Here’s something from Abby Jones, who recently retired from QEP Resources as corporate secretary:
As I write this, my canine companion – who just a few months ago begged for scraps and dodged auto rickshaws on the bustling roads of Delhi – lies curled up next to me. I wonder what Jasmine dreams about – the rabbit she stalked in our local park this morning, or struggling to keep nine puppies alive on the unforgiving Indian streets. How she came to us is one miracle among many in the world of animal rescue.
Why, you can fairly ask, am I writing about animal rescue on this blog? I believe that sometimes, if we look at a problem through a different lens, it becomes easier to understand and perhaps solve. I sense that you, as trained skeptics, are doubtful – but stay with me for a few minutes, at the very least you may learn something about animal rescue.
I am fortunate to serve on the board of “Best Friends Animal Society,” a large non-profit whose mission is “to end the killing in America’s animal shelters … by building community programs and partnerships all across the nation.” In addition to running the nation’s largest no-kill sanctuary, which on any given day is home to nearly 2,000 homeless dogs, cats, rabbits, horses, goats, pigs and parrots, Best Friends has dog and cat adoption centers in Los Angeles, Salt Lake City – and one opening soon in Manhattan. They also work with a network including hundreds of no-kill organizations throughout the nation.
How Solving a Rescue Crisis Required Diverse Perspectives
In 1984, approximately 17 million animals were killed each year in America’s shelters. In that same year, the founders of Best Friends broke ground on their no-kill sanctuary in Kanab, Utah. As they worked toward their goal, the founders met many like-minded people and organizations striving for a no-kill nation. Due to the love and labor of thousands of people, the number of animals euthanized in America’s shelters is now 4-5 million. While Best Friends and its partner organizations will tell you that’s still too many, it is tremendous progress in 30 years.
Solving the euthanasia crisis involved tapping the talents of many smart people with diverse perspectives, and the solution is multifold. First, spay/neuter addresses the problem at the beginning – by preventing unwanted litters. In order to accomplish this goal, many animal welfare groups offer free or low-cost spay-neuter programs to low-income pet owners.
Second, adoption must be the preferred source of pets. The obstacle is that many potential pet owners dread going to shelters; they conjure images of forlorn animals, potentially with only hours before euthanasia, gazing at them from behind bars. Recognizing this issue, rescue groups pull animals from shelters, foster them in homes and take them to retail outlets where they can meet potential adopters. In addition to getting many animals adopted, this tactic reduces shelter populations, also decreasing the pressure to euthanize to create cage space.
The other strategies to achieve a no-kill nation include abolishing puppy mills (note – if your friend bought a cute puppy on the Internet or in a pet score, chances are over 90% that it came from a puppy mill), eliminating breed discrimination, and controlling feral cat populations through “trap-neuter-return” or TNR.
The Need for Fresh Perspectives on Boards
When, in 2013, one of the Best Friends founders asked me to consider serving on the board, I was stunned. The liberal, ex-hippie (maybe not ex), environmentalist founders who, with their passion and sweat had built an organization with revenues exceeding $50 million in 2014, were asking a lawyer who works for an oil and gas company (translate “fracker”) to serve on the board. What could I offer to a group that had already accomplished so much? The answer lies in what has changed the face of animal rescue over the last 30 years. Best Friends was looking for different perspectives – new ways to look at the problems the no-kill movement faces now.
Serving on the Best Friends board has helped me understand why board diversity is important. The boards of many oil and gas companies are populated with directors who come from the oil and gas industry (that they are almost always white and male goes without saying). Don’t get me wrong, their viewpoint is critical. Understanding geology and drilling techniques is incredibly challenging.
But imagine, if you will, adding a director who can ask the questions an ESG investor wants to ask, or the burning questions of a regulator? What kind of depth and breadth might those questions add to the debate? What if companies, instead of looking for directors who would help them perpetuate the existing company paradigm, offered them new ways to look at the problems of their industries today?
As investors push for change in the boardroom, I applaud their efforts. During my 13 years as a corporate secretary, I worked with many bright, talented and dedicated directors who truly did have corporate best interests at heart. I saw no instances of “group think” or simply rubber-stamping the CEO’s recommendations.
