The big news from Wells Fargo a few days ago was that the company’s board exercised its discretion to clawback $75 million from its former CEO and former head of community banking. Here’s the 113-page Wells Fargo board report – and here’s the news:
Recently, Corp Fin denied a no-action request from Celgene to exclude a shareholder proposal submitted by John Chevedden. The proposal sought a bylaw that would prevent the board from seeing a running vote tally when say-on-pay or shareholder approval of plans were on the ballot. The company made unsuccessful arguments under Rule 14a-8(i)(2) (arguing it was a state law matter) – and (i)(7) ordinary business. Over the years, Corp Fin has allowed exclusion of shareholder proposals that sought confidentiality for preliminary vote tallies for uncontested matters under (i)(7) – a broader plate of topics than the narrower “pay topics only” proposal at issue in this case.
Conflict Minerals: NGOs Say “Ignore Corp Fin Guidance”
As noted in this Cooley blog, a number of non-governmental organizations have issued statements emphatically rejecting Corp Fin’s recently updated statement about the effect of the Court of Appeals Decision on the conflict minerals rule – and they’re asking companies to disregard the Corp Fin guidance…
Yesterday, the self-effectuating changes – under the JOBS Act – to many of the SEC’s ’33 Act & ’34 Act forms became effective – since the rule changes were published in the Code of Federal Regulations. I originally blogged about this a few weeks ago, several days before the SEC put out their press release about it – not sure why the SEC waited to do that, but it seems to have caused some confusion among loyal readers (that along with my unartful title of that blog).
Most of these changes impact cover pages, which will help the SEC identify whether a filer is an “emerging growth company” or not. In other words, your cover pages will now change for these forms regardless if your company is an EGC or not.
Six employees at KPMG LLP have resigned after the U.S. audit regulator began investigating the leak of a confidential plan to inspect work performed by the global accounting firm, the company said Tuesday. The departing KPMG employees include four partners and Scott Marcello, a partner and the head of the firm’s audit practice, according to KPMG. The firm confirmed the matter after being contacted by The Wall Street Journal. Mr. Marcello couldn’t immediately be reached for comment.
The Public Company Accounting Oversight Board, created by Congress after the accounting scandals that took down Enron Corp. and WorldCom Inc. to police audits of listed companies, has hired an outside law firm to probe the breach, according to people familiar with the matter. The accounting board discovered the leak more than a month ago, according to the people, and the incident has sparked renewed concern about the management of the regulator, which has been criticized as moving slowly to advance new audit standards.
Revenue Recognition: Are Most Companies Behind?
Here’s an excerpt in this blog from “The SEC Institute”:
The second recent development is the release by Deloitte in a “Heads Up” newsletter in April 2017 of their most recent updated survey “Adopting the New Revenue Standard — Where Do Companies Stand?” In the survey, Deloitte found that many companies that had originally contemplated using a full retrospective have moved more towards the modified retrospective method. And, along with the worries of the SEC Chief Accountant above, they also found: “Slightly more than half of respondents had started to implement the new standard, but most were in the very early phases of adoption.”
Broc recently blogged about Gretchen Morgenson’s NY Times column on the growth of virtual annual meetings. Frankly, I can see why the virtual-only approach might be attractive to many companies whose live meetings are attended – much like my traumatic 10th birthday party – only by a handful of people who are paid to be there.
Still, I confess that even after decades of watching executives read from turgid scripts written by junior lawyers (“I move that the reading of the minutes of the 2016 annual meeting of shareholders of the Company be dispensed with blah, blah, blah. . .”), I’m kind of a fan of in-person annual meetings.
Done well, an annual meeting can provide a great opportunity to connect with retail shareholders, and there’s also something to be said for requiring the CEO to stand in-person before shareholders once a year without a mute button and a team of advisors to help with a response to a tough question. But there’s more to recommend them than just that.
