Monthly Archives: October 2016

October 17, 2016

Tandy Reps: No Longer Required for Acceleration Requests Too!

As John blogged recently, Corp Fin recently announced that it would no longer require companies to include “Tandy letter” representations in their responses to Staff comments. The question that I got from some members was: “I presume Tandy reps are still required for acceleration requests?” The answer is “no, the Staff no longer seeks Tandy language in acceleration requests.” This is consistent with the rationale for no longer requiring the language in comment response letters…

Here’s a blog by Keith Bishop highlighting that he had questioned whether Tandy reps were enforceable several months ago. By the way, these were called “Tandy” representations because of a position that the SEC Staff took in the mid-’70s against the Tandy Corporation…

Tomorrow’s Webcast: “Virtual-Only Annual Meetings – Nuts & Bolts”

Tune in tomorrow for the webcast – “Virtual-Only Annual Meetings: Nuts & Bolts” – to hear HP’s Katie Colendich, Broadridge’s Cathy Conlon, Ciber’s Sean Radcliffe, GoPro’s Eve Saltman and the Veaco Group’s Kris Veaco as they describe the recent trend towards virtual-only annual meetings, including numerous first-hand accounts of the processes necessary to pull them off.

Political Contributions: Senator Warren Still Red Hot

As noted in this WSJ article, Senator Elizabeth Warren recently wrote this scathing letter to President Obama about SEC Chair White’s failure to conduct political contribution disclosure rulemaking. I have blogged about this saga before…

Here’s a blog by Kevin LaCroix about Warren’s letter, noting it came on the heels of the SEC announcing record Enforcement activity…

Broc Romanek

October 14, 2016

PCAOB Inspections: Good for Auditors’ Business

This Audit Analytics blog highlights a recent study that suggests PCAOB regulation may be good for an auditor’s business:

In a recent paper titled “Regulatory Oversight and Auditor Market Share,” authors Daniel Aobdia and Nemit Shroff look into the PCAOB’s role in contributing to the perception of an auditor’s assurance value, and whether or not it has an effect on an auditor’s market share. If external stakeholders perceive the PCAOB inspection process to increase the quality of an inspected firm’s audit, then, they hypothesize, the demand for the inspected firm’s audits will increase.

Since all accounting firms that audit US publicly-traded companies are subject to PCAOB oversight, the study looked abroad to measure the effect of regulation on market share.  The study concluded that firms with positive PCAOB inspection reports realized bottom-line benefits:

PCAOB-inspected firms do indeed see an increase in market share relative to the firms that are not inspected by the PCAOB. According to the data, the average inspected auditor’s market share increased by 0.4 to 0.9 percentage points, or 3.5% to 6.4%. When looking at only auditors who received substantial negative criticism, however, they found that, true to their hypothesis, the auditors experienced no change in market share.

The study notes that the effect of a favorable PCAOB inspection was particularly significant in countries with higher levels of corruption.  Firms with good inspection outcomes saw an increase of 0.5 to 1.4% in high-corruption countries, while those in countries with a lower level of corruption only saw an increase of -0.4 to 0.4.

“Critical Audit Matters” Disclosure: Insurance Policy for Auditors? 

As Cooley’s Cydney Posner points out in this blog, accounting firms have not been big fans of the PCAOB’s proposal to make audit reports more informative through disclosure of “critical audit matters” – or “CAMs.”  Under the latest version of the proposal, critical audit matters would be defined to include any matter communicated to the audit committee that is material to the financial statements, and involves especially challenging, subjective, or complex auditor judgment.

According to a recent study, auditors may want to rethink their opposition to this proposed disclosure requirement:

It’s somewhat ironic to see the results of the study showing, among other things, that disclosure of CAMs could help protect auditors from legal exposure if a misstatement were subsequently discovered in the CAM area.

The study concluded that the “types of CAMs illustrated by the PCAOB are more likely to prompt a ‘disclaimer effect’ by warning users of the inherent subjectivity and complexity associated with auditing CAM areas. Specifically, we find that CAM disclosures lead to less confidence in the CAM area before a misstatement is revealed and less assessed auditor responsibility after a misstatement is revealed in the CAM area.”

