Way back before the SEC started putting out concept releases related to its disclosure effectiveness project, I blogged a few times about disclosure reform (& I was recently interviewed about the topic in this MergerMarket report). I like some of the ideas that SEC Commissioner Kara Stein laid out in this speech earlier this year.
I now tackle how companies should make the disclosure available. Obviously, companies can make disclosure available through SEC filings – a topic that is covered in the next item below. But companies make disclosure available outside of their SEC reporting stream:
This is a tougher topic than it might seem – even though we really are working off a clean slate. There is minimal regulation of IR web pages, social media channels, etc. Other than a few requirements (eg. breaking out Section 16 reports on a SEC filing stream), companies have great liberty on how they make information available.
Should this change? I do believe companies should continue to have great liberty. But I also believe there needs to be a bare minimum as the quality of what companies are doing varies greatly. And many companies are near the bottom of the barrel.
One argument that I have heard is that “investors rarely bother looking at my IR web page, so why should I care?” I have two answers for that – one reason they might not be looking is because you don’t care and there’s nothing there. The bigger answer is that if disclosure reform is successful and companies do start disclosing more meaningful information, then investors will care more about how you make it available.
So what do I mean about bare minimum? I’m thinking out loud here – but I do think the minimum needs to apply to more than just the IR web pages. I think that once a social media channel becomes mainstream, then companies should be under an obligation to deliver information via that channel. This is akin to the listing standards for the stock exchanges requiring a press release. It all boils down to how investors expect information to be delivered. Let me know what you think.
Disclosure Reform: How Should Companies “File” Disclosure?
In what ways should companies “file” their disclosure so that investors can rest assured that it really is the company that made the disclosure? And perhaps this is also necessary for liability purposes?
I do think Edgar is necessary. There needs to be a well-known repository of information that investors can feel comfortable as being trustworthy. Edgar certainly is branded by now and it wouldn’t make sense to change its name or purpose. However, it does make sense to reconsider how disclosure filings are displayed. The suggestions that have been bandied about for some time make sense to seriously consider – e.g., requiring companies to file a “core” disclosure or “company profile” document with information that changes infrequently, supplemented by periodic and current disclosure filings with information that changes from period to period. In addition, there would be transactional filings that have information relating to specific offerings or shareholder solicitations.
And then there is my pet peeve about form labels and how confusing they must be for retail investors. How does a small investor know that – when they search Edgar – a proxy statement is called a “DEF 14A”? The nomenclature on Edgar should change sooner rather than later…
More on “Disclosure Reform: What Do Investors Want?”
Joe Hall of Davis Polk responded to my blog about what investors want by noting:
I think the most important point is the one you get to in the second post. The series of questions I would ask is, who is the investor we are writing for? What are the needs of that particular investor? What does that investor need to be informed about and what do we not need to bother with?
Lawyers who write disclosure, much less company officers who write disclosure, never really focus on this question and it’s because to the extent the SEC has addressed it, they have come up with things like the plain English rules that suggest we are communicating to readers with a ninth grade education and no discernible quantitative skills. And of course court decisions focus on the “reasonable investor” who does not exist.
We don’t really know who to write for because the SEC has never done any studies to find out who reads company disclosures. But ask yourself how likely it is that retail investors get any information at all from 34 Act or 33 Act filings. I would be it is between zero and something less than 1%. Probably why the SEC studiously avoids the question. And I completely agree with your critique of EDGAR. It’s a joke to think that a novice could find anything on it.
What if companies were told to assume their investor was a college educated securities industry professional with several years experience reviewing company disclosures? There are some simple implications to this – e.g. you would lose half of your risk factors and forward looking statement boilerplate and the ones that remain would be the ones that are actually relevant (no more “We are exposed to competition” . . . “If we lose access to capital this could have an adverse effect on our result of operations and financial condition”…”We depend on our chief executive officer”…). But this sort of instruction would also force CFOs and IR folk to think about what analysts really want to know – and they know what this is! They talk to them at least quarterly!
