Monthly Archives: October 2015

October 16, 2015

Compliance Officers Call for SEC Enforcement Guidelines

On the heels of recent SEC enforcement actions against Chief Compliance Officers (CCO) and associated statements by Commissioners Gallagher and Aguilar and Chair White, the National Society of Compliance Professionals, a financial services industry trade group for compliance officers, sent this letter to SEC Director of Enforcement Andrew Ceresney requesting that the Commission establish policy that permits initiation of enforcement proceedings against CCOs only if they acted intentionally or recklessly – not negligently – to facilitate the underlying primary securities law violation.

See my earlier blog discussing the recent enforcement actions and internal SEC enforcement debate.

Access oodles of resources in our “Compliance Programs” Practice Area.

Survey: Compliance Officer Increasingly a Stand-Alone Position

This recent annual survey report from Deloitte/Compliance Week – reflecting input from over 350 multi-industry compliance professionals world-wide – generally reveals increasing acknowledgement of the importance of the compliance function.

Key results include:

  • 57% of respondents say their CCO reports directly to either the CEO or the board – the highest level in at least three years
  • 51% say the CCO has a seat on the executive management committee – up from 37% last year
  • 59% say the CCO job is a stand-alone position, compared to 50% in 2014 and 37% in 2013
  • 55% say they regularly brief the board on the company’s overall ethics and culture

Not surprisingly, financial services industry organizations are more likely to have larger compliance program budgets, larger staffs and standalone CCOs, and smaller organizations are less likely to have a designated or standalone CCO.

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:

– Most Common XBRL Errors
– Board Effectiveness: Role of Introverts
– Why Ds & Os Should Demand Indemnification Agreements
– Turnarounds: Tips for Maintaining a Long-Term View
– Information Security: Board Presentation Guidance

– by Randi Val Morrison

October 15, 2015

DOJ Eases Yates Memo Cooperation Credit Requirements

Assistant Attorney General Leslie Caldwell has – seemingly appropriately – softened the DOJ’s recently issued updated guidance focused on individual accountability for corporate misconduct. According to the widely reported, so-called Yates Memo (which Broc blogged about last month), in order to qualify for any cooperation credit, companies must (among other things) provide to the DOJ “all relevant facts relating to the individuals responsible for the misconduct.” In a speech announcing the new policy, Deputy Attorney General Sally Yates elaborated:

Effective immediately, we have revised our policy guidance to require that if a company wants any credit for cooperation, any credit at all, it must identify all individuals involved in the wrongdoing, regardless of their position, status or seniority in the company and provide all relevant facts about their misconduct.  It’s all or nothing.  No more picking and choosing what gets disclosed.  No more partial credit for cooperation that doesn’t include information about individuals.

Presumably in response to the backlash, and confusion and uncertainty, about the implications of this aspect of the guidance, according to the WSJ, Assistant Attorney General Caldwell subsequently clarified in remarks before the Global Investigative Review conference in late September that, effectively, companies need only share the information they have and – provided they have conducted an adequate investigation – they will still be eligible for cooperation credit even if they come up empty-handed as to culpable individuals:

Companies seeking cooperation credit “have to work affirmatively” to identify relevant information about culpable individuals and they can’t just disclose general misconduct without identifying the people behind the misconduct, said Ms. Caldwell, but she acknowledged that a company can’t be expected to provide what it doesn’t have, and that some investigations just don’t bear fruit.

“When a company is truly unable to identify culpable individuals, even after an appropriately tailored, careful, thorough investigation, but [it] still provides the government with all the relevant facts, and otherwise assists us in obtaining the relevant evidence, the company will still be eligible for cooperation credit,” she said.

See also this WSJ article noting the DOJ’s current focus on “bigger, higher impact [bribery] cases,” this blog discussing internal audit concerns with the DOJ’s new guidance, this blog addressing the governance implications of the guidance, and oodles of memos in our “White Collar Crime” Practice Area.

Stronger Connection Between Auditors & Accounting Employees = Better Audit Quality

Companies with a larger proportion of alumni from their current audit firm among their lower level accounting employees are purportedly significantly less likely to issue financial misstatements and have lower absolute abnormal accruals – so concludes this new paper reflecting the results of a study that examined whether alumni affiliations between companies’ auditors and accounting employees impact audit quality, as measured by financial misstatements and abnormal accruals.