Transcript: “Middle Market Deals – If I Had Only Known”

We have posted the transcript for our recent webcast: “Middle Market Deals: If I Had Only Known.”

John Jenkins

October 13, 2016

Whistleblowers: Court Adds “Front Pay” to Award

This blog discusses the SDNY’s recent decision in Perez v. Progenics Pharmaceuticals – which added $2.7 million in front pay to a whistleblower’s $1.6 million jury award for retaliation.  Here’s an excerpt:

The Court granted Perez’ motion for reinstatement in the form of an order for “front pay” in an amount over $2.7 million.  The Court did so because, among other things, it found Perez had no reasonable prospect of obtaining comparable alternative employment.  The amount of the award was based on a conservative estimate of expected earnings based on Perez’ age at the time of the verdict until a reasonable retirement age.

SOX Section 806 says that a successful plaintiff in a retaliation case is entitled to “all relief necessary” to make that individual whole – but the opinion cited only two cases when analyzing the propriety of a front pay award, neither of which involved a Sarbanes-Oxley retaliation case.

“Dela-fornia” Corporations?

Steven Davidoff-Solomon’s recent “Deal Professor” column notes that 20% of NYSE & Nasdaq-listed companies are headquartered in California. In this blog, Keith Bishop analyzes what that means for Delaware corporations that call “The Golden State” home:

Delaware continues to lead all other states as the jurisdiction for incorporation. This doesn’t necessarily mean that Delaware’s corporate law necessarily applies to Delaware corporations headquartered in California. Here are a few provisions of the California General Corporation Law that are explicitly applicable to foreign corporations having their principal executive offices in the state:

– Annual report requirement (Section 1501)
– Shareholder list inspection (Section 1600)
– Shareholder inspection of books & records (Section 1601)

But wait! There’s more – regardless of where you’re heaquartered:

Other California statutes apply to foreign corporations without regard to the location of their principal executive offices, including:

– Effectiveness of limitations in articles (Section 208)
– Issuance of replacement certificates (Section 419)
– Immunity for certain share transfers (Section 420)
– Action to contest election or appointment made in California (Section 719)
– Shareholder derivative actions (Section 800)
– County assessor right to California property records (Section 1506)
– Shareholder right to obtain results of shareholder meeting (Sections 1509-1511)

If your foreign corporation isn’t a listed company, then read the rest of Keith’s blog & you’ll find that this laundry list just scratches the surface when it comes to the applicability of California’s corporate statute.

Broc & John: Shareholder Proposal Reform

Broc & I had a lot of fun taping our 4th “news-like” podcast. This 8-minute podcast is about shareholder proposal reform & sports blogs. I highly encourage you to listen to these podcasts when you take a walk, commute to work, etc. And as we tape more of these, it’s inevitable we’ll figure out how to be more entertaining…

This podcast is also posted as part of our “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…

blm logo

John Jenkins

October 12, 2016

Survey Results: Registration Statement Due Diligence

Here’s the survey results from our recent survey about registration statement due diligence:

1. Prior to the effectiveness of a registration statement, we do this:
– No formal action was taken to bolster a due diligence defense – 31%
– Management reported to the board about the contents of the registration statement – 36%
– Counsel reported to the board about the contents of the registration statement – 31%
– Some other process was followed to bolster a due diligence defense – 29%

2. If no formal action was taken to bolster a due diligence defense, the reasons include:
– Counsel did not alert us to this issue – 11%
– Director personal liability seems remote – 34%
– Board relied on the audit committee’s prior review of the incorporated SEC filings, which are the likely source of any liability – 66%
– Process takes too much time for the value that it provides – 29%

Please take a moment to participate anonymously in this “Quick Survey on Management Representation Letters” – and this “Quick Survey on Board Minutes & Auditors.”

Board Diversity: Disclosures Few & Far Between

A new Equilar study says that companies aren’t saying much about board diversity in their SEC filings:

Lacking any regulatory requirement to disclose diversity on their boards of directors, few companies explicitly detail this information in public filings. Just 12.8% of S&P 500 companies included information on board diversity in terms of race or ethnicity in their most recent proxy statements, according to a new study from Equilar.