But what I rarely saw was a true diversity of viewpoints, people who looked at problems from different perspectives because their backgrounds were unique. It is that diversity that can truly change our boardrooms, help with crisis management and ensure companies are prepared to face the challenges that inevitably lie ahead.
Conflict Minerals: SCOTUS Extends Uncertainty
Last week, as noted in this Elm Sustainability Partners blog, the US Supreme Court granted an extension for filing an appeal to the SEC over the appellate court rulings on the conflict minerals disclosure requirements related to the use of specific determination wording – ie. NAM v. SEC.
Here’s the intro from this blog by Gunster’s Robert White:
Corporate venture capital has quickly developed into a major funding source for startup companies. This type of startup funding is available to some innovative startups and early stage companies, and the dollars involved are significant. This all sounds great, but is this type of funding right for your startup?
According to the National Venture Capital Association and PWC’s Money Tree survey, 905 corporate venture capital deals were closed during 2015 with $7.5 billion invested (primarily in high growth startup companies). These transactions comprised 21% of the total number of venture capital deals closed in 2015 and represented 13% of the total venture capital funds invested in that year. Not surprisingly, the biggest chunk of these investments went to software companies ($2.5 billion in 389 deals, which represented 33% of all corporate venture deals in 2015), while biotech deals were second ($1.2 billion in 133 deals, which represented 16% of all corporate venture deals that year).
Recently, the Rock Center for Corporate Governance at Stanford University conducted a nationwide survey of 1,202 individuals — representative by gender, race, age, political affiliation, household income, and state residence — to understand public perception of CEO pay levels among the 500 largest publicly traded corporations. Key takeaways are:
– CEOs are vastly overpaid, according to most Americans
– Most support drastic reductions
– The public is divided on government intervention
74 percent of Americans believe that CEOs are not paid the correct amount relative to the average worker. Only 16 percent believe that they are. While responses vary across demographic groups (e.g., political affiliation and household income), overall sentiment regarding CEO pay remains highly negative.
This part doesn’t surprise me – but it’s still pretty amazing:
Public frustration with CEO pay exists despite a public perception that CEOs earn only a fraction of their published compensation amounts. Disclosed CEO pay at Fortune 500 companies is ten times what the average American believes those CEOs earn. The typical American believes a CEO earns $1.0 million in pay (average of $9.3 million), whereas median reported compensation for the CEOs of these companies is approximately $10.3 million (average of $12.2 million).2
Responses vary based on the household income of the respondent, but all groups underestimate actual compensation. Lower income respondents (below $20,000) believe CEOs earn $500,000 ($9.7 million average), while higher income respondents ($150,000 or more) believe CEOs earn $5,000,000 ($14.9 million average).
Rulemaking Petition: Disclosure of Gender Pay Ratios
Normally I don’t blog about rulemaking petitions because they don’t go anywhere. The SEC is not required to act on them; see my blog about how a lawsuit was recently dismissed that sought to force the SEC to act on a political contribution disclosure petition – but that case is now back in court!
Anyways, I thought I would note this new petition from PAX Ellevate Management that seeks to require companies to disclose gender pay ratios on an annual basis, or in the alternative, to provide guidance to companies regarding voluntary reporting on gender pay equity to investors…
Climate Change: GAO Examines Corp Fin’s Review of Disclosure
The GAO recently issued this 30-page report – entitled “SEC’s Plans to Determine if Additional Action is Needed on Climate-Related Disclosure” – to analyze whether the SEC stands on reviewing climate change disclosure, among other actions. Here’s an excerpt from the intro of the report:
SEC has taken one of three planned actions described in its 2010 guidance to determine if investors may need additional information on climate-related risks. Specifically, SEC has monitored the impact of its guidance on companies’ filings through its routine review processes but has not held a public roundtable on climate change disclosure, and SEC’s Investor Advisory Committee has not considered the issue. SEC staff believe that SEC has not taken the other two actions because some circumstances that existed when the 2010 guidance was issued have changed. Specifically, the 2010 guidance was issued when Congress was considering legislation that, if enacted, would have limited greenhouse gas emissions by establishing a cap-and-trade program.
