In a recent speech on enhancing audit committee effectiveness, SEC Chief Accountant Wes Bricker raised the topic of audit committee overload – and said the onus is on the board to address it:
Recent surveys indicate that some audit committees are finding it difficult to perform its core responsibilities while covering other major risks on its agenda. For example, a recent Corporate Directors survey by an audit firm suggests that while 75% of directors say their workload is manageable, only 57% of audit committee members say their workload is manageable.
Among audit committee members, the survey results are more pronounced in certain industries. For example, in the banking & capital markets sector, only 34% of audit committee members surveyed indicated they believe their workload is manageable.
This emphasizes the importance of the role of the board in driving the audit committee’s focus and responsibilities. Directors should ask themselves if they are identifying the risk of audit committee overload – and if so, are they appropriately managing this risk to enable the audit committee to operate effectively.
While acknowledging that audit committees may be equipped to play a role in overseeing risks that extend beyond financial reporting, Bricker stressed the importance of audit committees not losing focus on their core roles & responsibilities.
New Accounting Standards: Don’t Forget to Disclose Material Changes in ICFR!
This “SEC Institute blog” points out another topic addressed in Wes Bricker’s speech. Here’s an excerpt:
In his recent, much publicized speech, Chief Accountant Wesley Bricker discussed the transition to the new revenue recognition standard. A bit later in the speech he addressed a not so frequently discussed issue, the requirement to disclose material changes in ICFR as it relates to implementation of the new revenue recognition, leases, credit losses and other standards.
The blog goes on to review line-item disclosure requirements that could be triggered by changes to ICFR made in connection with the implementation of the various new accounting standards that are bearing down on companies like a freight train.
Nobody’s Perfect: Glitches in New Cover Pages
I should preface this by saying that I once published a 12-page “Corporate Governance Advisor” article in which I referred to “emerging growth companies” as “ECGs” throughout instead of as “EGCs,” so I’m an expert when it comes to imperfections. With that being said, I feel obligated to report that folks have flagged a few glitches in the SEC’s recently revised forms.
As Keith Bishop noted a few weeks ago, the language adding a box for EGCs on the cover of the new 10-K & 10-Q forms has led to confusion over whether companies that are both EGCs & accelerated filers should check one or two boxes. Fortunately, this blog from Jay Knight confirms that Corp Fin has informally said that these companies should check both boxes.
More recently, a member pointed out that the pdf of the new Form S-3 on the SEC’s website has a typo in it. Instead of saying “…indicate by check mark if the registrant has elected not to use the extended transition period for complying with…” (which is what the adopting release said, and is also what all of the other pdf versions updated to date say), Form S-3 says “…for comply with…”
As Liz blogged yesterday, the latest iteration of the Financial Choice Act has attracted substantial criticism from the CII. If you’re also not a fan of the legislation, then this Bloomberg interview should cheer you up – the conventional wisdom says that it’s likely deader than disco in the Senate. That’s not a surprise, since it’s merely the opening salvo in what promises to be an extended debate over efforts to reform financial regulation.
It is likely that Republicans will try to push the bill through the Committee and onto the House floor in the coming weeks.
Not yet clear is how this effort will be coordinated—if at all—with the Trump Administration, as the Treasury Department is in the process of completing a study on financial regulatory reform, expected to be issued in early June, pursuant to an executive order signed by President Trump in February. Furthermore, while we anticipate that the House of Representatives will pass some version of the FCA in 2017, prospects in the Senate are much less clear. The Senate is more likely to pursue regulatory reform legislation that is more limited in scope than the FCA. Also, the Senate being the Senate, such action probably will not be seen until 2018.
Check out this blog from Cydney Posner for a detailed summary of Financial Choice Act 2.0.
“SEC Penalties Act” Would Raise Financial Stakes for Securities Violations
Meanwhile, back in the Senate, bipartisan legislation was introduced late last month that would substantially increase the statutory limits on civil monetary penalties, directly link the size of penalties to investor harm – and raise the financial stakes for repeat securities law violators.
