Monthly Archives: July 2015

July 31, 2015

’34 Act Reports: Benchmarking Law Firm Bills

I probably haven’t been touting our numerous checklists – over 300 of them now – sufficiently. For example, this one on “’34 Act Reports – Benchmarking Law Firm Bills” provides practical guidance – for those in-house – about benchmarking your ’34 Act bills and how to best create a RFP for ’34 Act work…

SCOTUS: Poised to Address Insider Trading Standard

Yesterday, as noted in this Orrick memo, the Solicitor General filed a petition for a writ of certiorari in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), asking the United States Supreme Court to address the standard for insider trading in a tipper-tippee scenario. Specifically, the Solicitor General argues that the Second Circuit’s Newman decision is in conflict with the Supreme Court’s 1983 decision in Dirks v. SEC, 463 U.S. 646 (1983), and the Ninth Circuit’s recent decision in United States v. Salman, No. 14-10204 (9th Cir. July 6, 2015). Because the Supreme Court grants certiorari in nearly three out of four cases filed by the Solicitor General, the likelihood of a cert grant in Newman is particularly high…

Europe: Shareholder Rights Directive II Moves Ahead

A few weeks ago, as noted in this article, the European Parliament passed the Shareholder Rights Directive – and it will now be considered by member states before a final vote. Some provisions were watered down – but new ones were added. Among others, the topics include say-on-pay (non-binding every 3 years, instead of binding originally proposed); investor disclosure (disclose how investments align with long-term interests and how engagement policies are implemented, but only on a comply-or-explain basis); and proxy advisors (adopt code of conduct & describe changes annually). The prior Shareholder Rights Directive in Europe was enacted in ’09…

– Broc Romanek

July 30, 2015

Pay Ratio Rules Coming Next Wednesday! (& Our “Pay Ratio Workshop” on August 25th!)

Last night, the SEC posted its Sunshine Act notice to adopt the pay ratio rules next Wednesday, August 5th. My blog on gives a guess as to some of the rule’s final parameters.

We want to help you get prepared – so I have put together a “Pay Ratio Workshop” that will be held on Tuesday, August 25th, which will be held online via audio webcast. Here’s the “Pay Ratio Workshop” agenda.

This “Pay Ratio Workshop” is part of a registration to the “Proxy Disclosure Conference” & “Say-on-Pay Workshop” that will be held on October 27th-28th in San Diego and by video webcast. In other words, this new audio-webcast only event is paired with our prior pair of executive pay conferences. So it’s three conferences for the price of one! Register now – discounted rate available only through August 7th!

These are part of our FAQs:

– For those registered to attend in San Diego in person or by video, you also gain access to the August 25th “Pay Ratio Workshop” that is available only by audio webcast
– You will receive an ID/pw to access the August 25th “Pay Ratio Workshop” by the middle of August (although it will just be your existing ID/pw to our sites if you already have a membership)
– There is no CLE available for the “Pay Ratio Workshop” (but there will be CLE for the “Proxy Disclosure/Say-on-Pay” Conferences in October in most states)
– An audio archive of the “Pay Ratio Workshop” will be available starting on August 25th in case you can’t catch that event live

Survey: Pay Ratio Disclosures So Far

Last week, I blogged about Mark Borges’ blog about a comprehensive pay ratio disclosure – and then Mark followed up by blogging about some more samples. And now thanks to Simpson Thacher, we have this survey on pay ratio disclosures posted on that they prepared in late March. The survey also includes some examples of companies that provide a comparison of compensation increases/decreases among the CEO and average employee.

To prepare this survey, Simpson Thacher searched all SEC filings since 2010 for companies that have disclosed the ratio of CEO to employee pay and found 16 examples. In reviewing these 16 examples, they noted the following data points for their disclosure:

1. Employees Included in Comparator Group
– Three (19%) note that the employee comparator group includes all employees, including part-time or temporary employees.
– Three (19%) note that the employee comparator group is limited to full-time employees.
– Three (19%) impose geographic restrictions on which employees are included in the comparator group (e.g., limiting to strictly U.S. or UK employees).
– Seven (44%) did not specify which employees are included in the comparator group.