According to SEC, this could have triggered disclosure requirements for companies covered by the program. However, the legislation was never enacted. This and changing priorities have resulted in SEC and its Investor Advisory Committee not taking additional actions. According to SEC staff, however, other efforts may address the issue of climate-related disclosure, including SEC’s project to review the effectiveness of disclosure requirements.
This project provides investors and other stakeholders with opportunities to provide comments to SEC on any disclosure topic. As of October 2015, the project is in its initial phase, and SEC staff have not recommended changes to the Commission.
This Q&A interview with SEC Chair White conducted by Wilson Sonsini’s Steve Bochner is more useful than the typical speech (here’s a summary from Ning Chiu). Here’s an excerpt from near the end:
STEVEN BOCHNER: We have a few more minutes. Maybe talk a little bit about something that the next panel’s going to touch on as people get their lunch in a few minutes here, which is kind of balancing shareholder rights with the domain of the board. I mean, that seems to be one of the topics of our time here and there’s just been — since Sarbanes-Oxley dramatic change in shareholder rights, which has caused shareholder activism and a lot of is it a good thing/bad thing? The answer is probably somewhere in the middle, but proxy access, I think people know that history here.
What’s your view of how to strike that balance, the Commission’s role in it? How do you see that particular debate playing out?
CHAIR WHITE: Yes. I think at its core it’s not for the Commission to take sides in the debate. I can sort of explain what I mean about that a little bit. I mean, we obviously have rules that govern various acts of activism if we want to phrase it that way. We have rules that require disclosure. We’re focused on everybody, obeying/adhering to those rules, so investors get the information, shareholders get the information that they need to have. And so, I think that’s, one kind of important bedrock principle in that to the extent that I’ve said this before, I don’t think activists are a seamless piece. I think they can fall into different categories and they can be seeking different things and they can use different methods, which presumably means issuers may want to be responding differently depending on exactly what’s in front of them.
One of my favorite anecdotes is, I gave a speech on a lot of this at Tulane, at their corporate governance [conference], and the two immediate press readouts from what I said, one said, “White supports activists.” The other one side, “White trashes activists.” So I think I struck the balance right that day. [Later, they wrote about differences] between me and your opening speaker yesterday. On shareholder proposals, obviously our rules, since 2011 have provided for qualifying shareholders to make proposals.
Proxy access, clearly 2015 was a pivotal year. I think there were a lot — I think ISS has said over 120 shareholder proposals. I think 90 plus of them made it to a ballot. Sixty percent of them if I’m right, I think got majority support, and then I think there were 118 companies who actually in 2015 adopted some form of proxy access, names everyone knows –GE, Microsoft, Goldman Sachs, Morgan Stanley, Bank of America, and many other companies. And I saw one figure recently where I think there are 20 percent of the S&P — I think it’s 100, not 500 now have some form of proxy access. If you look back in 2013, it was 1/2 of 1 percent.
So, obviously there’s been a lot of activity in that space. I expect, by the way, there’ll be more activity this season in that space too.
The other piece of this — free associating a little bit — is, the uptick in what I call direct shareholder engagement that boards and companies are doing and shareholder proposals aren’t in that category. I’m really thinking of the outreach that’s being done. I think that’s all to the good. I mean, that’s something I really think is quite constructive.
STEVEN BOCHNER: Yeah. Well, why don’t we end on a topic that I know is important to you, which is diversity and you’ve been a director of a public company. You’ve been a federal prosecutor, Chair of the SEC. You’ve worked in a law firm, so you’ve seen it from about every side and I know it’s something you care deeply about.
CHAIR WHITE: Diversity on boards I think is enormously important — diversity everywhere I think is an enormously important topic. I think it adds value. I think you’ve seen in terms of the board context really study after study showing that greater diversity on boards adds value. I mean, it makes your board function better and adding value to your company obviously correlations — but start with that, and yet the numbers [on boards] really are not bearing that out in most companies.