The tech sector lagged almost every other industry, with only four (5.7%) of the technology companies in the S&P 500 disclosing information about board diversity in their 2016 proxy statements. Oil & gas companies were also lacking when it came to diversity disclosure – only one company included this type of information in its 2016 proxy statement.

According to the report, tech companies have improved board diversity in recent years – but still have far to go:

While still lagging the overall S&P 500, the technology sector did see the largest percentage growth of women on boards during the last five years, according to the Equilar study. In 2012, women held 14.4% of tech board seats, and that percentage increased to 21.0% in 2016. However, that growth still was not enough to reach the overall S&P 500 average—21.3%—nor up its ranking in comparison to other sectors.

Women on Boards: Benefits of Gender Diversity

While we’re on the topic of gender diversity, this recent CFA Institute blog highlights the results of an MSCI study on women serving on corporate boards in the US and other developed & emerging markets.  It also cites some interesting results associated with increasing the gender diversity of corporate boards:

– Companies that had strong female leadership generated a return on equity of 10.1% per year versus 7.4% for those without (on an equal-weighted basis).

– Companies lacking board diversity tend to suffer more governance-related controversies than average.

– Strong evidence was not found that having more women in board positions indicates greater risk aversion.

John Jenkins

October 11, 2016

New Accounting Standards: SEC Staff on Best Practices

This Deloitte memo reviews recent comments by senior Staffers from the SEC’s Office of Chief Accountant addressing best practices in implementing the upcoming new accounting standards on revenue recognition, leases & credit losses.  Specific recommendations include:

– Management may need to exercise greater judgment under the new credit loss ASU and should implement any changes to internal controls necessary “to support the formation and enforcement of sound judgments” under the new standard.

– Auditor input regarding the implementation of new accounting standards and the accounting for complex transactions will not raise independence issues so long as management makes the final determination based upon its own analysis as to the accounting used, and the auditor does not design or implement accounting policies.

– When a company can’t reasonably estimate the impact of adopting the new standards, it should consider providing additional qualitative disclosures about the significance of the impact on its financial statements. The SEC staff would expect such disclosures to include a description of:

– The effect of any accounting policies that the registrant expects to select upon adopting the ASU(s).

– How such policies may differ from the registrant’s current accounting policies.

– The status of the registrant’s implementation process and the nature of any significant implementation matters that have not yet been addressed.

Also see this blog that Broc ran last week on our “Mentor Blog” entitled “Disclosure of New Accounting Standards: SEC Seeking Incremental Qualitative Disclosures.”

New Accounting Standards: KPMG Says “Get Moving!”

Meanwhile, in this memo, Baker & McKenzie’s Dan Goelzer notes that KPMG is sounding the alarm about a lack of readiness for two of these new accounting standards with rapidly looming effective dates. Companies must apply FASB’s new revenue recognition standard for periods beginning after December 15, 2017 – while the new lease accounting standard kicks in a year later.

KPMG reports that more than 2/3rds of companies are still in the assessment phase when it comes to the new revenue recognition standard – and that less than half have begun to assess the impact of the new lease accounting standard. Here’s an excerpt from the memo:

Audit committees should be actively monitoring the company’s plans and progress with respect to implementation of these new standards. Given the importance of revenue recognition to virtually all companies, and the fast-approaching effective date, a realistic work plan and adequate resources for implementation of that standard are becoming critical priorities. KPMG states: “[I]t is becoming increasingly evident that some companies will be forced to implement the standard using manual processes and controls with the ability to introduce system changes until sometime after the effective date. As reliance on manual processes increases, companies will be faced with heightened risk of errors, increased costs, and less efficient operations.”

While there is somewhat more time available for implementation of the leasing standard, audit committees of companies that engage in any significant amount of leasing should make sure that the company has an implementation plan and has begun its assessment efforts.

