A transactions. Reg. FD violations accounted for an additional 149 incidents.
– There were over 900 “Regulated Data” incidents consisting of improper disclosure of user names/passwords, SSNs, credit card numbers, etc.

The report also offers recommendations for developing a successful social media compliance program – summarized by Compliance Week.

See also this WSJ article discussing the various state social media laws, this Corporate Compliance Insights post, and this new FTI/NYSE Law in the Boardroom survey, which found that social media ranks among the top three areas about which directors have the least amount of confidence in their GCs’ oversight. And 91% of directors and 79% of GCs affirmed that they don’t have a thorough understanding of their company’s social media risks.

Access additional resources in our “Social Media” and “Compliance Programs” Practice Areas.

When & How to Update Your Compliance Policies

This recent CEB (Corporate Executive Board) blog identifies the most important triggers, and provides a decision tree, for determining when to develop a new or update an existing policy.

CEB research found that the seven most important reasons for writing a new policy or updating an existing one are:

  1. New risk assessment results.
  2. Revision of the company’s code of conduct.
  3. New internal audit findings.
  4. Publicized failure in the same or similar industry.
  5. Shift in business strategy.
  6. Merger, acquisition, or other organizational change.
  7. Geographic expansion.

See the blog’s nifty decision tree, and this CEB Policy Management Toolkit on how to create and implement a policy on policies.

More on “The Mentor Blog”

We 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:

– Spencer Stuart Addresses Board “Refreshment”
– Avoiding & Managing Boardroom Disputes
– Using COSO to Assess & Manage Cyber Risks
– Form 10-K Preparation Tips
– How to Proactively Tackle the Director Tenure Issue


– by Randi Val Morrison

June 10, 2015

Myths & Facts About Female Directors

This recently published paper seeks to undermine six myths about board gender diversity. I say “seeks” only because the rebuttal to one of the myths – that concerning the cause of gender disparity in the boardroom – is premised on an assumption with which I disagree, i.e., there aren’t enough women at the top of the corporate ladder who are potential candidates for directorships.

Not only do I disagree that there aren’t enough women at the top such that board diversity could be measurably improved (at least in the U.S.), but I also and – more importantly – disagree with the assumption that being a qualified director candidate is dependent upon being at the top of the corporate ladder. However, that’s just my personal view, and certainly all of the myths and associated discrediting facts are worth consideration.

Six myths about boardroom gender diversity:

– Popular boardroom surveys provide an accurate picture of women’s relative underrepresentation.
– The financial crisis would not have happened if Lehman Brothers had been Lehman Sisters.
– Female directors are just like male directors.
– HR directors are to blame.
– Adding a woman to your board will improve shareholder value.
– Quotas are necessary to improve female board representation.

See this recently released NYSE Governance/Barker Gilmore survey,  which found that more than half of company director respondents believe having a GC serving as an independent director on an outside board adds value to the company, and this recent Fortune article identifying (based on a PwC survey) five ways boards may differ if they had more women directors.

Access heaps of helpful memos, surveys and other resources in our “Board Diversity Practice Area.”

Role of “Character” in Director Effectiveness

In this interesting new article, Ivey Business School Professors Seitjs, Gandz, and Crossan and Post-Doctoral Fellow Byrne elaborate on their previously published notion that being an effective board member requires competencies, character and committment by further exploring the aspect of character.

Based on meetings and surveys with over 780 directors and prospective directors, the paper discusses in detail the important – but too often ignored – attribute of character as represented by 11 character dimensions deemed to play a critical role in director effectiveness including judgment, integrity, accountability and others.  

Among other things, the survey results revealed that boards don’t spend enough time addressing or assessing the character of their director nominees, despite believing that character is very important. In that context, the article offers a number of tangible recommendations to aid the director search, evaluation and performance review processes.

We have heaps of helpful resources in our “Board Composition” Practice Area.