I think on the gender side, it’s 16 percent women [on public boards] and I think GAO just put out a study in December saying that it’d take about four decades to get parity if you had an equal number of men and women, for example appointed to boards.
I don’t think it’s a want of supply either. I think there are plenty of highly qualified diverse candidates. There are resources to find them if your nominating committee needs resources to find them. I think I would urge boards to kind of start there. Where are you looking for your board candidates? If it’s that old traditional network where everybody’s come from for the last 50 years, you may have more trouble getting to highly qualified, diverse members of your board.
Obviously [I am] speaking [personally] from my various perspectives. When it comes to the SEC’s regulatory space, we don’t tell you who should be on your board and we don’t generally talk about even board qualifications. You know, a couple of exceptions to that, we do have disclosure rules on directors and their experiences and backgrounds and diversity. Those rules have been the subject of some conversation as to whether they are strong enough, whether they really are giving [enough useful information to] investors who are interested, and many are, in the racial, ethnic, and gender diversity of boards. They don’t require that disclosure. What they require is if a board considers diversity, say so and how, if it does. If you have a policy on a diversity as you’re locating and nominating directors how is that implemented and how do you judge its effectiveness?
In that rule we don’t have a definition of diversity because obviously diversity can mean a lot of things. In addition to gender, race, ethnicity, all kinds of qualifications, rightly so, fit into that concept.
We have a number of petitions pending that raise the issue of — wouldn’t this be more meaningful if you actually defined diversity in your rule, SEC, to at least include ethnicity, race, and gender, in addition to whatever other qualities, fall under that category and require disclosure of those facts And I think those concerns, from my point of view, are well-founded and I’ve asked the staff to study basically what the disclosures are currently under our existing rule, what they’ve been over time with an eye towards — with these concerns that I share, whether we need additional guidance or rulemaking.
Going Concerns: Slightly Down
Here’s the highlights of this Audit Analytics study on going concerns, for which an initial review seems to provide positive news, but a deeper analysis reveals a mixed bag of indicators:
– Fiscal year end 2014 is estimated to receive 2,233 going concerns, a decrease of 170 from the year prior, but this decrease is only 10 companies more than the 160 companies that ended up filing terminations with the SEC after disclosing a going concern in 2013. Therefore, almost all the drop was due to company attrition from the prior year’s going concern population.
– It is estimated that 15.8% of auditor opinions filed for fiscal year end 2014 will contain a qualification regarding the company’s ability to continue as a going concern. In 2008, the figure was 21.1% and the percentage decreased for 6 consecutive years thereafter to drop to the value of 15.8%.
– For fiscal year 2014, the number of new going concerns (going concerns filed for a particular fiscal year, but not the year prior) is estimated to be 530, which is the 4th year in a row with an amount under 600. This streak is notable because the 10 years prior to 2011 all had numbers above 600. Moreover, it should be noted that 48% of the new going concerns as of July 14th were disclosed in S-1s or F-1s and thus linked to recent IPOs, not established companies. A new going concern linked to a recent IPO should not necessarily be viewed as a negative economic event.
– Fiscal year 2014 saw the third (tied) lowest number of companies that improved well enough to shed its going concern status. A multi-year analysis of the going concerns allows for an identification of companies that filed a going concern one year but not the following year. This cessation can occur for one of two reasons: (1) the company files a subsequent clean audit opinion (subsequent improvement) or (2) the companies stopped filing audit opinions altogether (subsequent disappearance). A review of companies that experienced a subsequent improvement reveals that only 200 companies that filed a going concern in 2013 were able to file a clean audit opinion in 2014. This figure represents the third lowest (tied) for any year analyzed, since 2000.