Analysts – and anyone who invests – want to know about the future, not the past. No one really cares how a pre-IPO company priced its options (except to the extent it reveals how willing to play fast and loose management is), and few care about things like dilution, endless product descriptions, “compensation philosophy” etc. They are often interested in company specific things that aren’t covered in S-K line item requirements. What’s your utilization ratio? How much are you going to have to spend to complete that new mine? How will that new product work on a mobile platform? The staff would still be able to review and comment on a filing – all they would have to do is listen to the company’s earnings call and see whether the company’s disclosures are addressing the questions on analyst’s minds.
Back in September, the US Supreme Court denied cert in the Tilton case based on a constitutionality argument of the SEC’s administrative law judge framework. Now there is another split in the circuit courts over the ALJ’s constitutionality that might be heading SCOTUS’s way in the wake of the new decision, Bandimere v. SEC (we’re posting memos about this new case in our “SEC Enforcement” Practice Area). Here’s this WSJ article by Dave Michaels:
A federal appeals court dealt a strong blow to Wall Street’s top cop this week, deciding that the Securities and Exchange Commission’s in-house courts don’t meet constitutional requirements. A three-judge panel of the U.S. Court of Appeals for the 10th Circuit, based in Denver, ruled 2-1 that the SEC’s process for hiring administrative-law judges violates a clause of the U.S. Constitution that governs presidential and other appointments. The 10th Circuit’s decision, issued Tuesday, diverges from an August ruling by the U.S. Court of Appeals for the District of Columbia Circuit, which upheld the SEC’s use of its in-house courts to air claims against people accused of violating securities laws.
The SEC’s five administrative-law judges are a cornerstone of the agency’s enforcement efforts, handling most routine cases. “This is the first time that an appellate court has accepted the argument that challenges the constitutionality of the administrative-law judge system,” said Stephen Crimmins, a partner at law firm Murphy & McGonigle in Washington. “It sets up a conflict with other courts of appeals on a very important issue and it would appear ripe for a U.S. Supreme Court review to resolve that conflict.” An SEC spokesman said the agency is reviewing the court’s decision and wouldn’t immediately have further comment.
How Emotional Baggage Will Cost You!
As I wrap up a nice year of self-discovery (being an empty nester helps!), I can’t help but chuckle over this hilarious promo from Air Canada about how it intends to start charging for emotional baggage in 2017:
Air Canada announced this morning that as of 2017, passengers will be required to pay an extra fee to transport any emotional baggage they happen to be carrying with them onto their flight. Jacqueline Villeneuve, head of communications, explains that the exact amount of the fee will depend on the nature of the emotional baggage, how much space it will take up on the flight, and likely it is to interfere with the other passengers.
“When it comes to homophobia, misogyny, and deep-seated racism, we’ll be charging $500 per issue,” she explains. “That kind of emotional baggage is quite heavy and nearly impossible to store safely. It takes tremendous effort on behalf of the cabin crew to make room for those kinds of issues.” “However,” Villeneuve continues, “low-level anxiety, trust issues, fear of commitment, a sense of entitlement, or garden variety anger due to a delayed flight or a lack of gluten-free options in Terminal B – we will be happy to transport those for you for just $250.”
IPOs: Accounting & Legal Fees
Check out this “Audit Analytics” blog for the latest on legal & auditing fee levels in IPOs. One member notes that the accounting & legal fee data “trend” suffers from small sample sizes and the nature of IPO companies in the past three years…
In my new “Broc Tales” blog (go ahead & “Subscribe” to get those stories pushed to you), I’ll eventually get around to telling wacky stories about some SEC Staffers that I worked with back in the day. I’m tickled pink that the WSJ is covering that type of sensational stuff too! Here’s the intro from a recent WSJ article:
The internal watchdog for the Securities and Exchange Commission has taken the rare step of accusing an employee of committing “attendance fraud,” saying the public official was paid $125,000 for more than 1,200 hours of work “that he did not work or account for.” The claim is included in separate reports published this year by the inspector general for the securities regulator, most recently in the agency’s semiannual report issued Nov. 14.