2. Compensation Included
– Nine (56%) compare the CEO’s total compensation to the average total compensation for the company’s employees.
– Three (19%) compare the salary of the CEO to the average salary for the company’s employees.
– Three (19%) have two separate ratios: one based on salary, and one based on both salary and bonus.
– One (6%) has two separate ratios: one based on salary, and one based on total compensation.

3. Basis of Employee Comparison (Average vs. Median Salary)
– Three (19%) use the average salary for employees as the basis of comparison.
– Five (31%) use the median salary for employees as the basis of comparison.
– Eight (50%) use both the median and average salary for employees as a basis of comparison.

The first section, titled “Examples of Pay Ratio Disclosure”, includes the disclosure of the 16 companies discussed above, as well as information regarding the data points. Among these 16 examples, five companies (31%) have a market cap under $100 million; four companies (25%) have a market cap between $100 million and $1 billion; and seven companies (44%) have a market cap of over $1 billion. In addition, of these 16 companies, nine (56%) employ fewer than 1,000 employees, while only Whole Foods and Israel Chemical employ more than 5,000 employees. Further, seven companies (44%) are incorporated in Israel, as such disclosure appears to be encouraged under Israeli corporate law.

The survey also includes an additional chart at the end, titled “Examples of Compensation Increase Disclosure,” which includes seven examples of companies that disclose percentage pay changes (i.e., the annual percentage increase in pay of the CEO and other top executives, and the comparable percentage increase for all other employees). This disclosure, although it does not provide pay ratios, was provided by companies that all employed more than 1,000 employees (or, with respect to Aon, Astrazeneca, Avery Dennison and Reed Elsevier, employed more than 25,000 employees), and indicates the type of compensation used and the employees considered for the disclosure.

pay ratio

– Broc Romanek

July 29, 2015

Proxy Disclosure Awards: The Winners!

We have the winners in the 12 categories for our “Proxy Disclosure Awards”! Congrats to them & all the nominees! As promised, the voting was transparent as here are the results of the final tallies. Thanks to the 500+ of you who voted! The winners are:

1. Best Overall Proxy (Combined Online & Print) – Coca-Cola
2. Best Print Proxy – Large Cap – ConocoPhillips
3. Best Print Proxy – Mid-to-Small Cap – KBR
4. Best Online Proxy – Coca-Cola
5. Most Improved Print Proxy – Hologic
6. Most Improved Online Annual Meeting Information – UPS
7. Most Persuasive Supplemental Letter/Additional Soliciting Materials – DuPont
8. Best Executive Summary – Nasdaq (huge surge at end to overtake American Express!)
9. Best CD&A – Merck
10. Best CD&A Summary – Staples
11. Best Shareholders Letter – Target
12. Best Director Bios – CVS Health

Still in the voting mood? Take a moment to participate in our “Quick Survey on What is a Perk?” and our “Quick Survey on Annual Meeting Conduct.”

Corp Fin’s Michele Anderson Promoted to Associate Director

Congrats to Michele Anderson for the much-deserved promotion to Associate Director in Corp Fin. Michele is the long-standing head of Corp Fin’s Office of Mergers & Acquisitions, which she will continue to run – but she will now oversee the Office of International Corporate Finance too…

Here’s the latest about the rumors of who might become a SEC Commissioner when Aguilar and Gallagher depart…

Transcript: “Nasdaq Speaks ’15 – Latest Developments and Interpretations”

We have posted the transcript for our recent webcast: “Nasdaq Speaks ’15: Latest Developments and Interpretations.”