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:

– Boards: Portfolio Managers as New Directors
– LSE: Changes AIM Rules to Reflect ‘Market Abuse Regulation’
– PwC Violates Auditor Independence Rules – Yet Again
– US Foreign Bond Issuers: Fed Cracks Down on Form SLT Reporting
– Delaware Supreme Court Affirms Chancery’s Lack of Damages Award as Remedial Discretion

John Jenkins

October 10, 2016

“This Moment Is More Precious Than You Think”

I love this pic that I took in NYC recently, with apologies to those working on a federal holiday…although I’m working too, come to think of it…


Broc Romanek

October 7, 2016

Yahoo! Hack: How the Fortune 100 Discloses Data Breaches

Recently, Senator Mark Warner wrote this letter (also see this article) to the SEC asking the agency to investigate whether Yahoo! adequately informed investors about its massive data breach – this focuses even more attention on a hot topic: cybersecurity disclosure. This Debevoise memo reviews the disclosure practices of Fortune 100 companies for data security breaches.  Here are some of the key findings:

– Most Fortune 100 companies make initial disclosures about a cyber incident through their periodic reports, rather than on a current report Form 8-K.

– Periodic reports typically reflected the cybersecurity event in updated risk factors, sometimes by directly calling out the event and other times by revising risk factors in light of it, though without specific reference to the event.

– Disclosures were typically contained in the “risk factors” section of periodic filings.  When disclosures did appear elsewhere, they were usually made in the financial statement footnotes, in MD&A, or – occasionally – in the discussion of legal proceedings or the business.

Board & CEO Views: What Makes a Good GC?

Recently, KPMG published these survey results that reveal how CEOs & boards perceive what makes a good general counsel. The answers suggest that the job requires a lot more than just being the company’s chief lawyer. Here are the five attributes that characterize a top GC:

– Business leader providing insightful commercial advice to the other senior executives and the board, based on sound legal principles.

– Risk manager being constantly alert to – and vigilant against – an increasingly broad array of global threats to the company, and handling them accordingly.

– Technology champion leading the change in mindset – from technology as a stand-alone, isolated specialism to the all-pervasive reality of doing business in the digital age.

– Key communicator adeptly handling communications with key stakeholders such as the board and investors, as well as effectively communicating with regulators and internal teams.

– Builder of corporate culture setting a tone of trust at the top & building a risk-aware culture in which compliance is not seen as a straitjacket, but as a source of competitive advantage.

If a GC’s Profile Increases, A Greater Risk to Privilege?

The changing role of today’s GC increases the risk to the attorney-client privilege. This recent blog by McDermott Will’s Michael Peregrine & Bill Schuman notes that the emerging best practice of giving the general counsel greater organizational prominence may create attorney-client privilege issues. Here’s an excerpt:

Despite its organizational benefits, the transformation of the general counsel’s role carries with it a significant potential cost. The challenges of attempting to attach the protections of the attorney-client privilege to business advice provided by the general counsel have long been acknowledged.

These challenges become more consequential as the general counsel’s internal communications increasingly extend to operational or strategic considerations, and not just purely legal matters. And the stakes are even higher now that the Justice Department and other enforcers have said they will hold accountable more individuals, for whom the privilege may be unavailable.

John Jenkins

October 6, 2016

Corp Fin: Farewell to “Tandy” Letters

Yesterday, Corp Fin announced that it would no longer require companies to include “Tandy letter” representations in their responses to Staff comments.  In a Tandy letter, a company essentially represents that it won’t raise the SEC’s comment process as a defense in securities litigation. In its announcement, Corp Fin makes clear that the absence of Tandy letter language doesn’t mean that the SEC’s posture on that position has changed.

The Staff began to require this language in all response letters in 2004, when it made all comment & response letters publicly available. Back then, Broc blogged about the Staff’s reasons for imposing that new requirement:

Before August 2004, the SEC Staff only required this language when the Staff had an open Enforcement inquiry related to a particular company – but this selective approach became unworkable when response letters became universally available.

The change is effective immediately – so if you have a comment letter that you haven’t replied to yet, Corp Fin says you can forget about the Tandy letter request that’s in it.

Wells Fargo: Is There A Caremark Claim?