Using the two key measurables of “alumni affiliations” (i.e., accounting employess who previously worked for their companies’ current audit firms) and audit quality based on the two commonly used proxies of financial material misstatements and absolute abnormal accruals, the results suggest that the stronger the connection between auditors and accounting employees, the better the audit quality.

Importantly, however, audit quality varies by accounting employee position level. Strong auditor alumni affiliations among lower level accounting employees have significantly positive effects on audit quality in terms of both reducing egregious misreporting (misstatements) and within GAAP earnings management (abnormal accruals), while alumni affiliations with auditors among middle management only reduce the likelihood of misstatement and, among upper management, only marginally restrain earnings management. The study’s authors surmise that this variability by position level is based on the fact that lower level accounting employees are likely to enhance audit quality given their previous working experience with the auditor (as further discussed in the paper), but have few incentives or opportunities to reduce it.

Given that hiring accounting employees from the company’s current audit firm is fairly common – and the close and ongoing interaction between the audit firm and the company’s accounting employees throughout the year (and during the audit process in particular) – the study’s findings are worth consideration.   

See also this FEI articleand heaps of additional resources in our “Auditor Independence,” Auditor Engagement,” and Auditing Process” Practice Areas.

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:

– Cybersecurity Tops Director & GC Concerns
– Study: Director Tenure Counterbalances CEO Authority
– Audit Committee Collaboration Releases External Auditor Assessment Tool
– DOJ Furthers Transparency on Corporate Cooperation
– Cybersecurity Preparedness

– by Randi Val Morrison

October 14, 2015

IIA Calls on SEC to Mandate Internal Audit Function

In conjunction with the SEC’s request for comments on its Audit Committee Disclosure Concept Release, the Institute of Internal Auditors (IIA) has requested that the SEC require all public companies to have an internal audit function or – at a minimum – explain why they don’t.

Assuming the requirement of an internal audit function, the IIA’s comment letter further recommends that, to assist investors’ understanding and evaluation of audit committee performance, audit committees be required to disclose:

– Whether the internal audit function has the stature, independence, and resources to fulfill its mission “to enhance and protect organizational value by providing risk-based and objective assurance, advice, and insight,” and
– Whether the internal audit function is performing in accordance with globally recognized standards, such as the IIA’s International Standards for the Professional Practice of Internal Auditing.

In his recent blog, IIA President & CEO Richard Chambers reiterates the value to good governance and – more specifically – control environment oversight – that an effective internal audit function can provide, while (wisely) being careful to not imply that a company’s success or failure rides on the presence of internal audit.

While I understand the likely resistance to the suggested mandate and believe it is more appropriately the province of the exchanges (e.g., the NYSE already requires its listed companies to have an internal audit function) rather than the SEC, as noted previously, I am a firm believer – based on my personal experience – in the benefits attainable by a strong internal audit function.

Access heaps of checklists, surveys, samples and other relevant resources in our “Internal Auditors” Practice Area.

Internal Audit: Opportunities to Increase Use of Technology

According to a recent worldwide survey conducted by the world’s largest ongoing study of the internal audit (IA) profession (the Global Internal Audit Common Body of Knowledge (CBOK)), 50% of North American CAEs report using technology appropriately or extensively for audit processes, while 37% report some use of electronic workpapers or other office information technology tools, and 13% rely primarily on manual techniques. CBOK posits that this may be due to inadequate IT expertise on the IA staff, or the risk-taking and creativity associated with finding new ways to use technology that exceed that required for normal IA activities.

Whereas more than 90% of survey respondents worldwide hold four-year degrees or higher, only 1 out of 10 studied computer science or information technology – revealing little change since 2006. CBOK cites as one possible explanation of this the fact that technology is being incorporated into other areas of study, e.g., an information systems course as part of the IA curriculum, AIS as part of an accounting program.