– Broc Romanek

July 28, 2015

Once a Crowdfunder, Always a Crowdfunder

A lot of ink has been spilled about crowdfunding in the press, such as this Huffington Post piece that gives a plain vanilla take on crowdfunding (and here’s another piece). In addition, there are some misunderstandings in the press about the capital options that a company has – this infographic by Kiran Lingam and Anthony Zeoli can help sort that out.

Here’s some thoughts from members on crowdfunding (similar to this series of blogs a few years back): In response to a question about the effects of an initial crowdfunding investment on a possible later venture capital transaction, Patrick Reardon of The Reardon Firm had the following thoughts:

First, on your other point about representations and warranties in crowd-funding, please note that, while there may not be any reps or warranties in an initial crowdfunding round, there are the duties under SEC Rule 10b-5 and state securities laws to disclose all material information. So, one could view those as a form of statutorily-mandated representations and warranties.

Now to your point on later VC financings. Although my experience does not directly involving crowdfunding, my belief is that once a crowd-funder, always a crowd-funder. Well, if not “always,” at least to every conceivable statute of limitation expires.

The appeal of crowdfunding is that small (and often unsophisticated) investors make up the initial investors. Unfortunately, these people do not understand basic investment concepts like investment risks, dilution by subsequent investments, or corporate principles such as approval of related party transactions, dissenters’ rights, governance of the internal affairs of the entity by the state of formation, not the state where the investor resides, etc. For example, try explaining to a school teacher/investor why the company has to have a down-round venture capital financing for legitimate business reasons that don’t involve wrongdoing. Very likely, he or she will only see that his or her investment has decreased by X% in value.

Also, unsophisticated investors also often have unsophisticated attorneys. In Texas, I have seen cases where obvious corporate and securities law causes of action have been ignored, and other, what I consider off-the-wall causes of action, are pled. Our Texas courts have relatively lax pleading and procedural rules, and a significant portion of the trial bar will not bring cases in Federal courts. So you might get a securities law case brought under state law instead of Federal law, just to avoid the U.S. Dist. Cts. The effect of this is exacerbated by elected state judges who often have limited business litigation experience. Texas, unlike Delaware, does not have separate business courts.

Do not misunderstand. I am not singling out my home state. I think many states have a legal system similar to that I described above. The point is that foregoing all create far more than the usual uncertainty of possible claims. After years of representing professional investors, I feel that VC or other investors will see crowd-funded companies as fraught with unknown risks. This will scare off most professional investors from subsequent rounds.

That is why I say once a crowd-funder, always a crowd-funder. If your start-up company can limit itself to investments from accredited investors, I recommend a public solicitation under Reg. D, Rule 506(c), instead of crowdfunding.

Crowdfunding: Status of SEC vs. State Laws

Brad Hamilton of Jones & Keller (see his blog) had these thoughts about that issue:

In the US, it is currently a theoretical question – there is no federally allowed crowdfunding equity investment regime in the U.S. The SEC’s “crowd funding” rules mandated by the JOBs Act are proposed rules only, and have not been approved and adopted. “Crowdfunding” in the U.S. currently applies only to (1) donations, or pre-sale purchase of goods or services, through websites such as gofundme, KickStarter, indiegogo, etc., and does not involve sale of equity, or (2) state crowdfunding registration exemptions.

Recently, you may have seen that several states are proposing and implementing rules for intrastate equity investment through “crowdfunding.” Most of those rely on the intrastate offering exemption from federal registration requirements, allowing offers and sales only to residents of that state, though you may have seen that Maine’s recent rules allow investment from non-Maine residents, although Maine’s rule is brand new, so I would be surprised if there have been any offerings under it. Texas, Indiana, Wisconsin, Washington, and Michigan are some of the states that have pending proposed, or adopted, intrastate crowdfunding rules. I believe Florida proposed, but did not adopt its own crowdfunding scheme. Here is a list covering a rundown of state exemptions.