According to a press release issued by the bill’s sponsors, the “Stronger Enforcement of Civil Penalties Act of 2017” – or “SEC Penalties Act” – would make a number of changes to the SEC’s current authority to levy civil penalties:
Under existing law, the SEC is constrained to penalizing violators in some cases to a maximum of $181,071 per offense and institutions to $905,353. In other cases, the SEC may calculate penalties to equal the gross amount of ill-gotten gain, but only if the matter goes to federal court, not when the SEC handles a case administratively.
This bill strives to make potential and current offenders think twice before engaging in misconduct by increasing the maximum civil monetary penalties permitted by statute, directly linking the size of the maximum penalties to the amount of losses suffered by victims of a violation, and substantially raising the financial stakes for repeat offenders of our nation’s securities laws.
Specifically, the SEC Penalties Act increases the per-violation cap applicable to the most serious securities laws violations to $1 million per violation for individuals, and $10 million per violation for entities. It would also triple the penalty cap for recidivists who have been held criminally or civilly liable for securities fraud within the preceding five years. The agency would be able to assess these types of penalties in-house – and not just in federal court.
The Financial Choice Act includes an increase in the SEC’s penalty authority too, so this might be an effort that turns out to have legs – although as this article notes, it’s Congress’s third try at this.
Whistleblowers: Securities Analysts Get Into the Game
This Reuters article tells the tale of a couple of enterprising securities analysts who smelled something fishy about a public company’s numbers, blew the whistle, and now stand to receive some serious coin from the SEC. While analysts are far from the disgruntled employee stereotype, the article notes that outsiders have played a big role in the whistleblower program:
The program, established in 2011 under the Dodd-Frank financial reform law, aimed to bolster the SEC’s enforcement program by encouraging insiders to report potential fraud. However, since its inception through Sept. 30, 2016, just over a third of the more than $111 million awarded to whistleblowers went to outsiders such as analysts or short-sellers, according to the SEC.
“Sometimes outsiders have a particular expertise and they are able to independently piece things together that might not be as obvious to those close to the matter,” said Jane Norberg, the head of the SEC’s Office of the Whistleblower.
I bet it won’t be long before somebody starts a whistleblowing hedge fund.
We normally don’t comment on rumors, but we couldn’t ignore this WSJ article by Dave Michaels:
President Donald Trump’s choice to run the Securities and Exchange Commission is quietly assembling a cabinet of top staff members who spent their careers on Wall Street or advised companies on big deals, foreshadowing the Commission’s quick pivot toward a deregulatory agenda.
Aides to Jay Clayton, Mr. Trump’s pick as SEC Chairman, have interviewed or offered positions to people who would run the divisions that investigate wrongdoing and fraud, regulate public companies and oversee stock exchanges, according to people familiar with the matter. The group of expected hires includes William Hinman, a partner at Simpson & Thacher LLP, who is likely to run the SEC division that writes the rules for public company disclosures.
The full Senate is expected to vote on Mr. Clayton’s nomination as soon as early May.
The SEC’s six division directors have often come from Wall Street or from law firms that advise or defend financial companies. Mr. Hinman, who donated to Hillary Clinton’s presidential campaign, was the top American lawyer advising Alibaba Group Holding Ltd. on its $25 billion initial public offering, one of the biggest ever in U.S. markets. He began his career in New York before moving to Silicon Valley in 1994 and becoming a top legal adviser on tech IPOs.
A spokesman for Mr. Clayton declined to comment on any hiring efforts, saying the nominee “remains focused on the Senate confirmation.”
Financial Choice Act 2.0: CII Weighs In
A few days ago, CII delivered a letter to the House Financial Services Committee in advance of today’s hearing. Broc is quoted on pg. 14 based on an excerpt from this blog.
Here’s the intro from this WSJ article by Andrew Ackerman:
Does the U.S. need two separate market cops in Washington? That question is generating a lot of discussion early in the Trump administration as U.S. policy makers consider ways to streamline the federal bureaucracy by potentially merging the Commodity Futures Trading Commission into the Securities and Exchange Commission.
