Cooley’s Cydney Posner blogs about a number of reported changes relating to corporate governance & executive compensation that have been incorporated into the latest version of the “Financial Choice Act” – Rep. Jeb Hensarling’s bill to consign Dodd-Frank to the ash heap of history. Changes to the bill include new provisions that would:
– Modernize shareholder proposal & resubmission thresholds for inflation
– Raise SOX 404(b) internal control audit threshold from $250 million to $500 million
– Prohibit SEC from promulgating a rule to require the use of “universal proxies”
– Modernize Section 12(g) registration requirements for smaller companies, including increasing the revenue/shareholder thresholds, indexing the revenue test for inflation and eliminating annual verification of accredited investor status
– Increase Rule 701 cap from $10 million to $20 million with an inflation adjustment trigger
– Expand provisions of Title I of the JOBS Act to apply more broadly by allowing all companies, not just emerging growth companies, to “test the waters” & file IPO registration statements with the SEC on a confidential basis
– Increase Reg A+ ceiling from $50 million to $75 million annually with an inflation adjustment trigger
So does any of this have a prayer of getting through the Senate without Republicans eliminating the filibuster? Maybe. It’s been suggested that some aspects of the bill might be passed under “reconciliation,” which requires only a majority vote & can be used for legislation that changes spending, revenues or the debt limit.
By the way, kudos to Bass Berry’s Jay Knight who – in this blog – tracked down the memo from Jeb Hensarling that started all the speculation about “Financial Choice Act 2.0.”
FASB: 2016 in Review
This BDO report reviews FASB’s work in 2016 – which was a very busy year. Here’s the intro:
During 2016 the Financial Accounting Standards Board (FASB) completed several major, long-term projects, and also issued guidance to resolve related practice issues. The FASB and the International Accounting Standards Board (IASB) focused on implementation issues related to the new revenue recognition standard, which resulted in several clarifying amendments during the year. Both boards also issued their respective lease standards, and the FASB finalized guidance on the classification, measurement and impairment of financial instruments.
In addition to reviewing last year’s guidance & previewing coming attractions, the report includes a helpful appendix showing the effective dates of recently issued accounting standards.
Transcript: “Conflict Minerals -Tackling Your Next Form SD”
We have posted the transcript for our recent webcast: “Conflict Minerals: Tackling Your Next Form SD.”
– 31% of S&P 500 companies’ proxy statements present enhanced discussion of the audit committee’s considerations in recommending the appointment of the audit firm, up from 13% in 2014. 21% of MidCap companies show enhanced discussion (up from 10% in 2014) compared to 17% of SmallCap companies (up from 8% in 2014).
– 17% of S&P 500 companies’ explicitly stated the role audit committees play in negotiating audit fees, more than doubling from 8% in 2014.
– 34% of S&P 500 companies disclose the evaluation or supervision of the audit firm, more than quadrupling from just 8% in 2014.
Transcript: “Audit Committees in Action – The Latest Developments”
We have posted the transcript for our recent webcast: “Audit Committees in Action – The Latest Developments.”
Study: 14 Years of Audit Fees (& Non-Audit Fees)
As noted in this blog from Audit Analytics, audit fees have increased by 9% over the past year. The ratio of audit fees over revenue (including audit related fees for tasks such as due diligence, accounting consultations, and internal control reviews) increased to a 2015 value of $599 per $1 million of revenue…
Lights, camera, action! There certainly is a lot of action so far by President Trump. Here’s an excerpt from this Reuters article:
President Donald Trump is planning to issue a directive targeting a controversial Dodd-Frank rule that requires companies to disclose whether their products contain “conflict minerals” from a war-torn part of Africa, sources familiar with the administration’s thinking.
Reuters could not learn precisely when the directive would be issued or what the final version would say. However, a leaked draft that has been floating around Washington, D.C., and was seen by Reuters on Wednesday calls for the rule to be temporarily suspended for two years. Reuters could not independently verify the authenticity of the document.
Someone sent me this draft executive order – but as Reuters notes, it’s unclear if it’s the real deal. This executive order apparently will be based on a “national security interests” rationale.