Corp Fin Issues EDGAR Guidance for Asset-Backed Issuers
The Obama administration will call on lawmakers to double the budgets of the top U.S. market cops over the next several years, the White House announced Monday, a push almost certain to encounter opposition from the Republican-controlled Congress. The big request, which the White House is set to unveil formally Tuesday, calls for boosting annual funding for the Securities and Exchange Commission and the Commodity Futures Trading Commission to $3 billion and $500 million, respectively, by the fiscal year starting Oct. 1, 2020, according to a blog post by Jeffrey Zients, director of the National Economic Council. “The President will continue working to make sure that the financial system works for everyone,” Mr. Zients wrote. “As the financial services industry continues to rapidly evolve, some in Congress have used budget limitations to hamper the agencies charged with establishing and enforcing the rules of the road.”
President Barack Obama’s push to boost funding significantly for the SEC and CFTC comes amid increasing calls from Democratic presidential candidates Bernie Sanders and Hillary Clinton to do a better job at holding Wall Street firms and their employees responsible for misconduct. Tuesday’s blueprint, for the fiscal year beginning Oct. 1, is widely seen as an opening bid for budget negotiations with congressional Republicans and is unlikely to be enacted without significant tweaks. Mr. Zients said the White House would request $1.8 billion for the SEC next year, $200 million above its current funding level, and $330 million for the CFTC, up from the $250 million level it has hovered at for the second consecutive year.
Webcast: “How to Get Your Equity Plan Approved By Shareholders”
Tune in tomorrow for the CompensationStandards.com webcast – “How to Get Your Equity Plan Approved By Shareholders” – to hear Towers Watson’s Jim Kroll and Brian Myers, Fenwick & West’s Shawn Lampron and Alliance Advisors’ Reid Pearson explain how to navigate the NYSE & Nasdaq rules – as well as the proxy advisor and institutional investor policies – to obtain shareholder approval for your equity compensation plans.
Director Pay: Nasdaq Proposes Golden Leash Disclosure Requirement
A few weeks ago, Nasdaq proposed a rule change that would require listed companies to disclose “golden leash” arrangements. As noted in this Dorsey memo, the proposed rule would require listed companies to disclose on their website or in their proxy all agreements between any director or nominee any person or entity (other than the company) that provide for compensation or other payment in connection that the person’s candidacy or service as a director. The proposed rule is meant to be interpreted broadly – so it would apply to payments for items such as health insurance premiums. However, disclosure of arrangements that relate only to reimbursement of expenses incurred in connection with a nominee’s candidacy for director, or that existed before the nominee’s candidacy would not need to be disclosed.
Recently, I ran a popular blog listing 31 pet peeves about earnings releases. In response, a number of folks sent in additional pet peeves – including Foley & Lardner’s Pat Quick and Morgan Lewis’ Alan Singer – so here are 21 more:
1. Inappropriately mixing first & third person (“the Company” and “we”).
2. Conflating use of percent & percentage points.
3. Misuse and overuse of the verbs “drive,” “leverage” and “grow” – and variations of those terms.
4. Describing something as “growing” or “increasing” (i.e. a continuing event) when the data or evidence are historical (support only “grew” or “increased”).
5. Inadvertently issuing an earnings release early.
6. Having a bracket/change/comment from earlier draft seeping into the final.
7. Failure to update the forward-looking safe harbor.
8. Word typos. My favorite is when “Chief” is misspelled “Chef.” Spellcheck doesn’t catch that. Fortunately, for the company I knew that it happened to, the “Chef” Executive Officer loved to cook so she found it amusing (that one and only time).
9. Classic typo is putting in the wrong phone number for the conference call. Somehow the 800 number (that should have been entered as 888 or something similar) often turns out being an inappropriate hotline.
10. Bad numbers – the right people did not check them carefully enough, including showing “millions” as “billions” or vice versa.
11. Not owning up to a mistake. If there’s a mistake of consequence in the earnings release, the CEO/CFO should address it in the prepared remarks on the earnings call. And putting out a corrective earnings release is a tough pill to swallow, but it needs to be considered.
12. Management statements that a component of company results were “within management’s expectations” or “exceeded management’s expectations,” when no prior public forecast of the component was made.
13. Highlighting good news & burying bad news, particularly from one quarter to the next (one quarter, matters about ‘X’ are good news & in the headline; the next quarter, when all about ‘X’ is bad, there is no news about ‘X’ or the news is buried).