From microcap meetings held in a conference room to Berkshire-Hathaway’s annual epic, annual meetings frequently provide an endearing slice of Americana. Warren Buffett’s “Woodstock for Capitalists” is famous for its folksy charm – but you don’t have to go to Omaha for that. At a community bank meeting that I attended last year in a small Ohio town, a very nice retiree proudly showed me a copy of a passbook for a savings account that her father opened for her at the bank in the 1930s (she brought it to show the CEO, who knew her by name, asked about her family, and very much admired her memorabilia).
For larger companies, annual meetings can also provide entertainment that rivals anything on reality TV. Where else can you see Jesse Jackson spar with Meg Whitman or watch Bill Ackman get verklempt in front of a couple thousand people for free? If that’s not your style, how about the guy who became a folk hero in Minneapolis by showing up at the Green Bay Packers annual meeting wearing a Vikings jersey? Perhaps your taste runs to the “annual meeting as performance art.” If so, check out Google’s 2014 gala or Facebook’s fiesta from that same year.
Seriously, why would anyone want to get rid of an event that can offer everything from Norman Rockwell to the “Gathering of the Juggalos”? So, while the future of shareholder engagement may well be in cyberspace, I hope that the in-person annual meeting doesn’t completely go the way of the Dodo. We’ll sure lose a lot if it does.
By the way, if you think annual meeting wackiness is a recent phenomenon, here’s an article describing the shouting match between Mitch (“Sing Along with Mitch”) Miller and legendary gadfly Evelyn Davis at the 1964 Xerox shareholders meeting.
Virtual Annual Meetings: New York Comptroller’s Not a Fan
This O’Melveny memo says that I’m not the only one who prefers live annual meetings. New York’s Comptroller has a strong preference for them too – and it looks like New York’s pension funds intend to express that preference with their votes. Here’s an excerpt:
In addition to sending letters outlining his concerns to S&P 500 companies that have held virtual-only meetings, Comptroller Stringer has recommended that the trustees of the $170 billion New York City Pension Funds approve a new proxy guideline to discourage virtual-only meetings. If approved, the New York City Pension Funds would vote against all governance committee members of S&P 500 companies that hold virtual-only meetings in 2017, and would extend this voting policy to all US portfolio companies in 2018.
S&P 500 companies holding virtual-only meetings in 2017 could avoid an “against” vote from governance committee members only if they commit in advance of their 2017 annual meeting to hold their 2018 annual meeting in person or as a hybrid (virtual and in-person) meeting. The Pension Funds’ trustees are expected to vote on the voting-policy change in April 2017.
Class Actions: More, More, More
Remember how 2016 set all kinds of records for securities class actions? Well, Kevin LaCroix at The D&O Diary blogs that 2017 is on course to blow those records away:
The annualized pace of the 1st quarter’s litigation rate of 10.8% is more than four times the 1997-2015 litigation rate of 2.5%. In other words, at the current filing pace, if continued for the rest of the year, U.S. publicly traded companies would face a likelihood of getting hit with a securities suit four times greater than the average annual likelihood of a securities suit during the last two decades.
Kevin says that during the 1st quarter, U.S. publicly traded companies were being sued at an annualized rate of nearly 11%. That compares to a 5.8% rate for the record-breaking 2016 year, and an average litigation rate of just 2.5% from 1996 to 2015. Merger objection litigation is part of the story, but far from all of it. Check out Kevin’s blog for more details.
Yesterday, the SEC announced enforcement proceedings against 27 firms and individuals arising out of alleged violations of the “anti-touting” provisions of the federal securities laws . According to the SEC’s press release, the defendants left the impression with investors that their publications promoting various company stocks were independent & unbiased – when in fact the writers were compensated for touting them. Here’s an excerpt describing the allegations:
SEC investigations uncovered scenarios in which public companies hired promoters or communications firms to generate publicity for their stocks, and the firms subsequently hired writers to publish articles that did not publicly disclose the payments from the companies. The writers allegedly posted bullish articles about the companies on the internet under the guise of impartiality when in reality they were nothing more than paid advertisements. More than 250 articles specifically included false statements that the writers had not been compensated by the companies they were writing about, the SEC alleges.