More on “The Mentor Blog”

We 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:

– Code of Ethics/Conduct Primer
– Audit Committee Role in Improving Disclosure
– CEO Succession Planning Guidance for CEOs & Boards
– Addressing Key Governance Challenges in International Markets
– Study: How Board Gender Impacts M&A Decision-Making


– by Randi Val Morrison

June 9, 2015

Study: Investors Concerned About Differential Reporting Requirements

A recently released CFA Institute study reveals significant investor concerns about current standard-setter initiatives (see FASB’s Private Company Council and Simplication Initiative) to create differential or reduced financial reporting requirements for nonpublic companies; extend certain alternative private company reporting requirements to public companies; and simplify certain public company reporting requirements. The proposed changes are purportedly driven by a desire to reduce companies’ compliance costs which, although certainly a laudable objective, presumably shouldn’t be pursued single-mindedly at the expense of impeding investors’ understanding and utility of companies’ financial performance and prospects.

The CFA Institute’s 2014 member survey found that:

– 82% of respondents believe differential standards will decrease comparability – so, create comparability challenges for those investing across public and private companies
– 73% believe differential standards will increase complexity rather than reduce it (by, e.g., prompting investors to seek alternate ways to obtain information including accessing management on a one-on-one basis; substantially raising the burdens and costs associated with going public or acquiring a private company)
– 65% believe differential standards will result in the loss of information useful to their financial analyses (e.g., reduced disaggregation of information; substituting presentation of items on the face of the financial statements by disclosure)

The report also notes that FASB is currently considering whether to extend certain private company accounting alternatives to public companies – a move favored by only 6% of CFA Institute members.

See CFA Institute’s Mohini Singh’s blog summarizing the study. For additional information, you may contact Mohini at

Identifying Opportunities for Nonprofit and For-Profit Boards to Learn From Each Other

In this Columbia Law School blog, Stanford Graduate School of Business Nicholas Donatiello, David Larcker and Brian Tayan discuss their  recently published paper, “What Can For-Profit and Nonprofit Boards Learn from Each Other About Improving Governance?“. The thought-worthy  paper focuses on lessons that for-profit and nonprofit directors can learn from each other to improve their respective governance (based in part on this recent nonprofit governance survey) including:

Lessons for Nonprofits:

– Formal governance processes
– Focus on fiduciary obligations
– Expertise and stability

Lessons for Corporate Boards:

– Balanced power with CEO
– CEO compensation
– Gender balance

Lessons for Both:

– Nonfinancial performance measurement
– CEO succession planning
– Racial diversity

More on “The Mentor Blog”

We 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:

– Vanguard Discloses Engagement/Voting Specifics
– FCPA Compliance: Third Party Diligence Framework
– Study: Investor Holding Periods Have Not Shrunk
– Germany Moves on Board Gender Diversity
– Should Directors Take a “Gap” Year?


– by Randi Val Morrison

June 8, 2015

Pay vs. Performance: Comparability vs. Reality

[Hi. It’s Randi blogging again this week so, to be clear, the views I express are my own and don’t necessarily reflect those of Broc or anyone else…] 

In the brief time since the SEC published the proposed Pay vs. Performance rule, there’s been a fair amount of criticism aimed at the proposal’s use of TSR as the sole “approved” metric by which investors will gauge the correlation between executive pay and corporate performance. In a perfect example of what one of my very seasoned and wise former board members during my GC days would likely characterize as the tail wagging the dog, investors’ desire for comparability across companies is trumping the proposal’s use of performance metrics that actually make sense given each company’s unique facts and circumstances and that drive behavior consistent with a long-term view.

In case you’ve just joined the fray, here’s just a sampling of recent, relevant critiques:

– LA Times columnist Michael Hiltzik shared his passionate critique of the rule proposal, noting (among other things) TSR’s imperfect correlation with corporate performance and its short-termism focus, i.e., tendency to drive executive behaviors that will boost TSR, but harm the company over the long-term. Hiltzik also criticizes the rule’s focus on “shareholder value” to the exclusion of everything else – a focus that ultimately distorts corporate behavior to the detriment of the broader economy.