Many practitioners and commentators, include me, think that the crowdfunding rules proposed by the SEC are worthless and if adopted as proposed would never be utilized by our clients. Some of the state crowdfunding rules eliminate the costly SEC proposals, such as audited financial statements, and may be more useful. Some states virtually mirror the SEC proposals, and are unlikely to see much use. All of the state crowdfunding rules are recent, and I too would be interested if anyone has a client who funded through state crowdfunding exemptions, and then had a subsequent exit. As I am a pessimist on this issue, I would be pleasantly surprised if any enterprise that included a crowdfunding of less than $1 million as part of its financial history, eventually succeeded to the point that a potential real-money acquirer was looking at the crowdfunding investors’ reps and warranties.

The Brits Are Winning the Crowdfunding Battle…

This article from last year about how the United Kingdom regulates crowdfunding compared to the United States is an eye-opener…

– Broc Romanek

July 27, 2015

Transcript: “Clawbacks – What Now After the SEC’s Proposal”

We have posted the transcript for our popular webcast: “Clawbacks – What Now After the SEC’s Proposal.”

Proxy Access: Comments on the SEC’s Review of (i)(9)

Given the high level of interest in the topic, I was a little surprised to find that there hasn’t been more commentary – in the form of official comments submitted to the SEC – regarding the SEC’s review of Rule 14a-8(i)(9). So far there has been a dozen and a half comment letters sent in, about half from the corporate world and half from investors…

This Cooley blog describes the most recent meeting of the SEC’s investor advisory committee and includes some discussion of proxy access shareholder proposals from this proxy season…

Form 8-K: Taking It Too Seriously

Just saw this in my neighborhood. Honestly, it’s not mine…


– Broc Romanek

July 24, 2015

Section 13(d): More Court Guidance on “Group” Status

For those of you that have been tasked with determining whether a “group” is formed for purposes of Section 13(d), you know that it’s a fact-intensive analysis – and often very difficult to determine with any real certainty. In recent months, even more pressure has been put on this analysis because of the SEC’s Sections 13(d) & 16 enforcement initiatives that Broc has blogged about (also see this blog). Fortunately, the Southern District of New York’s recent opinion – in Greenberg v. Hudson Bay Master Fund – provides some additional guidance that may be helpful when grappling with group formation. This blog summarizes the guidance:

– While participation in private placements with other investors does not in and of itself create a Section 13(d) group, it is advisable to include language in the transaction documents expressly providing that the obligations of the parties are several and not joint and that no action taken by a buyer pursuant to such agreements shall be deemed to create a group or create a presumption that the buyers are in any way acting in concert;

– It is essential for blocker provisions to expressly apply the conversion cap with other parties that may be deemed to be a member of a Section 13(d) group with the applicable holder; and

– Hedge funds cannot evade Section 16 obligations and liabilities by claiming that they have divested themselves of voting and dispositive power over shares in favor of their registered general partners or investment advisors; the funds themselves will generally be deemed beneficial owners of the shares that they hold.

Also see Alan Dye’s blog for a discussion of the particulars & analysis of the case.

SOX After 13 Years: Evolving Compliance & Increasing Costs

As we recover from the 5th Anniversary of Dodd-Frank and head towards the 13th anniversary of the adoption of Sarbanes-Oxley – check out Protiviti’s 2015 Sarbanes-Oxley Compliance Survey. This survey takes a detailed look – including a number of charts & diagrams – at the most recent Sarbanes-Oxley compliance trends and the time & money being spent on Sarbanes-Oxley related compliance. Here’s an excerpt from the findings:

SOX compliance costs, together with external audit fees and scrutiny, are increasing – External auditors are enhancing their scrutiny of internal controls and their fees are increasing as a result. Nearly three out of four organizations reported that their external audit firm is placing more focus on evaluation of internal control over financial reporting, and external audit fees rose for more than half of companies in the most recent fiscal year. In terms of overall internal SOX compliance costs (excluding external audit fees), 58 percent of large company respondents spent more than $1 million in their most recent fiscal year, while 95 percent of small companies spent less than $500,000. Bottom line: The larger your company, the more you will need to invest in SOX compliance.