Other notable stats:

  • 57% identified accounting as a major or significant field of study, followed by auditing at 43%.
  • 17% of North American CAEs reported certifications in information systems auditing (such as CISA, QICA, CRISC)
  • 11% relied on academic studies for obtaining their tech skills
  • 3% reported certifications in security for IT (such as CISM, CISSP, CSP, CDP)

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:

– Directors Debate Approaches to Board Refreshment
– SOX Compliance Costs & Audit Scrutiny on the Rise
– Effective Crisis Management: Impediments & Strategies
– Relationship Guidance for GCs & Internal Audit
– Board Effectiveness: Continuing the Journey

– by Randi Val Morrison

October 13, 2015

Activists Seeking Partnerships With Institutional Investors

Institutional investors are playing an increasingly important role in shareholder activist campaigns according to new survey findings from FTI Consulting/Activist Insight. The 2015 survey of 24 engaged activist firms revealed that 70% expect an increase in cooperation or “future partnerships” with institutional investors and pension funds in pursuing their target companies – and all perceive greater acceptance by these institutional investors.

Additional noteworthy findings include:

  • 300 companies worldwide were subjected to public demands in the first half of 2015 – compared with 142 in all of 2010
  • 96% suggest that M&A activism will increase in general
  • Number of board seats sought by activists has almost doubled – from 23 between 2010 and 2012, to 43 from 2013 to present
  • Activists believe that assets allocated to shareholder activism will continue to increase; 86% of surveyed funds expect to engage in new capital-raising over the next 12 months
  • Activists increasingly believe that the US activism market (i.e., competition for targets) is getting crowded, and are turning their sights toward Canada and Europe

In this new post, Wachtell Lipton’s Marty Lipton aims to encourage major institutional investors to recognize the harmful effects on company behavior and their overall portfolio value associated with the antics of activist hedge funds. The memo identifies three new studies by economists and law professors that Marty claims undermine the reliability of what has been characterized by some as “empirical evidence” allegedly supporting “short-termism, attacks by activist hedge funds and shareholder-centric corporate governance.”

See also this recent St. Louis Post Dispatch article wherein NYC Comptroller Scott Stringer expresses his concern about companies being too eager to succumb to activist demands to avoid a proxy fight to the detriment of long-term shareholder value.

Canadian Shareholder Coalition Seeks Universal Proxy

The Canadian Coalition for Good Governance, Canada’s largest shareholder coalition, is calling on companies and dissidents to voluntarily adopt the use of universal proxies in contested director elections pending sought-after corporate and securities laws reforms that would mandate their use. As blogged previously, on the US front, SEC Chair White indicated in June that she had asked the Staff for rulemaking recommendations on universal proxy ballots.

Matt Orsagh on Bank of America CEO/Chair Split

In this podcast, Matt Orsagh, Director of Capital Markets Policy for the CFA Institute, discusses combined and split CEO/Chair roles in the context of Bank of America’s recent shareholder vote, including:

– What was this vote all about?
– Is Bank of America backsliding on corporate governance?
– Are there potential conflicts of interest in combining the roles?
– What checks & balances do companies implement when they combine the roles?
– What is the trend in combining/separating the roles in the US?

– by Randi Val Morrison

October 12, 2015

Conflict Minerals: Would the FBI Challenge You?

Here’s a note from Lawrence Heim of Elm Sustainability Partners:

Not ones to cry wolf, we had a bit of a shock at the ThomsonReuters Governance and Risk Seminar we participated in this morning. One of the sessions included a representative from the FBI’s International Corruption Unit. Just to be clear, this is the US Federal Bureau of Investigation. The topic was current enforcement of the Federal Corrupt Practices Act (“FCPA”). We asked if matters such as conflict minerals, human rights abuses and human trafficking were on their radar screen, expecting a blank stare or an overly-general “non-answer answer.” Instead, a direct – and rather unnerving answer – was given. To summarize:

– The FBI has already identified linkages between known instances of FCPA violations/concerns (corruption, doing business in ”low integrity countries”) and human trafficking/human rights abuses. Human rights matters are of current interest to them.
– FBI’s FCPA enforcement resources have grown dramatically in recent years.
– FBI has unlimited global reach for FCPA compliance enforcement.
– Conflict minerals experts would do well to have at least a basic understanding of FCPA.