– Based on its recently reported analysis of the link between various LTI measures and corporate performance, FEI concluded that TSR was the worst performance measure to drive positive corporate performance:

TSR, particularly on a relative basis, is a poor LTI measure. For the majority of companies granting performance-based grants, relative TSR is a commonly used performance measure. However, using TSR as a measure has a negative influence on company performance, except in the case where it has been used as a performance measure for each of the past five years. Moreover, TSR, particularly when measured against a group of companies (including a stock index), does not motivate executives, and is similar to a stock option in its nature (another form of lottery ticket), as it does not provide the line of sight necessary for oversight.

– The IRRC Institute submitted this comment letter to the SEC accompanied by recently published research on pay and performance alignment, which found a disconnect between TSR and performance:

“[T]he focus on share price appreciation through total shareholder return (TSR) obscures more than it reveals with share price as a capital markets performance metric. Factors which impact TSR such as fund flows, central bank policies, macroeconomics, geo-political risks and regulatory changes are all beyond the control of executive management.

–  In this Fortune commentary, Eleanor Bloxham describes the proposal’s use of TSR as encouraging pay incentives that “fuel crisis”:

The American Bar Association and the Center on Executive Compensation, among others, have opposed the SEC’s prescriptive approach to this rule. In choosing total shareholder return (a measure of a company’s stock market price and dividends), the SEC admits that pay disclosure may have nothing to do with the actual way in which a corporate board makes compensation decisions. The problem is that this kind of measure may now have an influence on such decisions. Boards should not reward executives based on stock performance or dividends paid. They should reward executives based on the operational measures the executives in that company should be focusing on and can control. As a basis for incentives, a company’s stock price promotes undesirable CEO behavior, the kind that can lead to volatile swings in the economy. Those incentives helped fuel both the financial crisis and the stock market rout following the misdeeds of Enron and WorldCom’s top executives. Similarly, increasing dividends is not always wise, because they can strip a firm of the assets needed to make valuable long-term investments and the liquidity required to weather rocky times. The SEC should have required that companies report on the financial performance measures they currently use to determine compensation. Then, investors could sort out which companies actually understand performance measurement and which ones are clueless.

– In this recent article, Semler Brossy identifies TSR as a “flawed” incentive measure, noting:

Relative TSR rewards volatility more than steady performance. As they say, every dog has its day, and this is certainly true with relative TSR. We measured TSR for hundreds of companies over the recent 20 years and found that even long-term, bottom-quartile TSR performers can reach top-quartile heights in a given three-year measurement period — generally by ‘bouncing’ from a low share price. Further, relative TSR does little by way of focusing executives’ attention or driving behavior. Executives respond positively to incentive measures that reflect their day-to-day responsibilities. Rewards based on relative TSR are an affirmation of company success but do little to set the path to performance at the outset of a measurement period.

– Last but not least (for now), Steve Quinlivan shared these observations about the disconnect between TSR and executive pay:

What aberrations may exist?  First, there may be no link at all between executive pay and TSR.  This isn’t necessarily a governance faux pas.  Executive pay may well have increased because of improved financial metrics the compensation committee chose wisely to reward while the stock price declined because of general market conditions beyond the executives’ control.  Sure, the SEC invites the company to explain the reasons and to submit alternative measures of performance, but that will be hard to do without making it look like an apology.  Perhaps this will engender a trend to tie incentives to TSR to make the discussion easy and that may not universally by the best thing for companies to do.