“If a company pays someone to publish or publicize articles about its stock, it must be disclosed to the investing public. These companies, promoters, and writers allegedly misled investors by disguising paid promotions as objective and independent analyses,” said Stephanie Avakian, Acting Director of the SEC’s Division of Enforcement.
According to the SEC’s orders as well as a pair of complaints filed in federal district court, deceptive measures were often used to hide the true sources of the articles from investors. For example, one writer wrote under his own name as well as at least nine pseudonyms, including a persona he invented who claimed to be “an analyst and fund manager with almost 20 years of investment experience.” One of the stock promotion firms went so far as to have some writers it hired sign non-disclosure agreements specifically preventing them from disclosing compensation they received.
Fraud charges were filed against 7 stock promotion firms & 3 public companies – 2 company CEOs, 6 individuals at the firms, and 9 writers were also charged. The SEC announced that 17 of the defendants agreed to settlements ranging from approximately $2,200 to nearly $3 million based on the frequency & severity of their actions. Actions against 10 other defendants are pending in a New York federal court.
One other settled action is worth noting – the SEC brought separate charges against another company that was in registration at the time the publications were circulating. The agency alleged that these communications were therefore prospectuses that didn’t comply with Section 10 of the Securities Act.
My initial thought was that this was an unprecedented “sweep” – but it turns out that the SEC did something similar 19 years ago, when it brought anti-touting actions against 44 defendants in connection with Internet promotional scams.
SEC Enforcement: Harder Line on Private Equity?
This blog from Jenner & Block’s Andrew Lichtman and Howard Suskin says that the SEC may be taking a harder line in enforcement actions involving private equity fee allocations & conflicts of interest:
Over the last several years, the SEC has targeted private equity funds for various fee allocation arrangements and conflicts of interest. Rather than describing the fee practices as fraudulent, which would require a showing of scienter, the SEC has concluded that the private equity advisers committed disclosure violations. However, a recent proceeding in which the SEC secured a settlement based on both breach of fiduciary duty and fraud may foreshadow a more aggressive approach.
The SEC’s first private equity enforcement proceeding of 2017, In re SLRA Inc. (Feb. 7, 2017), involved allegations of breach of fiduciary duty & fraud against Scott Landress, the founder of a private equity fund, in connection with improper withdrawals of fees from the fund. While the SEC’s decision to pursue fraud charges may simply reflect its assessment of the egregiousness of the conduct at issue, the blog suggests that there’s reason to believe that fraud allegations may be on the table in a broader range of fee disclosure settings:
The SEC’s order stated that the failure to disclose the related-party transaction was a breach of fiduciary duty “[e]ven if” Landress had in fact hired the affiliate to perform the work. That finding suggests that the SEC may be more inclined to bring breach of fiduciary duty or fraud claims where private equity advisers fail to disclose improper fee arrangements.
Crystal Ball: Justice Gorsuch on Securities Law
The Supreme Court’s newest member doesn’t have a long record of securities law opinions as an appellate judge, but this recent post from “The Boardroom Blog” reviews Justice Neil Gorsuch’s more significant opinions & speculates that he’s likely to be skeptical of both securities plaintiffs’ claims and the idea of judicial deference to the SEC.
As Broc blogged earlier this month, the DC District Court entered a final judgment in the conflict minerals case – which placed the rule’s future squarely in the SEC’s lap.
On Friday, Corp Fin issued a statement indicating that, pending further review, it would not pursue enforcement proceedings against companies that didn’t comply with the source and “chain of custody” due diligence requirements in Item 1.01(c) of Form SD. Here’s an excerpt from Corp Fin’s statement:
Although the district court set aside those portions of the rule that require companies to report to the Commission and state on their website that any of their products “have not been found to be ‘DRC conflict free,’” that court and the Court of Appeals left open the question of whether this description is required by the statute or, rather, is a product of the Commission’s rulemaking.