14. Always stating something is a “record” performance, each & every quarter.
15. Using performance measures in press releases that ultimately will not find their way into the 10-Q/10-K such that the release & disclosure filing seem to be talking about two different things.
16. Identifying something as a key performance measure one quarter & then not addressing that measure in subsequent quarters.
17. Explaining results from the quarter in present tense such that the statement seems to apply to the quarter that is in progress (“We are growing sales of our widgets” rather than “We had higher sales of widgets in the 3rd quarter”).
18. Do quotes really serve a purpose? They are often nonsensical.
19. Inconsistent guidance practices, such as changing measures from quarter to quarter or switching from annual/quarterly guidance to “long-term guidance.”
20. Over-promising & under-delivering (with respect to guidance) and then trying to explain it.
21. Not listening to the investor relations team (relying on the lawyers too much). But sometimes the converse is the problem.
Transcript: “The Latest Developments – Your Upcoming Proxy Disclosures”
We have posted the transcript for the recent CompensationStandards.com webcast: “The Latest Developments: Your Upcoming Proxy Disclosures.”
Cap’n Cashbags: Fakes His Own Death
In this 50-second video, Cap’n Cashbags fakes his own death to avoid giving a raise to a long-time employee. Stick around til the end for a dog clip:
The ink is barely dry from the FAST Act – which had been tucked into a transportation bill and the mashup of numerous bills that had been floated in the US House of Representatives last year – than the House passes three more bills that would changes the federal securities laws, as noted by Andrew Kuettel in this blog. Also see this MoFo blog – and this other blog by Andrew Kuettel…
By the way, Mike Gettelman has been posting a bunch of notes from the recent San Diego conference in his blog – including some analysis of the FAST Act…
Yahoo! Compensation Litigation: Parallels to Disney Case
Here’s a blog by Stinson Leonard Street’s Steve Quinlivan: The Delaware Court of Chancery has issued an opinion on a Section 220 demand made against Yahoo! No complaint has yet been filed, and although Vice Chancellor Laster speculates on some inferences that can be drawn, no one has proven anyone has done anything wrong.
The allegations in the case have eerie parallels to the Disney compensation litigation. The Vice Chancellor notes:
Mark Twain is often credited (perhaps erroneously) with observing that history may not repeat itself, but it often rhymes. The credible basis for concern about wrongdoing at Yahoo evokes the Disney case, with the details updated for a twenty-first century, New Economy company. Like the current scenario, Disney involved a CEO hiring a number-two executive for munificent compensation, poor performance by the number-two executive, and a no-fault termination after approximately a year on the job that conferred dynastic wealth on the executive under circumstances where a for-cause termination could have been justified. Certainly there are factual distinctions, but the assonance is there.
While noting the decision does not hold the Yahoo directors breached their fiduciary duties, the Vice Chancellor observed:
Based on the current record, the Yahoo directors were more involved in the hiring than the Disney directors were, but the facts still bear a close resemblance to the allegations in Disney III. The directors‘ involvement appears to have been tangential and episodic, and they seem to have accepted Mayer‘s statements uncritically. A board cannot mindlessly swallow information, particularly in the area of executive compensation: ―While there may be instances in which a board may act with deference to corporate officers‘ judgments, executive compensation is not one of those instances. The board must exercise its own business judgment in approving an executive compensation transaction.‖ Haywood v. Ambase Corp., 2005 WL 2130614, at *6 (Del. Ch. Aug. 22, 2005). Directors who choose not to ask questions take the risk that they may have to provide explanations later, or at least produce explanatory books and records as part of a Section 220 investigation.
Transcript: “Pat McGurn’s Forecast for 2016 Proxy Season”
We have posted the transcript for the webcast: “Pat McGurn’s Forecast for 2016 Proxy Season.”