This blog from Christine Hurt at “The Conglomerate” ponders whether the unfolding scandal at Wells Fargo might support a Caremark claim against the directors for shortcomings in oversight.  Her answer?  As usual, probably not:

So, we have illegal activity.  The activity also does not seem isolated — over 5000 employees, possibly 2 million unauthorized accounts, over 500,000 unauthorized credit cards.  However, the Caremark case involved the company paying civil damages of $250 million in 1995.  Here, the fine is $185 million, which may be the largest fine levied by the brand-new CFPB, but isn’t that big in the scheme of things.  If more charges are brought, that would strengthen the claim.  I’m not sure I would be confident in a Caremark claim here, even though the activity is illegal and seems to be widespread.

Broc & John: Dodd-Frank Reform

Broc & I had a lot of fun taping our 3rd “news-like” podcast. This 6-minute podcast is about efforts in Congress to repeal Dodd-Frank & dinosaurs. I highly encourage you to listen to these podcasts when you take a walk, commute to work, etc. And as we tape more of these, it’s inevitable we’ll figure out how to be more entertaining…

This podcast is also posted as part of our “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…

blm logo

John Jenkins

October 5, 2016

Section 16: Ex-NY Governor Cops to Violations

Here’s something that Alan Dye blogged last week on his “Section Blog” :

Last Friday, the SEC initiated cease & desist proceedings against three outside directors of a now-defunct public company, Moon River Studios, alleging that each director failed to file a Form 3 within ten days of becoming a director and also failed to report an initial acquisition of issuer stock on Form 4 within two business days or on a Form 5 for the year in which the acquisition occurred. Two of the directors consented to the entry of a cease and desist order and agreed to pay a civil money penalty of $25,000. The third director did not offer to settle.

The case is interesting mainly because the directors were not charged with violations of any other provisions of the federal securities laws, which is unusual given that most Section 16(a) claims (other than those that resulted from the 2014 “sweeps”) are add-ons to more serious claims, usually involving fraud. At the same time the SEC initiated the cease and desist proceedings, though, it also filed a fraud action against three of the issuer’s executive officers, alleging that they misappropriated funds for personal use rather than using the funds to build and operate, in Savannah, Georgia, “the largest movie studio in North America.”

The case is also interesting because two of the directors, both of whom served on the issuer’s board for only a short time, are politically connected. One of the settling directors, David Paterson, is a former governor of New York. The non-settling director, Matthew Mellon, is a former chairman of the New York Republican Party Finance Committee.

Both of the settling directors filed a Form 3 and a Form 4 after the SEC commenced its investigation and after resigning from the issuer’s board. The SEC noted in its orders that the respondents’ “remedial acts” and “cooperation” shaped the terms of settlement.

Failure to Report Unregistered Sales: New SEC Enforcement Actions

Here’s news from this blog by Steve Quinlivan:

On two successive days, the SEC brought settled enforcement actions against issuers for failure to report sales of unregistered securities. Under Item 1.01 of Form 8-K, a registrant must disclose its entry into a material definitive agreement, not made in the ordinary course of business of the registrant, that provides for obligations that are material to and enforceable against the registrant.

Under Item 3.02 of Form 8-K, certain unregistered sales of equity securities must be reported. Likewise, under Item 2 of Form 10-Q, a registrant must furnish the information required by Item 701 of Regulation S-K as to all equity securities of the registrant sold by the registrant during the period covered by the report that were not registered under the Securities Act unless it was previously included in a Current Report on Form 8-K.

Also check out this blog by Steve about the SEC suspending a Regulation A+ offering…

Insider Trading: Supreme Court Hears Arguments on “Personal Benefit”

This Paul Weiss memo notes that the Supreme Court will hear oral arguments today in Salman v. United States – a case that could have a major impact on insider trading law.  Here’s an excerpt:

The question before the Court in Salman v. United States is technically a somewhat narrow one: whether a gift of confidential information to a trading friend or relative constitutes the type of personal benefit necessary to give rise to insider trading liability. The implications of the Court’s decision, however, will likely be far broader than that.

Salman provides the Court an opportunity to provide some much-needed clarity. It remains to be seen, however, whether the Court will try to limit its holding to the narrow set of facts presented or more broadly address the scope of the personal benefit requirement. The Court could even revisit the need for the personal benefit requirement altogether.