In addition, as a result of a request by the Acting Chairman, we have received several comments regarding the desirability of additional guidance or whether relief under the rule is appropriate. Those comments identified several areas for the Commission to consider.
The court’s remand has now presented significant issues for the Commission to address. At the direction of the Acting Chairman, we have considered those issues. In light of the uncertainty regarding how the Commission will resolve those issues and related issues raised by commenters, the Division of Corporation Finance has determined that it will not recommend enforcement action to the Commission if companies, including those that are subject to paragraph (c) of Item 1.01 of Form SD, only file disclosure under the provisions of paragraphs (a) and (b) of Item 1.01 of Form SD.
While the conflict minerals rule remains alive, the source & chain of custody due diligence requirements in Item 1.01(c) are widely regarded as its most burdensome aspects. In a separate statement, Acting Chair Mike Piwowar offered the SEC’s rationale for the decision to halt enforcement of this aspect of the rule:
The primary function of the extensive and costly requirements for due diligence on the source and chain of custody of conflict minerals set forth in paragraph (c) of Item 1.01 of Form SD is to enable companies to make the disclosure found to be unconstitutional.
Piwowar added that until the issues raised by the Court’s decision are resolved, “it is difficult to conceive of a circumstance that would counsel in favor of enforcing Item 1.01(c) of Form SD.”
So what are you supposed to do now with your Form SD? This Gibson Dunn blog – and this Steve Quinlivan blog – review the reporting obligations that remain in effect.
EU: Full Steam Ahead on Conflict Minerals
The future of conflict minerals disclosure may be uncertain in the US – but it’s full steam ahead in the EU. This recent blog from Cooley’s Cydney Posner reports that the European Parliament overwhelmingly approved new rules on conflict minerals. There are many similarities between the US & EU versions of the rules, but the blog highlights a number of important differences. Here’s an excerpt highlighting some of the differences in approach:
Unlike Dodd-Frank, which is primarily disclosure-based, EU Member State authorities will verify compliance by EU importers by examining documents and audit reports and, if necessary, carrying out on-the-spot inspections of an importer’s premises.
The EU rules are largely more prescriptive than the U.S. rules, even though both look to the OECD due diligence framework. Importers will be required to adopt and communicate a supply chain policy (including standards consistent with the OECD model), to incorporate the policy into supplier agreements, to structure their internal management systems to support supply chain due diligence and to establish grievance mechanisms.
The rules will also require EU importers to implement an elaborate supply chain traceability system that will require detailed information about the identity of the suppliers, the country of origin, the type & quantity of minerals and when they were mined. Even more information will be required for minerals originating in conflict-affected areas. The rules are scheduled to go into effect in 2021.
FCPA: DOJ Extends Pilot Program
As noted in these memos, the DOJ has announced that it will extend its pilot program on FCPA enforcement – the 1-year period would otherwise have expired in a few weeks. See this speech by Acting Assistant AG Ken Bianco about the program.
Earlier this week, the SEC announced that it had adopted amendments increasing the amount that companies can raise under Regulation Crowdfunding in order to adjust for inflation. Companies can now raise $1.07 million under Regulation Crowdfunding – up from the $1 million limit initially established by the JOBS Act. Corresponding changes were made to the income threshold ($100K to $107K) for determining investment limits and the maximum amount ($2K to $2.2K) that can be sold to an investor who doesn’t meet that income threshold.
Financial statement disclosure thresholds – which are based on offering size – were also adjusted upward to account for inflation (i.e., $100K to $107K, $500K to $535K, and $1 million to $1.07 million).
That same day, the Staff also issued these two new Regulation Crowdfunding CDIs:
The new CDIs address thresholds for disclosure of related party transactions under Rule 201(r) & eligibility to terminate ongoing reporting obligations under Rule 202(b)(2).