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:

– Sample: Proxy Statement Reg Summary Sheet
– Shareholder Proposals: Corp Fin Allows Exclusion of “Review of Company’s Voting Policies” Proposal
– More Debate: Harvard’s “Shareholder Rights Project”
– Trinity v. Wal-Mart: Serious Implications for the Ordinary Business Exclusion
– Shareholder Proposals: Playing Games With Submission Deadlines

– Jeff Werbitt

July 23, 2015

House Passes Five Securities Bills!

This Morrison & Foerster blog gives us the latest:

A flurry of activity was seen last week on the House floor as the Financial Services Committee reported on various bills, many of which JOBS Act related. These bills propose to change registration and reporting requirements for small reporting companies, Small Business Investment Companies (SBICs) and savings and loan companies, as well as affect the treatment of Emerging Growth Companies (EGCs). On July 14, the House passed the following bills, and on July 15, referred them to the Senate Committee on Banking, Housing and Urban Affairs:

– The SBIC Advisers Relief Act of 2015, H.R. 432, would amend the Investment Advisers Act of 1940 to exempt SBICs from certain SEC registration and reporting requirements;

– The Holding Company Registration Threshold Equalization Act of 2015, H.R. 1334, would amend Title VI of the JOBS Act and raise the threshold number of shareholders of record at which savings and loan companies must register with the SEC. H.R. 1334 also raises the threshold number of shareholders of record below which a savings and loan company may terminate its registration;

– The Small Company Simple Registration Act of 2015, H.R. 1723, proposes to have the SEC revise Form S-1 to allow smaller reporting companies to incorporate by reference any documents it files with the SEC after the effective date of a registration statement on Form S-1;

– The Swap Data Repository and Clearinghouse Indemnification Correction Act of 2015, H.R. 1847, proposes to amend the Securities Exchange Act of 1934 and the Commodity Exchange Act to repeal the indemnification requirements for regulatory authorities to obtain access to swap data;

– The Access to Capital for Emerging Growth Companies Act, H.R. 2064, proposes to make changes to the treatment of EGCs as defined by the JOBS Act. The bill would reduce the number of days that an EGC is required to have a confidential registration statement on file with the SEC before a “road show,” and would allow an issuer to retain EGC status through the date of its IPO if it was considered an EGC at the time of filing its confidential registration statement.

In contrast, plans to consider H.R. 1675 and H.R. 2354 were scrapped by House Republicans, according to CQ News. H.R. 1675 would have directed the SEC to revise regulations relating to compensatory benefit disclosures by issuers. H.R. 2354 planned to reduce the number excessive and costly regulations issued by the SEC by requiring a review of each significant regulation it had issued.

Alternative Fee Arrangements: Is the Tide Finally Turning?

In May, Broc blogged about how billable hours changed the legal profession. Now it looks like alternative fee arrangements are gaining momentum as the traditional law firm billing model is increasingly scrutinized. According to this Philadelphia Inquirer article, more law firms are embracing alternative fee arrangements. Big law firms are even beginning to employ a team of financial experts to price legal services. Here’s an interesting example from the article:

At Reed Smith – a 1,600-lawyer firm – a staff of 15 accountants, lawyers and MBAs helps partners pitch the law firm’s services. Alternative fee arrangements now account for about 30 percent of the firm’s revenue of $1.15 billion. If a client asks for a flat fee or charges based on case outcomes or some structure other than the billable hour, they project what the matter will cost and how it can be done profitably.