Anyway, conflict minerals filings are still due on May 31st – until we know otherwise. I’ll post the transcript from our recent webcast on conflict minerals in the next day or so (audio archive available now)…
Here’s a Mother Jones article about the impact (or lack thereof) of the conflict minerals disclosure rule…
Challenged in Court: Trump’s “2-for-1” Regulatory Order
Last week, I blogged about President Trump’s executive order that requires federal agencies to eliminate two regulations for every new one created. This order doesn’t apply to the SEC & other independent agencies. This order has been challenged now in this lawsuit: Public Citizen v. Trump. Here’s a press release from Public Citizen – and this blog summarizes the complaint.
White House’s Interim Guidance Encourages “Net Zero” Rulemaking
Meanwhile, the Administration issued this interim guidance last week about how to implement the “2-for-1” executive order – which includes language that encourages independent agencies that aren’t subject to the order – including the SEC – “to identify existing regulations that, if repealed or revised, would achieve cost savings that would fully offset the costs of new significant regulatory actions.”
Loving this CNet article about Snap’s impending IPO (Snapchat was renamed “Snap” last year; the company, not the app). The first sentence of the article is: “This may be the first time the word “sexting” has been included in an SEC filing.” Also see this CNet article about Snap’s Form S-1.
By the way, as noted in this article, Snap’s proposed governance structure is controversial – only non-voting stock is being offered to the public. Here’s a CII press release expressing anger about this structure…
Raytheon Adopts New Recognition Revenue Standard Early!
This blog from “The SEC Institute” tells us that Raytheon – in its 4th-quarter earnings release – announced it has adopted the new revenue recognition standard as of January 1, 2017, a full year before the required adoption date. Raytheon elected the full retrospective adoption method.
CII Report: How Proxy Access Private Ordering Is Faring
Last week, CII released this 11-page report about proxy access & private ordering. The conclusion states in part:
Reliance on private ordering (rather than a more standardized approach envisaged by the SEC in 2010) has meant that this area is even more complex, with the potential for various creative ways to block or frustrate what shareowners would see as legitimate uses of the mechanism. For example, some remarkably broad provisions require a nominating shareholder to file with the SEC anytime it communicates with another shareholder, regardless of whether that communication triggers a filing requirement under the SEC’s own regulations. CII is monitoring these and other onerous provisions, and intends to release an update to its 2015 Best Practices document in the second half of 2017.
He’s on a tear! Yesterday, Acting SEC Chair Mike Piwowar issued yet another statement directing the Corp Fin Staff to revisit another set of existing rules – the pay-ratio disclosure rules. Last week, Piwowar did the same thing with the conflict minerals rules.
The stated rationale for the reconsideration is that some companies are experiencing “unanticipated compliance difficulties that may hinder them in meeting the reporting deadline.” No mention of employee morale – or the desire to avoid negative publicity with the general public. Comments should be submitted on the pay ratio rules within the next 45 days.
Although this statement doesn’t repeal – or even suspend – the looming deadline for the effectiveness of the pay ratio rule, it evidences a clear intent to re-visit the rule. It also gives a strong indication that the rule is going to be under scrutiny from both regulators & Capital Hill over the next few months. Since pay ratio disclosures aren’t mandated until next proxy season, there is some time for this to play out. But not a whole lot of time…
In this blog yesterday, I noted this list of “major” rules that are on the potential “hit list” under the “Congressional Review Act” – the resource extraction rules were just killed under that Act. Conflict minerals & pay ratio aren’t on the list.
How Fast – Or Slow – Can the SEC Act?
That is the question of the day. Here’s an excerpt from this WSJ article:
Republicans on the SEC could be stymied by the commission’s own procedures on the pay-ratio rule because undoing a regulation is handled by an often lengthy process that is similar to creating one. It also is difficult for the SEC to delay it outright, because of the commission’s depleted ranks. There are just two sitting commissioners—Mr. Piwowar and Kara Stein, a Democrat—meaning the SEC is politically deadlocked on most matters. Ms. Stein on Monday signaled opposition to efforts to ease the pay rule. “It’s problematic for a chair to create uncertainty about which laws will be enforced,” she said.
But Maybe Congress Will Act Faster…
Mark Borges notes that this Bloomberg/BNA article reports that a new version of the “Financial Choice Act” will be introduced in Congress later this month. Not only is this bill likely to include a provision that would repeal of the pay ratio rule, it appears that it will also contain a version of the “Proxy Advisory Firm Reform Act of 2016.” As you will recall, that’s the bill that was introduced last year that would require the major proxy advisory firms register with the SEC and, among other things, disclose potential conflicts of interest.