SEC Enforcement: Ongoing Choice of Forum Debate

This recent WSJ op-ed addresses the fact that the SEC’s Enforcement Staff’s recently issued guidance to forum selection in contested actions generally was not well-received by those who had criticized the apparent lack of objective criteria driving determinations about whether an action would be brought in federal district court or in an administrative proceeding before an ALJ. The authors, former director of the SEC’s Division of Enforcement and former SEC chief litigation counsel, suggest the SEC take these steps to “reclaim the high ground”:

– Develop meaningful, objective criteria for exercising its discretion to bring matters in-house that is the product of input from interested parties, including the defense bar
– Modernize the rules of procedure governing its in-house proceedings
– Avoid finding, on appeal, additional violations and imposing additional penalties beyond those assessed by the ALJs, who are independent government employees

See this recent blog discussing an ALJ’s denial of an accused’s request for more information about the Commission’s forum selection process, and memos about Enforcement’s recent guidance, which are posted in our “SEC Enforcement” Practice Area.

More on “The Mentor Blog”

We 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:

– Investors & Directors: Understanding & Bridging the Gaps
– Bolstering Compliance Programs: Compliance & Ethics Liaisons
– Old COSO Internal Controls Framework: “Qualified Pass” for 2014
– FCPA: SEC’s Director of Enforcement Talks Compliance Programs
– Overlapping Audit & Compensation Committee Memberships: Pros & Cons


– by Randi Val Morrison


June 5, 2015

SEC Issues New Pay Ratio Analysis (& Our 20% “Executive Pay Conference” Discount Ends Today!)

The SEC is now moving fast on the last of its Dodd-Frank rulemakings! Yesterday, as noted in this press release, it released additional analysis from its “DERA” (former nickname of “RiskFin”) Division related to its pay ratio proposal. Comments on this new analysis are due by July 6th (coincidentally, the same deadline as the P4P proposal). As I blogged yesterday, the SEC has become more cautious during its rulemaking process since a 2011 court decision struck down part of the SEC’s proxy access rule after finding the economic analysis was incomplete – so the practice of releasing additional economic analysis for public comment is becoming fairly common.

In addition to reading this review of the SEC’s new analysis (& this MarketWatch piece), check out my example that helps illustrate the SEC’s new findings:

– If the standard deviation of compensation (meaning the variability among positions) is 55%, and the exclusion of non-US, part time and seasonal jobs results in the elimination of 20% of the workforce from the calculation, the ratio would decrease by 15%

– Thus, a ratio of 300:1 would become 255:1

– If the standard deviation is only 25% – and the exclusion removes 20% of the workforce from the calculation – the impact is only 6.5%, thus the 300:1 ratio might drop to 281:1

Today is the last day left at the reduced rate. The SEC’s new pay-for-performance & hedging proposals – not to mention the coming clawback proposal and final pay ratio rules – are causing a stir – and you should prepare now. These rules will be among many topics that Corp Fin Director Keith Higgins & other experts will be talking to at our popular Conferences — “Tackling Your 2016 Compensation Disclosures” — to be held October 27-28th in San Diego and via Live Nationwide Video Webcast on Act by the end of today, Friday, June 5th for the phased-in rate to get more than 20% off.

The full agendas for the Conferences are posted — and include the following panels:

– Keith Higgins Speaks: The Latest from the SEC
– The SEC’s Pay-for-Performance Proposal: What to Do Now
– Creating Effective Clawbacks (& Disclosures)
– Pledging & Hedging Disclosures
– Pay Ratio: What Now
– Proxy Access: Tackling the Challenges
– Disclosure Effectiveness: What Investors Really Want to See
– Peer Group Disclosures: The In-House Perspective
– The Executive Summary
– The Art of Communication
– Dave & Marty: Smashmouth
– Dealing with the Complexities of Perks
– The Big Kahuna: Your Burning Questions Answered
– The SEC All-Stars: The Bleeding Edge
– The Investors Speak
– Navigating ISS & Glass Lewis
– Hot Topics: 50 Practical Nuggets in 75 Minutes