To be sure, the idea of combining the scrappy CFTC with the much larger and more bureaucratic SEC remains politically contentious and is highly unlikely to ever materialize. It is an idea that has been kicking around Washington for decades—and remained an idea. But some policy heavyweights support it. They include former Federal Reserve Chairman Paul Volcker , the conservative Heritage Foundation and Barney Frank, the retired Democratic congressman from Massachusetts. Mr. Frank has said he regrets that his namesake regulatory-overhaul law, the 2010 Dodd-Frank Act, didn’t merge the two regulators. The fact that they operate separately is the “single largest structural defect in our regulatory system,” he said in a 2012 statement shortly before retiring.
If the government could start from scratch, it wouldn’t have two separate agencies, supporters of a merger say. Proponents also argue a merger would simplify the regulation of financial firms that must adhere to rules set by two separate entities. A bank, for instance, might be regulated by the SEC as a publicly traded company, a broker and an asset manager. The same bank might be subject to CFTC oversight as a futures commission merchant (the equivalent of a broker) and a swap dealer. (The SEC also regulates swap dealers, as it shares jurisdiction with the CFTC over swaps, but it only oversees a sliver of the market.)
1. Does your company require insiders to sell shares only pursuant to a Rule 10b5-1 trading plan?
– Yes, insiders are required to use Rule 10b5-1 plans in order to sell shares – 4%
– No, but they are strongly encouraged – 44%
– No, and they are not explicitly encouraged – 52%
– Not sure, it hasn’t come up – 0%
2. Does your company review and approve each insider’s Rule 10b5-1 trading plan?
– Yes, it is subject to prior review and approval by the company pursuant to the insider trading policy – 78%
– Yes, but only the template plan is reviewed and not the actual trading schedule – 13%
– No, but we have a broker that we require to be used and have reviewed that brokers template – 7%
– No, and there is no requirement to go through a specific broker – 2%
3. Does your company allow sales of shares through Rule 10b5-1 trading plans during blackout periods?
– Yes – 82%
– No – 13%
– Not sure, it hasn’t come up – 4%
4. Does your company require a waiting period between execution of Rule 10b5-1 trading plans and time of first sale?
– Yes, it is a two week waiting period or less – 11%
– Yes, it is a one month waiting period (or close to it) – 33%
– Yes, it is a two month waiting period (or close to it) – 4%
– Yes, it is a waiting period until the next open window – 28%
– No – 15%
– Not sure, it hasn’t come up – 9%
5. Does your company allow insiders to voluntarily terminate a Rule 10b5-1 plan?
– Yes – 86%
– No, only terminations dictated by the trading plan are allowed – 14%
6. Does your company make public disclosure of the insiders’ Rule 10b5-1 trading plans?
– Yes, but only for directors and/or one or more officers – 20%
– Yes, for all directors and employees – 2%
– No – 78%
7. If your company makes public disclosure, how does it do it?
– Form 8-K – 42%
– Press release – 0%
– Website posting – 0%
– Combination of above – 0%
– Other – 58%
Corp Fin’s “Small Business Forum”: 15 Recommendations
Recently, Corp Fin issued this set of recommendations from its annual “Small Business Forum.” The recommendations are on pages 15-19…
More on Our “Proxy Season Blog”
We continue to post new items regularly on our “Proxy Season Blog” for TheCorporateCounsel.net 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:
– Institutional Investors: Survey
– Virtual Annual Meetings: Activism Against
– Shareholder Proposals: Investors Weigh In on Reform
– The “50/50 Climate Project”
– Last Chance! Proxy Season Reminders
Here are stats about this year’s no-action letters for shareholder proposals, courtesy of this Bloomberg blog:
– An increase in number of no-action letter requests: Over 220 requests were submitted – almost a 10% increase over 2016.
– E&S requests were most common: Together, human rights & environmental proposals were the subject of 71 no-action requests. Companies were successful in excluding 62% of the human rights proposals – but only 17% of the environmental proposals.
– Ongoing attention to proxy access: 49 companies attempted to exclude proposals on proxy access – and the Corp Fin Staff granted relief more than 75% of the time. Most of these were probably “fix-it” proposals. As I blogged today on our “Proxy Season” blog, companies are starting to find a roadmap for excluding these proposals on the basis of “substantial implementation.”