On Friday, President Trump issued this Executive Order calling for a comprehensive review of Dodd-Frank. Here’s the pertinent language which applies to a broad swath of laws & regulations – including, but not necessarily limited to – Dodd-Frank:
Directive to the Secretary of the Treasury. The Secretary of the Treasury shall consult with the heads of the member agencies of the Financial Stability Oversight Council and shall report to the President within 120 days of the date of this order (and periodically thereafter) on the extent to which existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies promote the Core Principles and what actions have been taken, and are currently being taken, to promote and support the Core Principles. That report, and all subsequent reports, shall identify any laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies that inhibit Federal regulation of the United States financial system in a manner consistent with the Core Principles.
The “Core Principles” referenced in this directive are set forth in the first section of the Order:
It shall be the policy of my Administration to regulate the United States financial system in a manner consistent with the following principles of regulation, which shall be known as the Core Principles:
(a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;
(b) prevent taxpayer-funded bailouts;
(c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;
(d) enable American companies to be competitive with foreign firms in domestic and foreign markets;
(e) advance American interests in international financial regulatory negotiations and meetings;
(g) restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.
Here’s some analysis from “Mark Borges’ Blog“: It’s all very general in nature – but within the next four months (presumably sometime around the end of May), the Treasury Department will be delivering its report and (again presumably) it will address whether (and to what extent) Dodd-Frank promotes or does not promote the Core Principles. I expect that this report will cover the various executive compensation-related provisions of Dodd-Frank, including the CEO pay ratio requirement. While it’s still too early to know what this all means – or how it will play out, the Order clearly signals the start of the long-promised re-working of the law. This will likely include the repeal of some provisions, the modification and amendment of others, and, possibly, the survival of some provisions intact.
Also, it is being reported that Representative Jeb Hensarling (R-TX), Chair of the House Financial Services Committee and the catalyst behind last year’s Financial Choice Act, is expected to unveil legislation soon that will “overhaul” Dodd-Frank.
So, events appear to be picking up. Further, given the recent activity out of the White House, it’s entirely possible to that the Administration will want to demonstrate some degree of immediate progress on revamping the current law. If that’s the case, could a repeal – or delay – of the CEO pay ratio rule be in our immediate future?
Death of the SEC’s Resource Extraction Rule: R.I.P.
On Friday, the Senate passed a resolution under the “Congressional Review Act” that disapproves the SEC’s rule on resource extraction payments. As noted in this blog – citing this article – the vote was conducted pre-dawn! The House had already passed the resolution – so the rule is no longer in effect once the President signs it. The rule had a tortured history from the beginning, leaving it vulnerable to action under the Congressional Review Act…
Keir Gumbs notes: Interesting stuff. There is still a statutory mandate for resource extraction disclosures. Unclear what will happen if the rule is repealed & the mandate stands. The irony is that they only re-adopted it after they were ordered to by a federal court. Technically, the SEC will be required to move forward on the rule again until the relevant provision of Dodd-Frank is removed.
Given the recent change in Administration, it is doubtful that the SEC will pick this up again, which means that global transparency activists will have to pursue other means to get US companies to disclose this information. Notably, there is a comparable obligation in the EU that many US companies will have to comply with even though the US rules have been (or will be) repealed.
Form F-7: Green Light for Canadian Companies
From Paul Dudek of Latham & Watkins: On Friday, Corp Fin issued this no-action letter relating to MJDS Form F-7 rights offers by Canadian companies. Canadian securities regs were revised in 2015 – and there was a question as to whether companies could use F-7 with offers under the new regs. The Staff confirmed that rights offers under the new regs could be registered on a Form F-7. The incoming letter notes the number of Canadian rights offers taking place which have not been registered under the MJDS. This clarification could encourage more Canadian issuers to extend their rights offers to US holders through the MJDS.
Last year, we blogged about Corp Fin’s new policy of not asking for Tandy Letter reps in comment letter responses and acceleration requests. Apparently, IM also ceased requiring similar representations in connection with their review of 1933 Act and 1934 Act filings.