SEC Considers Updating “Accredited Investor” Definition

You might recall that Dodd-Frank requires that the SEC to review the “accredited investor” definition for natural persons beginning in 2014 and every four years thereafter. As part of its review process, the SEC has received a significant number of recommendations from comment letters and from two SEC advisory committees. While the vast majority of commenters recommended not changing the current definition, others recommended raising the financial thresholds cited in the definition or adjusting them for inflation. Still others offer alternate recommendations, including adding a new category for financial sophistication or allowing a percentage of income or net worth to be used in qualifying private placements. This memo does a great job of summarizing all this activity…

Also check out this Cooley summary of the latest meeting of SEC’s Advisory Committee on Small & Emerging Companies, focusing on the SEC’s disclosure effectiveness project. And see this “Crazy Quilt Chart of Regulation” graphic from SEC Commissioner Gallagher..

Environmental Liabilities: Shareholder Lawsuits Continue

In this blog, Kevin LaCroix reminds us that cybersecurity and mergers are not the only issues triggering lawsuits these days…

– Broc Romanek

June 4, 2015

Are Partisan Politics Destroying the SEC?

This is a challenging – and complex – question. A fair answer truly can’t be given unless you happen to work right now at the SEC at the highest levels. But I still can give my 10 cents without the benefit of true inside baseball. I’ll go out on a limb with an answer of “not really ‘destroying,’ but things aren’t good – and not necessarily for the reasons expressed by many today.” Here’s what I mean by that:

1. The Commissioners Certainly Are More Rebellious – SEC Commissioner unity is a thing of the past. Over the past decade or so, each succeeding slate of Commissioners have publicly fought more and more. As I’ve blogged before, back when I worked for a Commissioner in the late ’90s, Chair Arthur Levitt rarely would take a matter to a vote unless he knew he had a 5-0 vote in his pocket. And he certainly wouldn’t have tolerated public displays of contention. There occasionally were heated debates behind the scenes – but I don’t recall any of that spilling out into the open. Chair White – just like Chair Schapiro before her – doesn’t have that luxury. Oral & written dissents are a regular occurrence; not a rarity.

2. Rebellion Isn’t Necessarily a Bad Thing – My observations about Commissioner dissent above don’t mean that I think that’s a bad thing. I’m just noting a trend. Since it only takes three Commissioner votes to approve something, the fact that there are two dissenting votes – or even that a Commissioner is vocal in expressing displeasure – shouldn’t impact the agency’s daily operations. Of course, divisive dissent does have an impact on Staff morale – and certainly on how the public views the agency. But in terms of rulemaking & pursuing Enforcement cases, etc., that alone should be a small speedbump given the limited power that Commissioners have by themselves (learn more about that from the transcript of our webcast: “How the SEC Really Works”). You certainly don’t want Commissioners acting as rubber stamps.

3. Congress Is The Primary Partisan Problem – Partisan politics has seeped from Capitol Hill down into all the federal agencies – and the SEC is no exception. It used to be that a Congressional Committee Chair might only occasionally ask something of an agency head. Now it’s all the members of a Congressional Committee seeking an audience, with a greater frequency. During Chair Schapiro’s term, I blogged several times about the abuse – asking SEC officials to constantly testify in hearings. It’s hard to get real work done when you are constantly preparing to testify – or to respond to lengthy written requests from Congress. These shenanigans continue. Very little of this is driven by a desire to protect investors or benefit our markets. Most of it is purely for “show” – or an attempt to disrupt how the agency functions.

4. Rulemaking Will Always Be Hard Going Forward – Today’s WSJ article entitled “SEC Bickering Stalls Mary Jo White’s Agenda” provides us with some nice statistics for this point. It notes how Chair White has brought a record 755 enforcement actions in the latest fiscal year – but only finalized 7 rules in ’14 (compared to an average of 17 per year over the past decade). In my opinion, the largest factor for this rulemaking dearth is how hard it is to get a rule over the line since the DC Circuit’s 2011 proxy access decision in the Business Roundtable/Chamber lawsuit. Trust me, rulemaking was hard before that – now the requisite enhanced economic analysis & other new mandated processes increases the difficulty by an untold magnitude.