We don’t know what that all means just yet, but we do think it adds another dimension of risk to the SEC filings, compliance status and supplier relationships.

Lawrence will be among the speakers of our upcoming webcast: “Conflict Minerals: Tackling Your Next Form SD“…

Pay Ratio: Another House Bill Seeks to Repeal

Here’s a blog by Cooley’s Cydney Posner:

On September 30, the House Financial Services Committee approved, by a vote of 32 to 25, H.R. 414, the Burdensome Data Collection Act, following committee consideration and a mark-up session. Given that the bill is only one paragraph long, there was not too much to mark up. The bill will now go to a full vote of the House. The bill would repeal Section 953(b) of Dodd-Frank, the pay-ratio provision, and make any regulations issued pursuant to it of no force or effect.

Any of this sound familiar? It should. The very same bill was introduced in 2011, but went nowhere. (See this news brief.) With President Obama still holding the veto pen and a substantial constituency supporting the pay-ratio provision, a different result seems unlikely this time.

Europe: Director Duties & Liabilities

This 31-page “Guide to Directors’ Duties & Liabilities” was released last week by the European Confederation of Directors’ Associations. See the heading entitled “Comply-or-explain needs more explanation.” I guess that caption is tongue-in-cheek…

– Broc Romanek

October 9, 2015

FASB Proposes “Materiality” Guidance

As noted in this blog, the FASB issued two exposure drafts last week that address the use of materiality to help companies eliminate unnecessary disclosures in their financials. In addition, the exposure drafts are an attempt to have the FASB’s conceptual framework become better aligned with the legal concept of “materiality” established by the US Supreme Court.

The exposure drafts are part of the FASB’s disclosure framework project – and address the use of materiality in two ways:

– Helping companies use discretion when determining which disclosures in notes to financial statements should be considered “material,” and
– Helping FASB understand the reporting environment in which it sets accounting and reporting standards.

The exposure drafts are “Qualitative Characteristics of Useful Financial Information” – and “Notes to Financials – Assessing Whether Disclosures Are Material.” We’re posting memos in our “Materiality” Practice Area.

The Business Roundtable has a new white paper that argues that the materiality standard for determining disclosure obligations best protects investors and facilitates the capital markets…

PCAOB Auditor Inspections Will Focus on Three Areas

Last week, as noted in this blog, the PCAOB issued this “Staff Inspection Brief” to highlight the three general areas that it will focus on going forward during inspections: auditing internal control over financial reporting; assessing and responding to risks of material misstatement; and auditing accounting estimates, including fair value measurements. These are among the most common areas where inspectors found significant deficiencies in the past several years. In addition, PCAOB inspectors consider the current economic environment and related developments in their reviews. For example, economic uncertainty stemming from the financial crisis and the sluggish global economy has in the past factored into the audits and the areas selected for inspection.

Hat tip to the Society of Corporate Secretaries for noting how the PCAOB recently posted an updated Standard-Setting Agenda – and that based on comments received on its reproposal, the Staff anticipates recommending that the audit engagement partner disclosure be required on the new PCAOB form that was proposed as an alternative to disclosure in the auditor’s report. By the way, I just calendared this new webcast: “Audit Committees in Action: The Latest Developments.”

Coming? Disclosure Simplification for Smaller Companies

As noted in this Cooley blog, at last month’s meeting of the SEC’s Advisory Committee on Small and Emerging Companies, the Committee approved a set of recommendations in an effort to harmonize the jumble of rules that apply to the various categories of small companies and expanding the application of the small-company disclosure accommodations generally. Funny because I was just reliving some old memories with Brian Lane yesterday about the “Disclosure Simplification Project” that came out in 1996…

See this interview for a perspective of the disclosure effectiveness project underway related to accounting & the financials…

– Broc Romanek

October 8, 2015

NYSE’s New “Material Information” Policy: What to Do Now

Last week, I posted a poll to see how folks were reacting to the NYSE’s new “release of material information” policy. The poll results show that 27% of companies plan to make earnings announcements before 7 am – while 35% will do so after 4 pm (25% said they’ll make them when they want). In addition, I got this note from a member:

We talked to the NYSE’s “Market Watch” team yesterday and confirmed that while the decision whether to halt prior to 9:30 in connection with the issuance of material news is made by the company, the determination as to whether the news is actually “material” will be made by the company and the Market Watch team together – and the NYSE won’t implement a pre-market halt unless the Exchange Staff agrees with the company’s own materiality assessment. As a result, the factors that are relevant to whether an earnings release is material would be jointly considered by the company and the NYSE. In determining whether to halt trading, the NYSE asks that companies consider whether earnings are coming “near expectations” or whether there is a big beat or miss. So the NYSE will halt between 7:00 and 9:30 if (1) the company and the NYSE agree that the news is material and (2) the company requests a halt. If those two conditions are met, the NYSE will halt trading.

There is no change to practice during trading hours. Remember that the NYSE doesn’t halt a stock after news has been issued, so trading volatility after 9:30 in response to a release issued before the NYSE opens would never give rise to a halt. The only situation that perhaps the NYSE would halt trading in those circumstances would be if it was clear that the original earnings release was inadequate and either misstated or omitted material information and an additional release was necessary.

The NYSE Proposes to Significantly Increase Its Annual Listing Fees

Recently, the NYSE filed a proposed rule change with the SEC to amend the NYSE Listed Company Manual effective January 1, 2016 to increase annual listing fees. As noted in this Fried Frank memo, the minimum annual fee for a company’s primary class of equity securities is currently the greater of $45,000 or $0.001 per share. The proposed hike would increase the minimum annual fee to the greater of $52,500 or $0.001025 per share – roughly a 17% increase. For example, a company with 100 million shares of its primary class of equity securities will pay an annual fee of $102,500 per year in 2016.

Transcript: “Evolution of M&A Executive Pay Arrangements”

We have posted the transcript for our webcast: “Evolution of M&A Executive Pay Arrangements.”

– Broc Romanek

October 7, 2015

More Fake SEC Filings: Kraft Heinz, Phillips 66 Targeted

Following up on my series of blogs about fake SEC filings, here’s an excerpt from this WSJ article:

Two more companies were targets of apparently fake securities filings, this time Kraft Heinz Co. and Phillips 66. Two separate filings that said they were submitted by Loreto M. Zamora on behalf of LMZ & Berkshire Hathaway Co. to the Securities and Exchange Commission on Thursday morning claimed to hold at least 10% stakes in both Kraft Heinz and Phillips 66.

Both companies told The Wall Street Journal that the filings are fraudulent and they have contacted the SEC. Warren Buffett, whose Berkshire Hathaway Inc. owns stakes in the food and energy companies, said in an email that he has never heard of Mr. Zamora.

Transcript: “Whistleblowers: What Companies Are Doing Now”

We have posted the transcript for our popular webcast: “Whistleblowers: What Companies Are Doing Now.”

Yesterday, in a far-reaching judgment, the EU’s Court of Justice declared the European Commission’s 2000 US safe harbor decision invalid. I’ve never seen so many law firm memos come out so fast. For once, I’m not gonna post 50 of them – just these ones in our “Privacy Rights” Practice Area

Smaller Company Capital Formation: House Passes Two Bills

As noted in this MoFo blog by Carlos Juarez, the House passed two bills yesterday relating to the promotion of capital formation by smaller companies, H.R. 1525 and H.R. 1839:

– H.R. 1525 is the “Disclosure Modernization and Simplification Act of 2015,” which directs the SEC to issue regulations permitting issuers to submit a summary page on annual and transition report form, 10-K, if each item on that page cross-references electronically or otherwise the material contained in form 10-K to which the item relates. It also requires the SEC to revise regulation S-K and to study ways to modernize and simplify the requirements.

– H.R. 1839 is the “Reforming Access for Investments in Startup Enterprises Act of 2015,” which would amend the Securities Act of 1933 to exempt certain transactions involving purchases by accredited investors, and for other purposes, codifying Section 4(a)(1)(½).

– Broc Romanek

October 6, 2015

D&O Questionnaires: Do You Need to Update for AS #18?