Wall Street movie villain Gordon Gekko executed trades on a cellphone larger than his head. Today’s traders can execute thousands of trades ina second on their iPhones. One might assume that the Securities and Exchange Commission has kept up, enforcing its rules with state-of-the-art software, algorithms, and computers.
The SEC’s entire corporate-disclosure operation is based on the written document. For the most part, the agency collects financial information as documents, not as searchable data. Like many U.S. regulators, the SEC hasn’t kept pace with technological evolution. As a result, the firms it’s charged with overseeing are getting away with shady practices, investors are being denied easy access to key information, and, our economy is being put at risk.
To understand why the SEC’s low-tech disclosure system poses such a threat, consider the 2008 financial crisis. As the Treasury Department’s financial research director, Richard Berner, pointed out recently, “when Lehman Brothers failed six years ago, its counterparties could not assess their total exposures to Lehman. Financial regulators were also in the dark.”
The reason? Accessible data on Lehman just wasn’t available — not even to the SEC. Lehman had complied with relevant reporting requirements, but that information was trapped within thousands of documents, with no way to search across the whole. This lack of accessibility fueled a crisis that nearly toppled our financial system.
Here’s something that Mark Borgesblogged a few weeks ago over on CompensationStandards.com:
Although the future of the CEO pay ratio rule is somewhat uncertain, the corporate community continues to move forward to prepare for its eventual effectiveness in 2017 (and the attendant disclosures in the 2018 proxy season). While much attention has been given to the potential impact of this new disclosure, both externally (the various constituencies that will see and react to this information) and internally (your employee population), an ancillary consequence of the disclosure has been less discussed. Specifically, I’m talking about the potential state and local provisions that may tie directly to a company’s pay ratio.
As you may recall, over the past few years there have been a couple of initiatives introduced that would link the operation of a new law or regulation to the disclosed CEO pay ratio. For example, in 2014 a California legislator introduced a bill that would have modified the state’s corporate income tax rate to a sliding scale based on a company’s pay ratio. The rate would have been as low as 7% percent on the basis of net income if the ratio was no more than 25 to 1. At the other end of the scale, the rate would have been as high as 13% if the ratio was more than 400 to 1. Although the bill passed out of two state Senate committees, ultimately it failed on the Senate floor (in a tight 19-17 vote). In addition, in the same year the Rhode Island legislature considered a bill that would have given preferential treatment in receiving state government contracts to companies whose pay ratio between its highest-paid executive and its lowest paid full-time employee was 31-1 or less.
While, to my knowledge, neither initiative has made it all the way through the legislative process, the underlying concept is alive and well. Yesterday, the New York Times reported that the City Council of Portland, Oregon had voted to impose a surtax on companies whose CEOs earn more than 100 times the median pay of their rank-and-file workers. As indicated in the Times, “[t]he tax will take effect next year, after the Securities and Exchange Commission begins to require public companies to calculate and disclose how their chief executives’ compensation compares with their workers’ median pay.”
The article to goes on to say that the idea may not be limited to Portland: “Portland officials said other cities that charge business-income taxes, such as Columbus, Ohio, and Philadelphia, could easily create their own versions of the surcharge. Several state legislatures have recently considered bills structured to reward companies with narrower pay gaps between chief executives and workers.”
It certainly appears that if the CEO pay ratio rule goes forward, we may see more proposed laws and rules that seek to “piggy-back” on the disclosure.
Yesterday, ISS Corporate Solutions issued this primer that provides the basics of ISS Research’s Equity Plan Scorecard methodology that will affect meetings occurring on – or after – February 1st (see Appendix D for the ISS 2017 burn rates).