And things are bound to get worse before they get better. Congress continues to explore ways to meddle in affairs for which they have limited expertise. The latest is the “Regulation Sensibility Through Oversight Restoration Resolution of 2015,” which establishes a joint select committee charged with reviewing how agencies adopt rules – including holding hearings on how to reduce regulatory overreach. The SEC could only get 7 rules adopted last year – is that overreach? The circus plays on…

“Bad Actor” Waivers: Now for Forward-Looking Statements

A few days ago, SEC Commissioner Piwowar gave a speech supporting waivers relating to a company’s’ ability to rely on the PLSRA statutory safe harbor for forward-looking statements. Here’s a related blog by Steve Quinlivan:

The Securities Act (Section 27A(b)) and the Exchange Act (Section 21E(b)) exclude reliance on the safe harbor for forward-looking statements if, among other things, the statement is made with respect to an issuer that has, within the past three years, been convicted of any felony or misdemeanor described in paragraphs (i) through (iv) of Section 15(b)(4)(B) of the Securities Exchange Act of 1934. The Securities Act and the Exchange Act each provide the disqualifications may be waived “to the extent otherwise specifically provided by rule, regulation, or order of the Commission.” The SEC granted this waiver to Barclays PLC to continue be able to continue to rely on the safe harbor for forward looking statements as a result of a guilty plea for a violation of the Sherman Antitrust Act.

Meanwhile, another day, another waiver dissent from a SEC Commissioner…

IPO Analyst Research: FINRA Issues 7 FAQs on Conflicts

Here’s an excerpt from this MoFo blog:

Many market participants were left in a quandary following FINRA enforcement actions in connection with member firm research analyst “participation” in meetings with prospective issuers. Recently, FINRA published a handful of Frequently Asked Questions relating to its research rules.

The FAQs outline three stages of an IPO a pre-IPO period, a solicitation period, and a post-mandate period. Each such stage is described in the FAQs and FINRA also describes the attendant risks associated with a research analyst’s activities during these various stages. Of course, during the pre-IPO stage, the attendant risks are attenuated and FINRA believe that these attenuated risks can be addressed adequately through properly designed policies and procedures. However, FINRA cautions that member firms ought to be sensitive to any communications that would suggest the issuer already had determined to proceed with an IPO. The guidance also provides FINRA’s view regarding when the “solicitation period” would be deemed to begin, although this would seem, in real life, to be a highly fact-specific matter. In the post-mandate period, again, the risks are attenuated, in FINRA’s view, and may be effectively addressed by member firms through their policies and procedures. The guidance is particularly strident with respect to valuation analyses. For example, the FAQs note that a member firm that is competing for an IPO role must repudiate any communication that would seemingly indicate that a valuation reflects the analyst’s views and expressly note that the firm cannot make any representations about the analyst’s views on valuation.

– Broc Romanek

June 3, 2015

Clawbacks: SEC Planning to Propose Rules Soon!

The big news comes from this WSJ article, which says that the SEC will “soon” propose the clawback rules required by Section 954 of Dodd-Frank. If it happens as rumored, this surely is Exhibit A that the SEC’s Reg Flex Agenda is meaningless (as I hammer home down below) – because the SEC’s new Reg Flex Agenda had an April ’16 date for this activity. Here’s my quote in the WSJ piece:

Broc Romanek, a former SEC attorney who edits the websites and, said the SEC should make sure it implements the new clawback requirements in a way that makes practical sense for companies and allows them discretion in determining whether it is economically efficient for them claw back pay, given legal, administrative or other expenses that may be involved. “It would not be ideal if a company is forced to spend more resources clawing back than [what] they would get in return,” he said.