John Jenkins

October 4, 2016

Proxy Access: New No-Action Letters Follow H&R Block

Following up on what Broc blogged about last week, Cooley’s Cydney Posner notes that Corp Fin has issued three new no-action letters addressing proxy access proposals – & so far, the play stands as called in H&R Block. The letters were issued in response to no-action requests from Microsoft, Cisco & WD-40.

In its responses, Corp Fin continues to refuse to concur in “substantial implementation” arguments for exclusion of shareholder proposals to amend existing access bylaws, but takes a different view on proposals relating to the initial implementation of those bylaws:

In one of the Corp Fin responses to no-action requests posted yesterday, the shareholder proposal requested adoption of amendments to the company’s existing proxy access bylaw, identifying in the proposal specific changes characterized as essential elements for substantial implementation. The request for no-action suffered the same fate as H&R Block, as Corp Fin was unable to concur that the proposal to amend could  be excluded under Rule 14a-8(i)(10). As of now, the score for proposals to amend existing proxy access bylaws for H&R Block and progeny:  company-0 proponent-2.

However, where the proposal related to initial adoption of proxy access, Corp Fin has continued to grant no-action relief and permit exclusion, even where the proponent has identified specific elements of the proposal that he views to be essential.

There are still two no-action requests from Oshkosh & Walgreens Boots Alliance that are awaiting a response from the Staff that could impact the Rule 14a-8(i)(10) analysis.

Audit Committees: More Voluntary Disclosure in 2016

According to this EY study, voluntary audit-related disclosure by Fortune 100 audit committees continued to trend upward during 2016. Here’s a summary of some key findings:

– 50% of companies disclosed factors considered by the audit committee when assessing the qualifications & work quality of the external auditor increased to 50%, up from 42% in 2015. In 2012, only 17% of audit committees disclosed this information.

– 73% of companies disclosed the audit committee’s belief that the choice of external auditor was in the best interests of the company or shareholders; in 2015, this percentage was 63%. In 2012, only 3% of companies made this disclosure.

–  The audit committees of 82% of the companies explicitly stated that they are responsible for the appointment, compensation & oversight of the external auditor; in 2012, only 42% of audit committees provided such disclosures.

– 31% of companies provided information about the reasons for changes in fees paid to the external auditor compared to 21% the previous year.  From 2012 to 2016, the percentage of companies disclosing information to explain changes in audit fees rose from 9% to 31%.

– 53% of companies disclosed that the audit committee considered the impact of changing auditors when assessing whether to retain the current auditor. This was a 6 percentage point increase over 2015. In 2012, this disclosure was made by 3% of the Fortune 100 companies.

– Over the past five years, the number of companies disclosing that the audit committee was involved in the selection of the lead audit partner has grown dramatically, up to 73% in 2016. In 2015, 67% of companies disclosed this information, while in 2012, only 1% of companies did so.

– 51% of companies disclosed that they have three or more financial experts on their audit committees, up from 47% in 2015 and 36% in 2012.

T+2 Proposal: Will Firm Commitments Have to Toe the Line?

Broc recently blogged about the SEC’s proposal to move to a T+2 settlement cycle. Now Brian Pitko blogs that the proposal creates uncertainty about whether the exception provided under the current T+3 regime for firm commitment offerings will continue. Here’s an excerpt:

As currently formulated, Rule 15c6-1 provides an exception under Rule 15c6-1(c) for “firm commitment offerings registered under the Securities Act or the sale to an initial purchaser by a broker-dealer participating in such offering” which allows such offerings to rely on an extended T+4 settlement cycle instead of the standard T+3 settlement.

The proposed rules, however, seek comment on whether the settlement cycle timeframe under Rule 15c6-1(c) should be similarly shortened to T+3 or T+2 in conjunction with the broader proposed change to Rule 15c6-1 and how such changes would impact “risk, costs or operations of retaining the current provision for firm commitment offerings but shortening the settlement cycle to T+2 for regular-way transactions, as proposed.”

John Jenkins