Regulation A+: 6 New CDIs
It’s been a busy week or so at the SEC for matters relating to small issuers. The JOBS Act amendments & new Regulation Crowdfunding CDIs followed on the heels of these 6 new Reg A+ CDIs that were issued last Friday:
Here’s an excerpt from this MoFo blog that provides a brief summary of the new CDIs:
These address an issuer’s ability to use Form 8-A to register securities under the Exchange Act concurrent with completion of a Tier 2 Regulation A offering; the suspension of Tier 2 reporting obligations in the case of a withdrawn offering; the age of required financial statements for a Tier 2 offering; the requirement to file a tax opinion as an exhibit to Form 1-A; the inclusion of an auditor’s consent to use an audit report included in a Form 1-K annual report as an exhibit to the Form 1-K; and the application of Item 19.D of Guide 5 to Regulation A offering sales materials.
Speaking of small issuers, what child of the 1970s & 1980s does not have a soft spot for Ronco? C’mon, think about how many of this company’s products have made the transition from cheap consumer crapola to genuine pieces of Americana – the “Vegematic” . . . “Popeil’s Pocket Fisherman”. . . the “Showtime Rotisserie” – I could go on & on.
I even bought my mom the “Ronco Buttoneer” for Christmas one year (cut me some slack – I was 11 years old & she’s forgiven me).
Anyway, the latest incarnation of this American corporate icon – Ronco Brands – recently filed for a Reg A+ IPO. Here’s the preliminary offering circular.
Just when the U.S. is looking at how to roll back its regulations on corporations (among others), the rest of the world seems to be headed in the opposite direction. On Tuesday, the EU Parliament approved a Shareholder Rights Directive, which introduces, among other things, the concept of binding say-on-pay votes for companies listed in EU markets (over 8,000 of them). The Directive also includes some interesting measures intended to impede short-termism.
According to the fact sheet issued by the European Commission, the Directive must still be adopted by the European Council (expected shortly) and, assuming adoption, will become effective two years thereafter.
To date, 1,972 Russell 3000 companies have held Say on Pay votes and 93% have passed with above 70% support. 31 companies (1.6%) have failed Say on Pay thus far in 2016; no additional companies have failed since our last report. Proxy advisory firm ISS has recommended ‘Against’ Say on Pay proposals at 12% of companies it has assessed thus far in 2016. Our special topic this week features a breakdown of Say on Pay results for S&P 500 companies compared against all other companies in the Russell 3000. So far in 2016, smaller companies are receiving higher average Say on Pay support compared to larger companies despite having a slightly higher failure rate. This development is a reversal from prior years when larger companies had noticeably stronger Say on Pay results.
Alex Lajoux: Evolving Corporate Governance
In this 34-minute podcast, Alex Lajoux, former Chief Knowledge Officer of the NACD, talks about her amazing career, including:
1. Where did you grow up?
2. How did you get into this field in the 1970s?
3. How has the NACD grown over the years?
4. How has governance changed during that time?
5. What are you doing now?
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…
Recently, I blogged about Brad Cook – who resigned as the SEC Chair when he got caught up in a securities fraud scandal & was temporarily disbarred in two states for lying to a grand jury in the case. Before becoming the SEC Chair in ’72, Cook was the SEC’s General Counsel and first Market Reg Director (serving as both at the same time). He was the youngest person ever to lead a federal agency. He was 35!!!
Like me, a lot of members responded that they had never heard of this fascinating story. And one member pointed out this transcript of an interview with Brad. It makes for fascinating reading. Also fascinating is this newspaper article from when he resigned. Wonder who has the movie rights…
If you read the transcript, bear in mind that all the names mentioned (Stans, Vesco, et al) were all players in the Watergate scandal. As apparently was Cook…
As noted in this WSJ article, the Senate Banking Committee approved Jay Clayton as SEC Chair by a vote of 15-to-8 yesterday, mostly along party lines. Three Democrats voted in favor of the nominee. All 12 Republicans on the panel supported him. Final Senate action is expected in late April or early May…
Poll: Do You Care About JOBS Act’s “5th Anniversary”?