Each year about this time, I get questions from members about whether they need to update their D&O questionnaire (remember our “D&O Questionnaire Handbook“). That’s a tough question to answer so far this year as there hasn’t been a consensus yet about how to handle the PCAOB’s new Audit Standard #18 regarding related-party transactions (see our memos on AS #18).

From what I hear, the Big 4 auditors have not been forthcoming – or consistent if they are – about what they need from their clients in response to AS #18. In some cases, it appears that an independent auditor might ask a client to have D&O questionnaires elicit a list of all the members of an insider’s immediate family on the questionnaire so that the auditor can then search for transactions with those individuals. For info on how “related party” is defined for purposes of AS #18, see #8536 in our “Q&A Forum.” Give me your feedback – and stay tuned for more…

Nasdaq has released a bunch of “Top 10″ lists, such as the “Top 10 Frequently Asked Questions” and “10 Most Popular Staff Interpretations & Listing Council Decisions”…

SCOTUS & Insider Trading: Newman Stands!

As noted in this Paul Weiss memo, on the first day of the US Supreme Court’s 2015-16 term, SCOTUS declined take up the government’s petition for writ of certiorari in United States v. Newman, a landmark decision that dismissed indictments against two insider trading defendants. By declining to hear the petition, the Supreme Court ensures that the Second Circuit’s decision in Newman will remain binding in the Second Circuit and influential across the country as it has already had a significant impact on the law of insider trading.

Two of Newman’s holdings are particularly important: first, that the government must prove that a remote tippee knew or should have known of the personal benefit received by a tipper in exchange for disclosing nonpublic information; and second, that the benefits alleged by the government in Newman were not sufficient to support a conviction, as they were not sufficiently “consequential.”

Webcast: “Transaction Insurance as a M&A Strategic Tool”

Tune in tomorrow for the webcast – “Transaction Insurance as a M&A Strategic Tool” – to hear Dechert’s Markus Bolsinger, Aon Transaction Solutions’s Matt Heinz, Pepper Hamilton’s Jim Epstein, Norton Rose Fulbright’s Scarlet McNellie and Haynes and Boone’s George Wang discuss all the “in’s & out’s” as insurance in M&A transactions has gained in popularity.

– Broc Romanek

October 5, 2015

Conflict Minerals: SEC Files Petition to Overturn Court Decision

As noted in this Schulte Roth memo, the SEC & Amnesty International filed petitions (here’s the SEC’s petition – and here’s Amnesty International’s) on Friday seeking an en banc rehearing of the panel decision from August in which a divided three-judge panel of the US Court of Appeals for the DC Circuit reaffirmed its April 2014 majority decision that the requirement under the SEC’s rule to describe products as having “not been found to be DRC conflict free” is compelled speech that violates the First Amendment (see more in this Cooley blog). Here’s a key excerpt from the memo:

We think it is likely that the Conflict Minerals Rule litigation will continue for some time still, which is likely to preserve the status quo for at least the current compliance period (i.e., calendar year 2015 and the related filing due on May 31, 2016). Accordingly, registrants — and their direct and indirect suppliers — must continue with their conflict minerals compliance and traceability initiatives.

Resource Extraction: SEC Proposes to Adopt Rules Within 270 Days

As we blogged about a few weeks ago, the US District Court for the District of Massachusetts – in Oxfam America v. SEC – held that the delay in implementing the resource extraction rules violated the Administrative Procedures Act and ordered the SEC to file an expedited schedule for rule adoption within 30 days. On Friday, the SEC filed this notice with the court that it “proposes” to adopt a new rule within 270 days, June 27th 2016 (although the notice lays out how this will be difficult to accomplish for a variety of reasons).

Webcast: “Regulation A/A+ – Developing Market Practices”

Tune in tomorrow for the webcast – “Regulation A/A+: Developing Market Practices” – to hear Morrison & Foerster’s Marty Dunn & Dave Lynn, as well as Greenberg Traurig’s Jean Harris and Locke Lord’s Stan Keller, as they look at Regulation A/A+’s developing market practices and discuss how these new offering alternatives stack up against traditional offering techniques.

– Broc Romanek