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:

– Nasdaq Proposes to Stop Automatic Delisting for Failure to Hold Annual Meeting
– Do I Need to Update My D&O Questionnaire for 2015?
– Vanguard’s CEO Speaks
– How the Fall Proxy Season Reveals ’15 Proxy Season Trends
– Relational Investors Plans to Wind Down

– Jeff Werbitt

July 22, 2015

Pay Ratio: Disclosure Example & Ramping Up

Get ready to ramp up by registering now for our upcoming “Proxy Disclosure Conference“! A few days ago, Mark Borges blogged over on about NorthWestern’s pay ratio disclosure that bears reviewing. In addition, check out this study entitled “Consumers Prefer Firms with Lower CEO-to-Worker Pay Ratios” – and this WSJ article entitled “CFOs Prep for Pay-Ratio Rules“:

Finance chiefs at public companies are looking for clarification from the Securities and Exchange Commission as they prepare to comply with coming regulations on how they must disclose the boss’s pay compared to a typical worker. The SEC earlier this month accepted public comments on a proposed rule that soon could force thousands of companies to disclose annually the ratio of CEO-to-typical worker pay. The agency first proposed the rule two years ago to comply with the Dodd-Frank Act of 2010 and SEC Chairman Mary Jo White has said she wants the SEC to issue a final rule by this fall.

Among the issues that companies are expecting to get further guidance is how they should define a “median employee”—and what types of pay to include as compensation. The clarifications also will impact the cost to companies of preparing for the ratio. The SEC is “going to have to provide some degree of guidance” to clarify which employees that companies will have to include when they crunch the numbers, said Joseph Grundfest, a Stanford law professor and former SEC commissioner.

Companies can use different sampling methods in their calculations, which gives them “a lot of latitude to choose what they want those estimates to be,” said Michael Ohlrogge, a Stanford University law and engineering doctoral student, who wrote to the SEC earlier this month.

Some companies including Noble Energy Inc. are testing the waters. In March, the Houston-based oil and gas exploration and production company disclosed that former Chief Executive Charles Davidson made 82 times more than the median employee, who took home $103,500 in direct compensation in 2014. Mr. Davidson made $8.5 million in direct compensation, it said. Neither that figure nor its ratio calculation included the roughly $1 million increase in the value of his pension, employer retirement contributions and perquisites like club-membership dues the company provided. “If the SEC adopts rules on compensation ratio, we will conform the methodology by which we calculate that ratio to align with the SEC requirements,” a Noble spokeswoman said in a statement. “Until rules are adopted, we expect to continue with the current methodology in our future disclosures.”

In all, the SEC expects the 3,800 public companies affected to spend a combined $72.8 million to comply, according to its 2013 proposal. That comes to about $19,000 apiece. One “global technology company” the agency consulted estimated that the cost of crunching the numbers could amount to $350,000 plus $100,000 a year for compliance, it said. James Flaws, Corning Inc. ’s finance chief, said he expects the specialty glass and ceramics maker will lay out less than $250,000 to tally a ratio between the compensation of its CEO Wendell Weeks—$13 million in 2014—and its average worker. The Corning, N.Y. business employs 34,600 people full-time, with two-thirds of them working in more than 100 foreign countries.

At ingredients maker Ingredion Inc., based in Westchester, Ill., about 83% of the company’s full- and part-time workforce of 11,400 people is employed outside the U.S., which means that determining a pay ratio could be “resource intense,” said CFO Jack Fortnum. “There are many potential variables in the calculation of the compensation ratio, including how employees are paid around the world, and how to consider various pensions and other benefits,” he said.

A lobbyist for a S&P 500 technology company said that the company objects to including foreign employees in the calculation, because the average per capita income in places like the Philippines are a fraction of those in the U.S. and thus would skew the results.

As much as 95% of the cost and effort the company expects to face in calculating a pay ratio would arise from tallying the pay of overseas workers, he said. “If this was domestic employees only, it wouldn’t be worth my time” to fight against the rule in its current form, the lobbyist added.

The National Association of Manufacturers, a trade group, cited a member company that said it would face $18 million in costs related to implementing the rule. That unnamed company, it said, must scour 500 separate payroll systems around the world to hammer out compensation details for its 130,000 employees and build a centralized network to capture the information, according to its comment letter to the SEC. The SEC’s Division of Economic and Risk Analysis last month said the figures that companies use to calculate their pay ratios could vary between 3.4% and 15%, based on the percentage of workers the companies exclude from their sampling.

