Monthly Archives: September 2017

September 29, 2017

Insider Trading: Hacks Prompting SEC to Rethink Legislative Fix?

According to media reports, SEC Chair Jay Clayton faced some tough questioning from the Senate Banking & Finance Committee earlier this week on the Equifax fiasco & the SEC’s announcement that the Edgar system had been hacked.

In addition to concerns about the SEC’s delay in disclosing its own hack, lawmakers focused on the need for new SEC guidelines addressing the disclosure obligations of companies involving data breaches. This Bloomberg article also reports that Jay suggested that he was open to working with Congress on efforts to enact “legislation to ensure executives don’t profit by buying or selling company stock before the public is told about market-moving news.”

What sort of legislation the Chair might back remains to be seen.  However, his openness to Congressional action seems to represent a bit of a departure from previous statements – earlier this month, the WSJ reported that Jay said that legislation defining insider trading wasn’t necessary.

Any way you slice it, insider trading law isn’t exactly a model of clarity.  As a case in point, this Linked-In article says that if the SEC’s hackers traded on the information they obtained, they likely won’t be subject to liability under insider trading law as it currently exists – instead, the SEC would need to rely on a much less well established “outsider trading” legal theory.

Also this blog by Keith Bishop with some interesting questions about how insider trading laws would work with the hacker of the SEC’s Edgar. As noted in this MarketWatch piece, perhaps the hackers would be prosecuted in same way the SEC went after the Ukranian hackers of the wire services a few years ago…

Litigation Survey: South Dakota Dethrones Delaware

In a development that’s akin to the Alabama Crimson Tide not making the CFB playoff, the US Chamber of Commerce’s recent lawsuit climate survey says that South Dakota has knocked Delaware from its traditional top spot as the state with the most pro-business litigation climate.

There’s been a lot of commentary about the impact of Delaware’s rejection of disclosure-only settlements & changing approach to deal litigation, but according to the Chamber, that’s not what dethroned Delaware.  Instead, it’s a pro-plaintiff legislative climate & absence of tort reform that’s soured business on the First State:

“Delaware no longer lives up to its nickname as the ‘First State,’” said ILR President Lisa A. Rickard. “As the competition between states to enact legal reforms gets tighter, Delaware is losing ground.”

Delaware is getting passed by. The state’s main business court has remained solid, repeatedly refusing to approve bogus settlements where lawyers get all the money. But while other states are busy passing tort reforms, Delaware’s legislature is siding more with the plaintiffs’ lawyers than businesses.

This “Delaware Law Weekly” article says that another big reason for Delaware’s fall from grace was the legislature’s decision to overrule the Delaware Supreme Court and ban fee-shifting bylaws:

According to Bryan Quigley, senior vice president of communications for the ILR, the fee-shifting ban was of particular concern to companies, which complained that the General Assembly essentially overruled the state Supreme Court after the justices OK’d the so-called “loser pays” provisions for nonstock corporations.

Lawmakers, acting on the recommendation of the Delaware State Bar Association, passed the legislation amid fear that the same conditions would be imposed on stock corporations.

After occupying the top spot since 2002, Delaware tumbled to #11 in this year’s survey – that not only will keep it out of the playoff picture, but probably dashes any hope of a New Year’s Day bowl appearance.

SEC Provides Regulatory Relief for Hurricane Victims

Yesterday, the SEC issued an order granting conditional exemptions from filing deadlines and other requirements for companies & others by the series of hurricanes that recently struck the U.S. & Caribbean. It also adopted interim final temporary rules extending filing deadlines for specified reports and forms required under Regulation Crowdfunding & Regulation A. Here’s the SEC’s press release.

John Jenkins

September 28, 2017

Revenue Recognition: Is Anybody Ready?