The critical issue is whether the proposed clawback rules will be principles-based or prescriptive (remember how the recent P4P rule proposal was proscriptive, which was surprising to some). “Principles-based” means “just disclose what you have that you treat as a clawback.” And there are lots of tough questions about how a financial misstatement impacts compensation that may be indirectly – but not directly – based on financial performance, such as stock options (ie. how much is the stock price influenced by a restatement, as compared to performance criteria that is tied to EPS which is much more directly influenced). Remember this blog from last year: “Clawbacks & The New Revenue Recognition Rules: On a Collision Course?”

Whether the proposal is prescriptive or principles-based will in turn impact how much the rules drive a certain type of conduct – the more prescriptive, the more the SEC is making a judgment call and companies will have to come in line with what the SEC determines to be encompassed. And remember as to timing, the SEC’s rulemaking will just be the first step – because SEC will be proposing rules that the stock exchanges then have to adopt standards to implement…

With all this SEC rulemaking in the compensation arena, I have rejiggered the two-day agenda for our big pair of “Proxy Disclosure/Executive Pay Practices” conferences – 2000 attendees in-person and more online – for which a 20% discount expires at the end of this Friday, June 5th! Register now!

Pay Ratio & More: Senator Warren Lights a Fire

Yesterday, Senator Elizabeth Warren wrote this 13-page letter to SEC Chair White expressing her unhappiness with the pace of the SEC’s rulemaking. Warren isn’t happy – and even used the Reg Flex Agenda as one reason why she feels that White hasn’t been truthful with her (see my blog below about how that is meaningless). Pretty wild stuff.

Here’s an excerpt from this WSJ article (also see this Boston Globe article & Huffington Post piece – also see this Politico article that wonders if Warren went too far):

Though the SEC has recently reported it now expects to complete the rule by next spring, Ms. Warren said that deadline—revealed in a list of agency projects published by an arm of the White House—appears to contradict what Ms. White said in a face-to-face meeting last month with Ms. Warren. In that meeting, the SEC chairman predicted the SEC would complete the rule “by fall,” Ms. Warren wrote. “I am perplexed as to why you told me personally that the rule would be completed by the fall of 2015 when it appears that you were or should have been aware of additional delays,” Ms. Warren wrote.

The SEC’s New Reg Flex Agenda is Out (But It’s Meaningless!)

I continue to see so many people citing the SEC’s Regulatory Flexible Agenda as an indication for when the agency will propose and adopt rules. Don’t believe that – it’s not true! As I’ve blogged about before, all kinds of whacky and aspirational stuff makes it into the Reg Flex Agenda, which then winds up as part of the OMB Unified Agenda (in this blog, Keith Bishop explains what the OMB Unified Agenda is). And then the timelines for proposing & adopting rules are rarely accurate.

The internal process at the SEC (and other agencies) is complicated – maybe one day I’ll explain it in detail (eg. pet projects get thrown in that have zero chance of moving; timelines thrown in simply to fill out the form). But trust me, it has NEVER been a reliable source for when things might move at the SEC. But go ahead and keep citing it if it makes you happy – even though it will likely prove you wrong in the end (as it does over and over). I find it funny how the Reg Flex Agenda is now a newsworthy item after being completely ignored for decades.

I mention all this because the latest Reg Flex Agenda is now out and it indicates that adoption of pay ratio, investment managers pay voting disclosures, hedging and crowdfunding rules won’t happen until April ’16 (the prior Reg Flex Agenda said October ’15) – with clawback rules being proposed by April ’16. There is no timeline for adopting pay-for-performance rules included since that rulemaking’s comment period is still open. Of course, remember that this is all pulp fiction

Meanwhile, this article ticks off the SEC’s accomplishments over the past year based on Chair White’s recent testimony on the SEC’s 2016 budget…

– Broc Romanek