April 21, 2016

More on “SEC Commissioner Nominees: Political Spending Disclosure Throws a Wrench”

I received a flurry of questions in reaction to my blog last week about how the two SEC Commissioner nominees faced trouble during the Senate Banking Committee approval process. I turned to Jack Katz – former long-time Secretary of the SEC – to help me sift through these questions:

1. In the recent past (meaning the last 40 years), have any SEC nominees failed to be confirmed?

I can’t remember any nominees who were not confirmed. The closest comparison to this situation was the joint nomination of Norm Johnson and Ike Hunt. They were tied up in holds. Commissioner Johnson was a close friend & former law partner of Senator Orrin Hatch. Hatch ultimately broke the hold on Norm’s nomination and he was confirmed. Commissioner Hunt was not. During the confirmation hearing, Johnson and Hunt had gotten to know each other well. When Johnson learned that Hunt’s nomination was still in limbo, Norm called Hatch and asked him to do what he could to clear Hunt. Hatch did so – and Hunt was confirmed shortly after Johnson.

2. With two Commissioners not sitting, does it take a majority of the three to get something passed?

The quorum rules provide that three Commissioners is a quorum – and a majority of a quorum is sufficient to act.

3. I blogged a while back about needing three Commissioners for a quorum – how did things get done when there were just two Commissioners – Chair Levitt & Commissioner Wallman – back in the ’90s?

Simon Lorne, the General Counsel at the time, anticipated that there was a good chance that we would be functioning with only two Commissioners before it happened. So before it happened, we amended the Commission’s Rules of Practice on quorum and duty officer to provide that if there were only two Commissioners, then two would be a quorum (Rule 200.41 establishes a quorum rule for meetings of the Commissioners). This was an aggressive position that was buttressed by the duty officer authority. Since one Commissioner can act when necessary on behalf of the Commissioner, we felt comfortable that two Commissioners could act when necessary.

The limitation in this position is that the duty officer can’t act on rulemakings – only the full Commission can. So we were very reluctant about a two-person Commission engaging in adoption or amendment of final rules. To the best of my memory, the “Levitt-Wallman Commission” didn’t adopt any final rules – but it did approve enforcement actions. The “two-person quorum rule” was challenged and upheld by the D.C. Circuit (see In Falcon Trading Group Ltd. v. SEC, No. 96-1052 (D.C.Cir.)).

By the way, the duty officer rule requires the full Commission to ratify all duty officer actions. For years, we used to wait for additional Commissioners to come on board to ratify actions for which a quorum didn’t exist at the time of the action – for example, if Commissioners were recused.

Whistleblowers: The Latest Stats

Here’s the highlights from this whistleblowers report by NAVEX Global:

1. Companies now taking longer than ever to address issues identified by employees:
– 2015 companies took an average of 46 calendar days to close whistleblower cases, up from 39 in 2014, and 32 in 2011.
– Best practice case closure time is an average of 30 days.
– This trend is especially significant for organizations overseen by the SEC. They have limited time to complete internal investigations under that agency’s whistleblower provisions.
– Outside of this, the trend threatens to undermine employee confidence in their company.

2. Companies are not getting warnings of retaliation:
– Last year’s report found that the substantiation rate of retaliation reports more than doubled over the prior year.
– This higher rate was sustained in 2015 with 26 percent of all reports of retaliation substantiated.
– However, the total number of reports of retaliation that organizations are capturing is still very low – less than one percent of all reports.
– When we look at external whistleblowing – taking an issue to an outside entity – retaliation is still the Equal Employment Opportunity Commission’s most frequently filed charge of discrimination, making up 45 percent of all private sector charges filed.

3. More reports being substantiated:
– Overall 41 percent of all reports received were substantiated in 2015, up from 30 percent in 2010.
– The anonymous report substantiation rate remained at 36 percent in 2015, the same rate as in 2014 and 2013.

4. Report volume remains at an all-time high:
– Between 2010 and 2014 a significant rise in the reporting rate occurred, a 44 percent increase since 2010, where the median was 0.9 reports per 100 employees, to 1.3 reports per 100 employees.
– In 2015, the reporting rate remained at the elevated level of 1.3 reports per 100 employees.

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:

– CalPERS & AFL-CIO Announce Proxy Season Priorities
– Proxy Access: Vanguard Reduces Preference to 3%
– Annual Meeting Preparation: Considerations & Tips
– Audit Committee Considerations for Enhanced Disclosure
– SEC Comment Letters: Trend Towards Reviews Resulting in No Comments
– Webcast Archive: “Challenges in Compliance & Corporate Governance”

Broc Romanek