I was always one of those people who crammed a semester’s worth of studying into the night before the final exam. This Bloomberg accounting blog suggests that a lot of companies are going to find themselves in the same boat when it comes to implementation of FASB’s new revenue recognition standard:

The Financial Accounting Standards Board (FASB) issued ASU 2014-09 Revenue from Contracts with Customers declaring that the new standard would remove inconsistencies in revenue requirements, improve comparability of revenue, provide more useful information through improved disclosure requirements, and simplify the preparation of financial statements. You get the picture—all these wonderful benefits. It is only during implementation do the side effects become fully apparent. Most public companies are set to adopt the rules next year, however, many are only now realizing the numerous implementation issues.

“Most of the people today are struggling with readiness. A lot of people were not fast enough to get ready to adopt.” Jagan Reddy, senior vice president at Zuora Inc., told Bloomberg BNA staff correspondent Denise Lugo, when asked about the slow pace of implementation. “Another reason is companies want similar companies…to adopt first so they can use them as a guide.”

Despite the 2018 implementation date, the blog notes that Starbucks, Oracle & Apple have all recently announced that they won’t be implementing the new standard until 2019. MarketWatch’s Francine McKenna & her colleagues have been closely following the impact of the new standard. She notes that some companies can defer to 2019 because of the timing of their fiscal years. However, Francine points out that Apple’s an interesting example of the challenges that companies face – as this article notes, Apple originally planned to early adopt the new standard, but then delayed implementation one year to the latest possible date.

It turns out that there are some companies that stuck their necks out & early adopted the new revenue recognition standard. This recent blog from Steve Quinlivan reviews one recent early adopter’s fairly probing comment letter from the Staff, & has some tips for comments that companies that haven’t adopted should keep in mind for their 3rd quarter 10-Qs. Also see this Deloitte memo that analyzes revenue recognition disclosures in the 2nd quarter for a bunch of companies…

ESG: Building a “Sustainability Competent” Board

Boards are increasingly called upon to address a variety sustainability issues – including climate change, human rights & other environmental and social concerns that not long ago seemed pretty far afield from the business of running a public company. This Ceres report makes the business case for developing boards that are “sustainability competent,” and offers insight about how to accomplish this objective.

Here’s an excerpt from the executive summary addressing the business case for sustainability competence:

Where sustainability is material to a company, boards have a fiduciary responsibility to act. A key part of the fiduciary responsibility of boards is the duty of care, or the duty to adequately inform themselves of material issues prior to making business decisions. To discharge this responsibility, directors need to be able to understand and evaluate material risks facing the business. When a social or environmental force poses material risks, directors now need to consider those risks in decision-making in order to adequately discharge their fiduciary responsibility.

Investors are increasingly focusing on board sustainability competence. Investors are making connections between sustainability and materiality on one hand, and financial performance on the other. As a result, they are focusing on the critical role the board plays in ensuring the resilience of a company’s assets and its long-term business strategy. Consequently, investors are putting pressure on boards to show themselves as “competent” in environmental and social issues.

Your mileage may vary when it comes to legal arguments about what the fiduciary duty of care requires here, but there’s no doubt that sustainability is becoming a top priority for many investors.

The report calls for companies to take a variety of steps to build a sustainability competent board. These include integrating sustainability into the nominating process, educating directors on sustainability risks, & deepening engagement with experts and stakeholders on relevant sustainability topics.

When it comes to sustainability, most of the action among investors has come from institutions. This recent publication from the US SIF Foundation aims to change that – it provides a guide for retail investors to getting started in socially responsible investing.

IPOs:  Are SPACs the Answer for Unicorns?

We’ve previously blogged about various aspects of the Unicorn phenomenon – $1 billion dollar tech companies that are reluctant to take the IPO plunge. How can these companies be coaxed into the public marketplace? This NYT DealBook article says somebody’s building an app – uh, I mean a SPAC – for that.  Here’s an excerpt:

Last week, Chamath Palihapitiya, a brash entrepreneur who was an early Facebook employee, launched a public company known as a special purpose acquisition company, or a “blank check” company, with $600 million put up by investors. The intent is to merge with one of Silicon Valley’s unicorns, taking it public through a back door of sorts.