Climate Task Force Releases Proposed Disclosure Recommendations
Recently, as noted in this Davis Polk blog, the Financial Stability Board issued this 74-page set of recommendations that would enhance climate change disclosure on a global level. Participation would be voluntary. As noted in this article, there’s a recommendation to tie CEO pay to climate risk. There’s a 60-day comment period.
The SEC’s Investor Advocate Report
The SEC’s Investor Advocate has issued its annual report. Love the cover! Meanwhile, President Obama signed the legislation providing the SEC with a Small Business Advocate in the New Year (see John’s blog)…
Continuing my tradition of posting holiday disclaimers or what-not, here’s the intro of a funny take on Dr. Seuss by Lawrence Heim of Elm Sustainability Partners:
Oh, the jobs people work at!
Out west near Hawtch-Hawtch there’s a Hawtch-Hawtcher Bee-Watcher. His job is to watch… is to keep both his eyes on the lazy town bee. A bee that is watched will work harder, you see.
Well… he watched and he watched. But, in spite of his watch, that bee didn’t work any harder. Not mawtch.
So then somebody said, “Our old bee-watching man just isn’t bee-watching as hard as he can. He ought to be watched by another Hawtch-Hawtcher! The thing that we need is a Bee-Watcher-Watcher!”
The Bee-Watcher-Watcher watched the Bee-Watcher. He didn’t watch well. So another Hawtch-Hawtcher had to come in as a Watch-Watcher-Watcher!
And today all the Hawtchers who live in Hawtch-Hawtch are watching on Watch-Watcher-Watchering-Watch, Watch-Watching the Watcher who’s watching that bee.
You’re not a Hawtch-Watcher. You’re lucky, you see!”
Edgar: “Everything Edgar”
Recently, the SEC updated its “Everything EDGAR” page to provide additional information, including Quick Reference Guides…still needs a blog to provide info on outages in my humble opinion…
Check out Alan Dye’s blog on Section16.net about the SEC’s new procedures for setting Edgar passphrases…
Whistleblowers: Yet Another SEC Enforcement Action on Separation Agreements
The SEC’s Enforcement Division is on another whistleblower tear. On the heels of yesterday’s blog about an action involving severance agreements, here’s this settlement with SandRidge Energy over separation agreements. This WSJ article says more of these cases to come…
President-elect Donald Trump’s promise to eliminate regulations on U.S. businesses will likely take years to fulfill given the complex steps involved in reversing them and political and legal challenges from Democratic lawmakers and state attorneys general. Mr. Trump has said his administration will take aim at regulations across industries, and he will be backed by congressional Republicans eager to undo some of the more controversial Obama administration initiatives. Big targets include power-plant regulations and regulatory rules imposed on banks and financial institutions after the financial crisis of 2008, though the effort will also reach deep into the federal bureaucracy to include rules involving labor, telecommunications and health care.
Mr. Trump has a handful of ways to reach his goal, but they mostly point to a slow death of attrition for the Obama rules rather than an immediate elimination. He can opt not to defend rules currently tied up in court. His federal agencies can write new rules to justify revoking the ones he wants to eliminate. He can work with the GOP-controlled Congress to nullify recently completed regulations and restrict funding to certain parts of departments as a de facto way to hamstring a rule’s force.
In some cases, replacing rules will be as arduous as making them in the first place, particularly in the financial sector where some regulations have been issued by multiple agencies. The Volcker rule, which bans banks from making hedge-fund-like wagers, was adopted by five financial regulatory agencies. All five agencies would need to agree to changes for them to apply broadly. The Trump administration could loosen its enforcement of rules promulgated under Mr. Obama. That could make a difference where rules can be interpreted subjectively, such as in the case of the Volcker rule.
But where explicit rules are on the books, companies would be taking a risk by not complying, and there is no guarantee that career government staffers would agree to simply drop their enforcement actions.
Experience shows the difficulty of unraveling rules. Eight years ago the incoming Obama team pledged to review rules from the George W. Bush administration, including many so-called “midnight regulations” that were pushed through as Mr. Bush was preparing to leave office.