Today is the 5th anniversary of the JOBS Act. Do you care? Express yourself in this anonymous poll:
Recently, the SEC adopted technical amendments for self-executing provisions of the JOBS Act – mostly relating to EGCs. This Davis Polk memo highlights that the EGC revenue cap has been raised for $1.07 billion – adjusted for inflation. And as noted in this blog by Steve Quinlivan, many of the ’33 Act and ’34 Act forms have been tweaked. Here’s an excerpt:
Broadly speaking the cover page has been revised to include a “check the box” item to indicate that the person filing the report is an “emerging growth company” and an additional box to check as follows: “If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.”
– There were 742 EGC filers (or 38%) that have common equity securities listed on a U.S. national securities exchange. These EGC filers represented 15% of the 4,797 exchange-listed companies – and approximately 1% of total market capitalization of exchange-listed companies.
– Many EGC filers that were not exchange-listed had limited operations. Approximately 50% of the non-listed EGC filers reported zero revenue in their
most recent filing with audited financial statements and 23% of non-listed EGCs that filed periodic reports disclosed that they were shell companies.
– Approximately 51% of EGC filers, including 74% of those that were not exchange-listed, received an explanatory paragraph in their most recent auditor’s
report expressing substantial doubt about the company’s ability to continue as a going concern.
– Among the 1,951 EGC filers, 1,262 provided a management report on internal control over financial reporting in their most recent annual filing. Of those 1,262
companies, approximately 47% reported material weaknesses.
– Approximately 96% of EGC filers were audited by accounting firms that also audited issuers that are not EGC filers, including 39% of EGC filers that were
audited by firms that provided audit reports for more than 100 issuers and were required to be inspected on an annual basis by the PCAOB.
Conflict Minerals: Final Judgment Entered
Here’s the intro from this Cooley blog by Cydney Posner:
Today, the D.C. District Court entered final judgment in National Association of Manufacturers v. SEC, holding that Section 1502 of Dodd-Frank and Rule 13p-1 and Form SD, Conflict Minerals, violate the First Amendment to the extent that the statute and the rule require regulated entities to report to the SEC and to state on their websites that any of their products “have not been found to be ‘DRC conflict free.’” In addition, pursuant to the APA, the Court held the rule unlawful and set it aside but only to the extent that it requires regulated entities to report to the SEC and to state on their websites that any of their products “have not been found to be ‘DRC conflict free.’”
It is now up to the SEC to determine whether and how to revise the existing rules or whether to let stand, at least for the meantime, the Corp Fin guidance that was issued in 2014 and is currently in effect. That guidance requires companies to make the mandated filing on a timely basis without including a statement as to the conflict-free status of the products that could be deemed to violate the First Amendment.
Try Our Quick Surveys!
We have these three new “Quick Surveys” for you to participate in – all responses are anonymous:
Recently, we had this query posted in our “Q&A Forum” (#8989): “I have heard that the SEC’s BlueLinx/Health Net orders in the context of protecting whistleblowers may lead to stockholder demand letters where companies have objectionable language in their filed severance and other agreements; anyone aware of whether this is the case, and if so, what companies are doing in response?”
John responded: “You heard right. Here’s a Jones Day memo discussing this. It looks like the plaintiffs’ bar is just getting started, and I haven’t seen anything as to how companies are responding.” Which leads us to tomorrow’s webcast…
Tomorrow’s Webcast: “Whistleblowers – What Companies Should Be Doing Now”
Tune in tomorrow for the webcast – “Whistleblowers: What Companies Should Be Doing Now” – to hear Margaret Cassidy of Cassidy Law, Sean McKessy of Phillips & Cohen (& former Chief, SEC’s Office of the Whistleblower, Division of Enforcement) and Baker & McKenzie’s Joan Meyer discuss what you need to be doing now in the wake of the latest SEC – and other regulator – actions in the whistleblower arena.
Our April Eminders is Posted!
We have posted the April issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