This Cooley blog recaps this letter from BlackRock’s CEO to 500 companies about being wary of short-termism (as noted in this Davis Polk blog, the letter also urges companies to scrap quarterly earnings guidance). And here’s an excerpt from this CNBC article:
The world’s largest asset managers have held secret summit meetings to hammer out proposals for improving public company governance to encourage longer-term investment and reduce friction with shareholders. Jamie Dimon, chief executive of JPMorgan Chase, and Warren Buffett convened the sessions with the heads of BlackRock, Fidelity, Vanguard and Capital Group to work on a new statement of best practice that would cover the relationship between U.S. companies and their investors.
Also see this new study about short-termism by a trio of professors…
Transcript: “Proxy Drafting – Mid-Cap & Smaller Company Perspective”
We have posted the transcript for the webcast: “Proxy Drafting: Mid-Cap & Smaller Company Perspective.”
Political Spending: Court Dismisses Suit Against SEC for Not Acting on Rulemaking Petition
In practice, however, very few rights actually attend this right to petition, as was illustrated by the U.S. District Court’s recent ruling in Silberstein v. United States SEC, 2016 U.S. Dist. LEXIS 284 (D.D.C. Jan. 4, 2016). The plaintiff in that case sued the SEC after it failed to take any action in response to his rulemaking petition for over a year. The plaintiff complained that the SEC had both failed to respond and had effectively denied his petition.
With respect to both of these claims, Judge Rosemary M. Collyer ruled that the plaintiff was in the wrong court because Section 25(a)(1) of the Securities Exchange Act vests review of final orders of the SEC in the Court of Appeals, not the District Courts. Judge Collyer also found that SEC did not deny the petition; it merely failed to respond to it. Consequently, the plaintiff had failed to state a valid claim under the Administrative Procedure Act.
NASAA Proposes Rule for Tier 2 Regulation A Offerings
Here’s this blog from Morrison & Foerster’s Joanne Sur and Ze’-ev Eiger:
On January 27, 2016, the Corporation Finance Section of the North American Securities Administrators Association (NASAA) requested comments on a proposed model rule and uniform notice filing form aimed at simplifying the state notification requirements for Regulation A Tier 2 offerings. One of the most significant concerns regarding the proposed amendments to Regulation A was the requirement to comply with state securities laws. At the time the amendments to Regulation A were proposed, there was no coordinated review process by the states for Regulation A offerings. The final rules amending Regulation A, adopted on March 25, 2015, provide that Tier 1 offerings (for smaller offerings up to $20 million in any 12-month period) will remain subject to state securities law requirements, but Tier 2 offerings (for offerings up to $50 million) will not be subject to state review if the securities are sold to “qualified purchasers” or listed on a national securities exchange. Although the final rules define the term “qualified purchaser” in a Regulation A offering to include all offerees and purchasers in a Tier 2 offering, states continue to have authority to require filing of offering materials and enforce anti-fraud provisions in connection with a Tier 2 offering.
The NASAA’s proposed rule would require Regulation A Tier 2 issuers to file basic information about the issuer and the offering on a short notice form and pay a filing fee that can be used for filings in multiple jurisdictions. A consent to service of process also is included in the notice form so that a separate Form U-2 filing for consent to service of process for each applicable jurisdiction is not necessary. Issuers also can incorporate by reference into the notice form those documents filed on the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. Issuers would be required to submit the notice form at least 21 calendar days prior to the initial sale and the notice form would be effective for 12 months from the date of filing. Issuers can amend or renew the notice form for an additional 12-month period if the same offering is continued.
If you’re someone that spends any time reviewing the lists of comment letters on the SEC’s proposed rules, you may notice that occasionally those lists have a “memo to the file” indicating that a group has met with a SEC Commissioner about that specific proposal. Here’s an example of what such a memo looks like. This begs the question: “what is the rule that requires the SEC to post a memo reflecting that a meeting between a SEC Commissioner and someone happened over a proposal?”
This is a tricky one. It’s not really a rule that causes these “memos to the file.” Rather, it’s an interpretation from the SEC’s Office of General Counsel that the Administrative Procedures Act requires a discussion of a pending rule to be memorialized for the comment file.