– Requests vary by industry: Most of the no-action requests were submitted by companies in the financials, consumer discretionary & health care industries. In the financial sector, 9 out of 40 no-action requests dealt with shareholder proposals relating to executive compensation. In consumer discretionary, most of the requests related to human rights/social issues.
How does your board balance convenience & security? Directors need to be able to access & interact with documents while traveling – but their accounts & devices are prime targets for hackers.
Recently, NYSE & Diligent surveyed 350 directors to understand current practices. Among other findings: 92% use unsecured personal email accounts for at least some board communications – yikes! Here’s another nugget:
It’s a bit perplexing that the auditing of board communications, accompanied by cybersecurity training for directors, has not yet become routine. At most companies, board members are on the front lines of a pitched battle; directors are targeted for cyberattack precisely because they have access to the most sensitive information with the least amount of oversight…
Experts agree, the company’s information security officers should provide a similar level of oversight, cyber risk auditing, and cybersecurity training for directors as for the rest of the company, and a director’s ability to adhere to proper procedure should be considered a basic standard for continued membership on the board.
Transcript: “Whistleblowers – What Companies Should Be Doing Now”
We have posted the transcript for our recent webcast: “Whistleblowers – What Companies Should Be Doing Now.”
Section 845 of the Act would prohibit the SEC from requiring the use of a universal proxy. It states “The Commission may not require that a solicitation of a proxy, consent, or authorization to vote a security of an issuer in an election of members of the board of directors of the issuer be made using a single ballot or card that lists both individuals nominated by (or on behalf of) the issuer and individuals nominated by (or on behalf of) other proponents.”
Section 844 of the Act would drastically alter the shareholder proposal rules. The Act would require the SEC to eliminate the option to satisfy the holding requirement by holding a certain dollar amount, require the shareholder proponent to hold one percent of the issuer’s voting securities and increase the holding period from one year to three years. It would also increase thresholds for resubmission of proposals. Interestingly, it would also prohibit the common practice of having a proxy submit a proposal on behalf of a shareholder.
The House Financial Services Committee will hold a hearing on the bill next Wednesday…
A Few New Cover Pages For You…
Recently, the SEC changed the cover pages for most ’33 Act & ’34 Act forms by adding a box relating to “emerging growth companies.” Hat tip to Bass Berry’s Jay Knight for providing these new cover pages in Word:
Director Viewpoints: Changing Domestic Strategies & More
The annual “What Directors Think” survey – by Corporate Board Member/Spencer Stuart – addresses a wide range of topics ranging from deregulation & tax policy to the board’s role in long-range strategic planning & cybersecurity. Key findings include:
– While a full third of board members agreed Dodd-Frank should be completely repealed, the majority (58%) argued in favor of tweaking only certain provisions.
– Half of the respondents believe a one-time deemed repatriation of 10% on offshore profits would support their company’s domestic growth.
– Two-thirds of directors said it is unlikely they’ll adjust their global strategy over the near term, though 46% speculated about the likeliness of doing so domestically.
– Thirty-nine percent of directors said they discuss cybersecurity at every meeting, a slight uptick from the 35% reported six months earlier.
– Four out of 10 respondents reported their board has at least one director with cyber expertise, with an additional 7% who are in the process of recruiting one.
– Only 8% of directors reported being in favor of federal regulations for overboarding.
Last week, Broc blogged that companies are lagging in preparing for the upcoming changes to the “revenue recognition” accounting standard that takes effect the start of next year. And it’s notable that companies may also be lagging in 10-Q transition disclosure. Over on our “Proxy Season Blog,” Broc recently identified this as “The Key MD&A Item in 2017 10-Qs” & highlighted a sample disclosure.
This blog excerpt from Dorsey’s Gary Tygesson provides more pointers:
Of more immediate concern, companies should be reviewing their Form 10-Q disclosures this quarter and for the balance of the year to make sure that they have addressed the SEC staff’s transitional disclosure requirements set forth in Staff Accounting Bulletin No. 74 regarding the expected impact of the new revenue recognition rules. If a company does not know, or cannot reasonably estimate, the expected financial statement impact of the new rules, that fact should be disclosed.