CEOs and CFOs must attest, under penalty of law, that the information is accurate, since the disclosures will be included in SEC filings, according to Timothy J. Bartl, president of the Center on Executive Compensation, a Washington, D.C., advocacy group of human-resources chiefs.

Some shareholders say they’re eager to see the new statistics. “I think the pay ratio is going to be a data point in the conversation,” said Jonas Kron, senior vice president and director of shareholder advocacy at Boston-based Trillium Asset Management LLC, with $2.2 billion in assets under management. Trillium generally votes against any executive compensation package exceeding $7 million. “We’re going to be able to have more sophisticated conversations with companies and internally when making investment determinations,” he added.

Proxy Disclosure Awards: Last Chance to Vote!

It’s time to vote! Please take a moment to vote for these 12 categories of awards. Voting is anonymous – and ends this Friday, July 24th. Here’s the FAQs

Poll: “What is a Perk?”

It’s been 9 years since we ran our popular “Quick Survey on “What is a Perk?” (here’s those old results) – so it’s time to do it again. Please take a moment to participate in our new “Quick Survey on “What is a Perk?”

– Broc Romanek

July 21, 2015

Happy Anniversary! Dodd-Frank Turns 5

If you’ve read this blog for a while, you know that we don’t need much of a reason to celebrate around here. So put down those pay-for-performance & clawback proposing releases – and help us celebrate the 5th anniversary of the Dodd-Frank Act!

To take stock of where we’ve been & where we’re going, here’s a rundown of what’s being said about Dodd-Frank on its anniversary:

SEC Chair White
House Financial Services Committee
Q & A with Dodd-Frank (WSJ)
Market Watch
The Hill

Also check out Davis Polk’s “5th Anniversary Dodd-Frank Progress Report” and cool “Dodd-Frank Infographic”.

SEC Chair White: “The Response”

As Broc blogged about last month, Senator Elizabeth Warren sent a letter to SEC Chair White expressing disappointment with her leadership. In response to Senator Warren’s letter, Chair White wrote this letter addressing each of Senator Warren’s four primary issues: implementation of Dodd-Frank rules on pay ratio disclosure, admission of wrongdoing in SEC enforcement cases, disqualifications & waivers and recusals. Chair White’s letter specifically highlights the SEC’s enforcement & rulemaking accomplishments during her tenure – and defends the accuracy of her projected timing of the pay ratio rulemaking. Here’s an excerpt from this WSJ article (also see this blog):

In a letter to Ms. Warren released [on July 10], Ms. White denied the agency had been soft in punishing wrongdoers, saying the commission brought a record number of enforcement cases—as well as a record amount of fines—in the most recently completed fiscal year.

She also defended the agency’s work completing new rules developed in response to the financial crisis, such as tighter restrictions on money-market mutual funds that had stymied the agency for years.

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:

– Usability Study: Investors Frustrated With Disclosure
– Independent Board Chairs: An Interview with ISS’ Carol Bowie
– Shareholder Proposals: Statements in Support Permitted
– Whether & How to Supplement or Amend Your Proxy Materials
– Member Musings on the SEC’s Proxy Season Punt

– Jeff Werbitt

July 20, 2015

Study: Disclosing Internal Control Weaknesses May Backfire

Here’s news from Baker & McKenzie’s Dan Goelzer: As noted in prior Updates, SEC officials have expressed concern that companies are not properly identifying and disclosing material weaknesses in internal controls, and that such weaknesses are too frequently disclosed only in conjunction with a restatement – after the damage is, in effect, done (e.g., January 2014 Update). However, an academic study in the May/June 2015 issue of The Accounting Review, published by the American Accounting Association, suggests that companies may have good reasons to be reticent about disclosing their control weaknesses: Companies that disclose material weaknesses in advance of a restatement are more likely to be penalized than those that do not. As summarized in an AAA press release, the study finds that there is:

“[N]o evidence that penalties following a restatement are more likely for firms that fail to detect and disclose their control weakness as required. Instead, firms that do report their control weaknesses in a timely manner are generally more likely to face [varied] penalties in the event of a later restatement. These results are consistent with the disclosure of control weaknesses making it difficult for management to plausibly claim later that they had been unaware of the underlying conditions in the control environment that led to their restatements.”