But of the more than 4,500 proposed or final regulatory actions cleared by the Bush White House, Mr. Obama repealed just 74 in his first nine months in office, when rules are most-often revisited, according to a 2009 presentation by a former official of the White House Office of Management and Budget. Of those, only 34 were final rules.
Whistleblowers: New SEC Enforcement Action Over Severance Agreements
Yesterday, the SEC announced that Neustar had settled whistleblower charges for routinely entering into severance agreements that contained a broad non-disparagement clause forbidding former employees from engaging with the SEC and other regulators “in any communication that disparages, denigrates, maligns or impugns” the company. Former employees could be compelled to forfeit all but $100 of their severance pay for breaching the clause.
In the wake of the financial crisis, federal regulators are demanding a vast trove of private data to help them better monitor markets. But in the age of routine, sophisticated hacks, many in the financial industry worry the government will be unable to keep that sensitive information secure.
Investment firms cite numerous breaches at federal agencies, most recently the late-October admission by the national bank overseer that a former employee had downloaded 10,000 records with two thumb drives and took them home.
Industry trade groups also fret about what they consider insufficiently specific assurances that regulators are beefing up cybersecurity commensurate with new demands. The Commodity Futures Trading Commission has drawn industry ire with a project to crack down on rapid-fire trading firms, which includes a provision that would require the firms grant the CFTC access to their confidential computer source code without a subpoena. Last month, the SEC completed new rules to increase significantly the volume of data mutual funds report about their holdings, including derivatives instruments and securities-lending activities, to better track risks across the industry. “We remain concerned about the SEC’s ability to safeguard confidential information, as they provide precious little detail about their plans,” David Blass, general counsel for the Investment Company Institute, a mutual-fund lobbying group, said following the rule’s completion.
This is a fun one! In this 22-minute podcast, our NYC trio – Roshni Banker Cariello and Melissa Glass of Davis Polk, as well as Connor Kuratek of Marsh & McLennan – discuss the latest in random things about life, including:
2. Office sizes
3. Deal cubes
4. TV shows about NYC
5. Holiday parties
This podcast is also posted as part of my “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…
Chief Accountant Wes Bricker’s speech highlighted what the Staff has been out saying before – that the impact of new accounting standards need to be disclosed more fully. With new revenue recognition (see also this speech) & lease standards becoming effective soon, this is something to bear in mind for this proxy season. Wes also covered questions that audit committees should be asking…
A new Equilar study notes that while more than 1/3rd of the S&P 500 disclose in their proxy statements that they have a CEO succession plan, only about 3% provide any details about what that plan entails. As this excerpt notes, CEO turnover has increased significantly over the past five years:
In the last five years, the number of S&P 500 CEO retirements, resignations or terminations has increased incrementally year over year, to the point where there has been more than 10% turnover at the CEO position every year across the index. As of October 31, 2016, there had been 59 CEOs who had either left their positions or announced that they would before the year’s end, up from 56 in all of 2015 and from 48 in 2012—nearly a 25% increase in a five-year timeframe.
While there’s no line-item requirement compelling disclosure about CEO succession planning, increased investor & proxy advisor scrutiny in recent years has turned up the heat on boards to clarify their strategy and risk oversight in public filings – and if CEO turnover continues at a high rate, pressure for more detailed disclosure may rise.
Post-IPO Governance: How Much Do Companies Change?
This EY study reports on how the governance practices of the IPO class of 2013 have evolved since the time of their IPOs. Findings include:
– The 2013 IPO companies have actively refreshed their boards, ushering in slightly older, more independent directors with more CEO and public company board experience.
– New directors often replace directors representing the early-stage investors who brought the companies public. Reflecting this fact, 65% of the directors who left their positions had an M&A or private equity background.