In that case, however, as noted in a recent speech by the SEC’s Chief Accountant, Wes Bricker, the SEC staff expects a qualitative description of the effect of the new accounting standard, and a comparison to the company’s current accounting, to aid investors in understanding the anticipated impact. Mr. Bricker said that companies “should also disclose the status of its implementation process and significant implementation matters yet to be addressed.” Based on a preliminary look at disclosures in SEC filings to date, Mr. Bricker reported that a number of companies have enhanced their transition disclosures, while for others “there is still more work to do.”
Mr. Bricker also advised caution for companies that conclude in their transitional disclosures that the impact of the new revenue recognition standard is not expected to be material. Because the new standard includes comprehensive new disclosures about contracts with customers and related judgments made by companies, he warned that “the basis of any statement that the impact of the new standard is immaterial should reflect consideration of the full scope of the new standard, which covers recognition, measurement, presentation and disclosure for revenue transactions.”
A New “Intrastate Integration” CDI: Rule 147
Yesterday, Corp Fin issued this new CDI 141.06 regarding how offerings under Rule 147 can transition to those relying on Rule 147A…
PCAOB’s “AuditorSearch” Database: Auditors & Engagement Partners Now Searchable
Recently, the PCAOB launched “AuditorSearch” – a public database of engagement partners & auditors. This search tool allows you to surf through the data filed as part of the new Form AP. The database can provide insight into the relative experience of various engagement partners – such as whether they’ve been associated with restatements or disciplinary proceedings. It also shows whether other auditors performed work underlying the audit report.
Poll: Another Editor??
It’s official – my first week of blogging is here. Readers everywhere are checking their bookmarks & emailing Broc. I can confirm he’s well (albeit in Japan on vaca) – and that all of our content remains subject to our quality-control procedures.
I’m joining TheCorporateCounsel.net after 10 years in private practice. Everyone – including me – thought I’d spend my life in the law firm trenches. Who doesn’t love the adrenaline rush of an FD slip or an unexpected shareholder proposal? But when opportunity knocks…
When we know each other better, I’ll share some reactions to my job change by former colleagues. Let’s just say they were all across the board. In the meantime, Broc & I thought it would be fun to get your reactions too – in this anonymous poll:
Dig this 170-page Form 10-K for the US Government! It was drafted at the behest of former Microsoft CEO Steve Ballmer (the guy who bought the LA Clippers a few years ago for a cool $2 billion) – and his “USAFacts Institute” project.
The “Top 5” things that tickled me (page numbers are those of the PDF – not the ones from the actual doc):
1. Includes the standard “forward-looking statements” disclaimer, but it is tailored! (pg 5)
2. Executive pay data for the US officers – where’s that equity comp? (pg 152)
3. Executive pay data for state governors – Maine gov is underpaid! (pg 153)
4. Related-party transactions – ie. political contributions (pg 154)
5. Cover page notes that all US governments have $15.1 trillion in aggregate debt (pg 1)
While I love that all the exhibits are numbered 99.xx, I think they missed a real opportunity to include the Constitution as “Exhibit 3.1,” the Bill of Rights as “Exhibit 3.2,” and so on. Hat tip to Bjorn Hall of Rise Companies for pointing this gem out!
IPO alternatives appear to be alive and well as we learn from press reports that unicorn music service Spotify may go public through a “self-filing,” also known as a “direct listing.” In my first book, over 10 years ago, I talked at length about the potential value of this very straightforward technique. Assuming you otherwise qualify for an exchange listing, you simply file to register some already outstanding shares for trading, without raising new money, and off you go. Recent self-filers include Coronado Biosciences.
T+2 in Practice: Three Implications Not to Be Missed
This Weil blog by Howard Dicker & Kaitlin Descovich provides some great practice pointers about the shortened settlement period. Also see these memos about the rule change in our “Settlement” Practice Area…
Grimes’ decision marks the failure of the SEC’s game plan to pursue Hill through an in-house administrative proceeding, a strategy approved by a federal appeals court in Atlanta last June after more than a year of litigation by Hill.