So I presumed that Tandy letters were dead. But I forgot about the SEC’s Office of Chief Accountant (known as “OCA”; not to be confused with Corp Fin’s own Chief Accountant’s office). OCA has required a stand-alone Tandy letter for auditor independence determinations for a long time – and still does. I can be forgiven for forgetting this as lawyers don’t often get involved in auditor independence issues…
Is there any way for the SEC’s Enforcement Division to better bring a message case then using the hit musical – “Hamilton” – in the title of a press release?
Form AP: Updated PCAOB Staff Guidance
Recently, the PCAOB issued Staff Guidance on Form AP that updates its guidance from June. Here’s the press release, which notes that the primary addition is an explanation of the filing deadline for companies that don’t file reports with the SEC…
FASB Proposal: Call Out Debt Waivers on Balance Sheet
This Deloitte memo discusses FASB’s recent proposal to simplify the process of determining whether debt should be classified as “current” or “noncurrent” – that’s “long-term” to us Earthlings – on a balance sheet. One part of the proposal that caught my eye relates to the disclosure of lender waivers of covenant defaults:
Entities would be required to separately present the amount of debt that is classified as noncurrent as a result of the waiver exception on the face of a classified balance sheet.
Some folks have tried to play games with disclosure of covenant waivers over the years, but I think there’s a recognition of the need for greater transparency about them. Under the new proposal, there would be no place to hide.
Shrinkage. One of the best Seinfeld episodes. Anyway, the Trump Administration is targeting a smaller Federal government with much fewer benefits, as noted in this Washington Post article. Although the SEC doesn’t seem to be specifically targeted, it likely will be impacted by these efforts in a major way. The question remains – just how much?
We have come full circle from the aftermath of the ’07 financial crisis, when hiring 800 new Staffers was being bandied about – and eventually happened, an increase of total staff by over 20%!
How to Reduce the SEC’s Regs By 75%…
Speaking of shrinkage, let’s talk about President Trump’s goal of reducing government regulations by 75%. As I blogged a few days ago, the SEC is not impacted by the Executive Order. But let’s pretend it was. I wonder how the SEC would go about doing such a thing. Give me your feedback as to which rules & regs would go on your own personal “eliminate vs. keep” list.
But note that the rules of the game are that you have to keep or eliminate entire rule or regs, not merely portions. Give me your feedback & then I’ll roll up your answers – anonymously – into a poll so that we can crowdsource this thing. Thanks to Eliot Robinson of Bryan Cave for the idea!
Our Pair of Popular Executive Pay Conferences: A 30% Early Bird Discount
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Last night, SEC Acting Chair Piwowar released this statement, announcing that the SEC would be reconsidering its conflict minerals “2014 guidance.” Here’s an excerpt from Lawrence Heim’s note:
Although there is ambiguity in this statement that we hope to get clarity on soon, it appears that the statement may only relate to the 2014 guidance and not the rule as a whole. In addition, it also appears that the outcome of the SEC’s action in relation to Piwowar’s statement applies to filings covering calendar year 2017 and therefore may not impact activities currently underway by issuers preparing for their CY2016 filings.
The statement notes that Chair Piwowar visited Africa last year & has seen the rule’s unintended consequences firsthand (and see more analysis in this Gibson Dunn blog). Comments on the reconsideration can be submitted over the next 45 days.
This news comes just in time for our webcast tomorrow – “Conflict Minerals: Tackling Your Next Form SD” – featuring our own Dave Lynn of Morrison & Foerster, Ropes & Gray’s Michael Littenberg, Elm Sustainability Partners’ Lawrence Heim and Deloitte’s Christine Robinson. They will discuss what this latest development means for you, as well as what you should be considering as you prepare your Form SD for this year.
Steve Quinlivan blogs that the resource extraction rules might turn to dust soon as the House seeks a “joint resolution of disapproval” today…
The Investor Stewardship Group’s Governance Framework
Yesterday, the “Investor Stewardship Group” wrapped up two years of work to release these long-term value principles: “Framework for U.S. Stewardship and Governance.” The group includes 16 large institutional investors & global asset managers: BlackRock, CalSTRS, Florida State Board of Administration, GIC Private Limited (Singapore’s Sovereign Wealth Fund), Legal and General Investment Management, MFS Investment Management, MN Netherlands, PGGM, Royal Bank of Canada (Asset Management), State Street Global Advisors, TIAA Investments, T. Rowe Price Associates, ValueAct Capital, Vanguard, Washington State Investment Board and Wellington Management.
Our February Eminders is Posted!
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