– They have also brought more women into the boardroom, but still lag behind more seasoned companies. The average S&P 600 small-cap board was 14% female in 2016, compared with 12% for the 2013 IPO companies.
– The percentage of 2013 IPO companies with independent board chairs has increased from 26% to 34%, while the percentage of those with independent lead directors has grown from 35% to 40%.
Interestingly, the 2013 IPO companies have been slow to adopt a couple of the current good governance talismans – annual election of directors (23% to 28%) & majority voting (11% to 18%).
“SEC Small Business Advocate Act” Heads for President’s Desk
This blog from David Jenson notes that the Senate has passed the “SEC Small Business Advocate Act” – and that it will now head to President Obama’s desk for signature. If signed into law, the Act will establish an “Office of the Advocate for Small Business Capital Formation” within the SEC – which will be modeled after the Office of the Investor Advocate established under Dodd-Frank.
The Act would also establish the Small Business Capital Formation Advisory Committee, which would provide the SEC with input on capital raising, reporting and governance issues on behalf of privately held small businesses and public companies with a public float of less than $250 million.
This article touts the benefits of the proposed legislation. Maybe I’m too jaded, but – aside from allowing politicians to boast about how they’re looking out for “small businesses, the real job creators and the engines of economic growth” – I’m skeptical that establishing another bureaucratic cubbyhole in an agency that already has too much on its plate is going to do much to move the needle for small business.
Andrew Abramowitz has an interesting take on the potential for crowdfunding & new Regulation A to tilt the playing field in favor of issuers:
Traditional capital-raising involves spending an enormous amount of time with potential investors, explaining the business, responding to due diligence requests, etc. In addition, when there is an investor syndicate rather than just one investor, the different members of the syndicate may have different requests/concerns, so the process is like herding cats. In contrast, at least in theory, with crowdfunding and Regulation A, once the proper disclosure is prepared and posted for investor review, the investors make their choices, and if there’s enough interest, you just go ahead and close.
Of course, a potential crowdfunding investor can decide to ask detailed questions of the company and try to negotiate terms of the offering. However, the dynamic is different than the venture capital scenario if the questioning investor is proposing to invest, say, $1,000. The company may try to be responsive up to a point, but when the individual investments are in small increments, it’s easier for the company to maintain a take it or leave it attitude.
Time will tell whether there is enough investor interest for crowdfunding to be a workable alternative to traditional methods of fundraising. But if we get to a point where a company only needs to take a week or so to put together the necessary disclosure, rather than taking out a few months or more to negotiate with individual investors, crowdfunding could prove to be an attractive way to do things.
Speaking of crowdfunding’s potential to flip the script – check out VidAngel. This company reportedly raised over $6 million in the first part of its Reg A+ offering in just two days. It took a break to blue sky the deal in more states, reopened it to investors – and promptly raised another $4 million in three days. The deal’s done – but the entertaining video offering circular lives on!
Reg AB: Corp Fin Issues Guidance for ABS Issuers
Corp Fin recently issued 23-pages of guidance for asset-backed issuers to help them file on Edgar, which has undergone programming changes that relate to revised Regulation AB and new Exchange Act Rule 15Ga-2. Not gonna lie – I have no idea what anything I just wrote means, but anyway, God bless. . .
Joe Hall on Life as a Corporate Lawyer
Check out this 30-minute podcast with Joe Hall of Davis Polk in Manhattan, another born n’ bred big legal mind. With nearly 30 years of practice under his belt, Joe leads the corporate governance practice at Davis Polk – one of Broc’s favorite law firms – and has a wealth of capital markets experience, both on the issuer and the underwriter side.
Joe has left Davis Polk twice: once to go in-house for a few years and once to work for SEC Chair Bill Donaldson in DC, during the height of Sarbanes-Oxley rulemaking – but has always returned to what he feels is his true home, Davis Polk.
More recently, Joe has led his firm into the art of podcasting – launching the firm’s “Before the Board” podcast series. Check it out on iTunes & other platforms today!
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…