Arguably, if the discussion sticks to the four corners of a comment letter submitted by the meeting counterparty, no memo is required (and no memo is required for discussions not related to a proposed rule). Since there is no rule, practice among the SEC’s Divisions, Offices and Commissioners varies in terms of how meticulous they document these meetings. Said differently, not every meeting is reduced to a memo – there might not be anything in the comment file about some meetings. So to answer the question posed above: “No rule, just practice varies by Commissioner.” And practice varies by federal agency – the CFTC is very meticulous about posting memos for all outside meetings. Thanks to Scott Kimpel of Hunton & Williams for his wisdom!
Personally, I remember when they first started posting the memos. I have always thought they were silly since they don’t say anything – nor should they. I think the Commissioners should be allowed to talk to folks to become more knowledgeable about rulemaking and not have it broadcast. But see this blog by Keith Bishop, who doesn’t like these ex parte meetings…
Recently departed SEC Commissioner Dan Gallagher has joined former Commissioners Atkins & Casey to work at Patomak Global Partners, as noted in this WSJ article…
Webcast: “Activist Profiles & Playbooks”
Tune in tomorrow for the DealLawyers.com webcast – “Activist Profiles and Playbooks” – to hear Bruce Goldfarb of Okapi Partners, Damien Park of Hedge Fund Solutions and Renee Soto of Sard Verbinnen identify who the activists are – and what makes them tick.
DTCC Explores Blockchain Technology
As noted in this blog by Steve Quinlivan, the Depository Trust & Clearing Corporation – known as “DTCC,” whose subsidiary that keeps book-entries is known as “DTC” – issued this white paper examining the use of blockchain technology to settle trades…
Recently, a member claimed that he heard that the SEC’s Public Reference Room was closed. I was surprised to hear that – so I paid a visit to find out that it indeed still exists. It does – albeit it’s now subsumed into the SEC’s library, with daily hours reduced to 10 am – 3 pm.
Of course, the importance of the Public Reference Room has greatly diminished over time. Before Edgar came online, that was the place to go to obtain SEC filings. There were times when there was a huge line to merely gain access to it – and it was often bedlam as described in this NY Times article from 1982. And here’s a GAO report from 1989 about how to improve its operations – remember microfiche! Here’s a pic of the room from 1937. And even when Edgar first started, there were many SEC-related documents that could be found only there.
But at this point, it’s more of a historic relic as information is readily available online, for free or a fee. In fact, the Public Reference Room now consists of what essentially is a one-person office with a solitary filing cabinet in it, filled with Form 144s. And if the SEC eventually requires the electronic filing of those forms (which Jesse Brill has urged for quite some time in The Corporate Counsel and more recently in this rulemaking petition), I imagine the Public Reference Room will truly be history. Please send your memories of the place – I won’t share without your permission.
How’s the SEC’s Library Looking?
I did visit the SEC’s library, which always has been one of my favorite spots. How many of the old-timers out there remember the library being jammed with both Staffers and visitors? And more than one Staffer perhaps getting a little shut eye? A nice quiet place for a nap. Send me your fond memories (and I won’t attribute unless you want it).
Getting in there is not as simple as the old days, when you could just walk in off the street. You still can walk in off the street – but you first must go through security and then wait in the Visitor’s Office until a librarian comes to fetch you. But it’s worth the trip! Of course, the library’s staff spends most of its time managing the numerous electronic resources available to the entire SEC – so the book collection is not visited often. It’s more of a museum. But for securities law nerds, it’s full of classic resources.
An exclusive group of heavyweights is chosen to deliberate over an obscure, yet crucial, policy matter. Two players who didn’t make the membership cut take offense, and spurn an invitation to join the discussion. It’s the stuff of classic Washington power politics intrigue. In this case, the tussle over the shape of an advisory panel has set up a behind-the-scenes tiff between the country’s top markets regulator – the Securities and Exchange Commission — on the one side, and two of the country’s biggest exchanges — the New York Stock Exchange, and Nasdaq – on the other.
The two exchanges are so upset the SEC didn’t offer either of them a seat on the agency’s Equity Market Structure Advisory Committee that they have spurned offers by the panel to participate in policy deliberations held by its members behind closed doors, according to people familiar with the matter.
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