Critics of such proceedings, which were championed by former SEC enforcement chief Andrew Ceresney, say they are unfair to defendants because there are no juries and limited depositions, and because judges are on the SEC payroll. Federal appeals courts have divided on the proceedings’ constitutionality, raising the prospect that the U.S. Supreme Court may take up the issue.
I’m very excited to announce that Liz Dunshee has joined us as an Editor for our sites. Liz is an “all-star” in every sense of that word, as you’ll soon find out. She’s based in Minneapolis – her email address is included in her bio if you want to drop a line. She’ll be blogging soon enough.
Given her tender age, Liz is poised to take over this enterprise from me someday – when either my paws can’t hammer this keyboard anymore or I refuse to write “conflict minerals” one more time…
Did you know? The term “conflict minerals” has been mentioned in over 200 entries in this blog! #ThoughtThisWasaSecuritiesLawJob
White Collar Crime in a Post-Bharara World
Here’s some analysis of where the SDNY might be headed in the wake of Preet Bharara’s ouster:
Book Review: How to Make An Effective Corporate Video
Recently, I read the new book by Vern Oakley entitled “Leadership in Focus: Bringing Out Your Best on Camera.” For those that watched my “Usable Proxy Workshop” a few years back (the video archives from that excellent event are still available), you’ll remember Vern as the filmmaker that helps many companies with their corporate videos. This new book is easy to read, filled with interesting anecdotes & stories to bring home the points that Vern wants to make. My favorite type of book!
Here’s some of my favorite chapters, along with an explanation about why I feel that way:
1. “Speak from Your Heart: Connect with Millions“: A more humanizing presentation holds the viewer’s attention & helps connects them to your ideas. Too many videos – and blogs! – are bereft of any humanity. You want the video to feel “authentic” (but not sharing too much, of course – share what’s appropriate).
2. “Nobody Wants Perfect“: Building authenticity means bringing your guard down a little. Show some vulnerability. That shows courage. Your flaws can motivate people to listen to you more closely.
3. “The Leader Has No Clothes“: There is no failure, only feedback. And you want to provide feedback, not criticism. Empathy builds trust. If your trusted advisors aren’t offering the kind of objective feedback you want, share this book!
4. “Anatomy of an Effective Video“: Good practical stuff!
As noted in this WSJ article, the bartering to tweak the “Financial Choice Act” continues. Most of the Corp Fin-related notables in the bill remain untouched (eg. pay ratio would still get the axe) – but there are a few proposed changes that would impact you, such as changes to the ownership thresholds under Rule 14a-8, the shareholder proposal rule. This chart contains the changes – so far – from “Financial Choice Act 1.0.”
Of course, it’s still too soon to say what form the Choice Act will ultimately wind up taking – and even too soon to know if this legislation will eventually be “the one” put forward to replace Dodd-Frank…
By the way, the White House recently issued this memo, which affirms that its executive order with the “kill two rules-for-adopting one” mandate isn’t binding on independent agencies – like the SEC. But this new memo also reaffirms President Trump’s encouragement that independent agencies voluntarily abide by this mandate. The new memo dovetails with OMB’s Interim Guidance from a few months back on this topic…
Katherine Blair: Life as a Corporate Lawyer
In this 32-minute podcast, Katherine Blair of Manatt Phelps discusses her long & enjoyable career, including.
– Where did you grow up?
– How did you wind up becoming a lawyer?
– How did you wind up selecting securities laws?
– How has practicing in a law firm evolved over time?
– What is corporate practice in Los Angeles like?
– How active are the LA County & California bars?
– What types of tasks do you enjoy the most?
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…
Resource Extraction: 12 Senate Democrats Want to Try Again
Recently, a group of a dozen Senate Democrats sent this letter to the SEC asking that they try again with a resource extraction rule. I wouldn’t bet on that happening. This counters the letter that 6 Senate Republicans sent down to the SEC a few months ago…