The study, entitled “Does SOX 404 Have Teeth? Consequences of the Failure to Report Existing Internal-Control Weaknesses,” was authored by Sarah C. Rice of Texas A&M University and David P. Weber and Biyu Wu of the University of Connecticut. According to the press release, the findings are based on analysis of the disclosures made by 659 companies that filed restatements between November 14, 2004 (when the internal control reporting requirements of SOX Section 404 became effective) and the end of 2010. During that period, 134 of the restating companies reported material weaknesses in their internal controls prior to announcing the restatement, while 525 did not report control weaknesses. Of those that did not disclose a material weakness prior to the restatement, 314 made after-the-fact disclosure of the existence of an internal control weaknesses at the time of the restatement.

The SEC enforcement risk associated with disclosing a material weakness is fairly small. The press release states that pre-restatement disclosure of a material weakness increases the likelihood of SEC enforcement action by about 6 percent, “probably because it aids the agency ‘in identifying cases where potential enforcement actions are likely to succeed and make it difficult for management to claim they were unaware of the problems that led to the restatement.’” Companies that make pre-restatement disclosures may also suffer other consequences:

– Class action lawsuits are “5 to 10% more likely when firms report internal control weaknesses prior to restatements”
– “Top management turnover is 15 to 26% more likely”
– “Auditor turnover is 6 to 9% more likely”

Professor Weber summarizes the study in these terms:

“For as long as anyone can recall, investors have complained about being blindsided by companies, where one day everything is fine and the next day it all falls apart. SOX 404 is supposed reduce the incidence of that sort of thing, but to do its job there has to be an incentive for top execs and auditors to divulge control problems in the company annual report, as mandated by the provision. I must admit that my colleagues and I were only mildly surprised that firms which fail to do so aren’t penalized. What surprised us a lot more is that companies which evidently take SOX 404 to heart are penalized.”

Comment: The study’s findings may provide interesting insight into SEC enforcement policy. The study should not, however, be used as a guide to corporate disclosure policy. If the Commission were to uncover evidence that a company intentionally withheld disclosure of a known material weakness, it is quite likely that it would bring enforcement action against the individuals – including, if applicable, audit committee members who made that decision or were aware of it.

Podcast: Fraud Enforcement Compliance

In this podcast, Michael Peregrine of McDermott Will & Emery discusses corporate governance & compliance matters relating to increased government fraud enforcement, including:

– What areas of corporate governance & compliance should directors & counsel be evaluating as a result of increased government fraud enforcement matters?
– How much of this is as a result of financial fraud enforcement and how much of this is as a result of health care fraud enforcement?
– What steps should be taken now to strengthen governance, compliance & oversight?
– What initial steps should be taken by a company that is the subject of a fraud enforcement matter?

Tomorrow’s Webcast: “Selling the Public Company – Methods, Structures, Process, Negotiating, Terms & Director Duties”

Tune in tomorrow for the webcast – “Selling the Public Company: Methods, Structures, Process, Negotiating, Terms & Director Duties” – to hear Greenberg Traurig’s Cliff Neimeth, Richards Layton’s Ray DiCamillo and Richards Layton’s Mark Gentile analyze the legal and commercial parameters of what you can – and can’t do (or should & shouldn’t do) – when shopping and agreeing to sell control of a public company are evolving due to judicial decisions, legislative developments and market conditions.

– Jeff Werbitt