The idea is to remove “the process of going public that is true brain damage,” Mr. Palihapitiya said.

Unicorns may have the cash to defer going public, but it does create problems for them when it comes to retaining talent – at some point, employees realize that they can’t eat private company stock.  By gobbling up Unicorns into a SPAC, the idea is that the entity will enable their management to avoid all of the headaches and distractions of the IPO process, and become public in a blink through a reverse merger.

Reverse mergers as a vehicle for going public don’t have the greatest track record – but most of the companies that have gone down that path weren’t in a position to attract the kind of attention from market participants that a hot tech property might.  So, who knows?  It might just be crazy enough to work.

John Jenkins

September 27, 2017

Transcript Available: “Non-GAAP Disclosures – Corp Fin Speaks”

We have posted the transcript for our popular webcast – “Non-GAAP Disclosures: Corp Fin Speaks” – featuring Mark Kronforst, the Chief Accountant of the SEC’s Division of Corporation Finance and Dave Lynn of and Jenner & Block…

Private Liquidity Programs: Key Considerations

We’ve previously blogged about the growth in liquidity programs for  private companies electing to defer IPOs.  PwC has pulled together this “White Paper” addressing key considerations for CEOs and CFOs of companies considering liquidity programs.  Here’s an excerpt from the intro:

The rapidly growing nature of these secondary markets has led to many sellers and an increasing array of alternatives for those sellers to achieve liquidity. Despite being an established market, the information available to buyers and sellers is limited when  compared to the market for publicly-traded stock and therefore the market is characterized by significant opacity as compared to public exchanges where US federal securities laws, disclosure requirements and investor rights are well understood.

Private companies understand the steps and potential impact of issuing equity to investors in a primary sale either privately or publicly as these transactions are customary and well-known (i.e., in a private preferred stock financing or an IPO). Sales of shares in a secondary market, on the other hand, introduce unique challenges that are not well understood. This publication outlines certain valuation, accounting, tax, regulatory, legal, and human resources related considerations that should be carefully considered by private companies whose shares are sold in a secondary market.

Human Capital Management Disclosure: The Next Big Thing?

In this 10-minute podcast, UAW Retiree Medical Benefits Trust’s Cambria Allen discusses the “Human Capital Management Coalition” – which is led by the UAW Retiree Medical Benefits Trust – and the Coalition’s recent petition for rulemaking to the SEC, including:

1. What is the “Human Capital Management Coalition”? And what is “human capital management disclosure”?
2. Why did those interested in this topic decide to submit a petition for rulemaking to the SEC (as opposed to other routes)?
3. What are the main goals of the petition?
4. Any surprises so far since submitting the petition?
5. What can folks do who want to support the petition?

John Jenkins

September 26, 2017

Tomorrow’s Pre-Conference Webcast: “How to Apply the SEC’s New Pay Ratio Guidance”

For those registered for the upcoming “Pay Ratio & Proxy Disclosure Conference,” tune in tomorrow – 2 pm eastern (audio archive goes up when the program ends; transcript available in a week or so) – for the third in a series of three monthly webcasts that serve as a pre-conference: “Pay Ratio Workshop: What You (Truly Really) Need to Do Now.” There will be a heavy emphasis on “what now” given the SEC’s new guidance.

The speakers for tomorrow’s webcast are:

Mark Borges, Principal, Compensia
Ron Mueller, Partner, Gibson Dunn
Dave Thomas, Partner, Wilson Sonsini
Amy Wood, Partner, Cooley

Register Now: This is the only comprehensive conference devoted to pay ratio – and it’s only three weeks away! Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days. Register today.

ISS Releases ’18 Policy Survey Results

Yesterday, ISS released the survey results for its upcoming policy changes – with findings including:

Unequal Voting Rights – ISS solicited respondents’ views on multi-class capital structures that carry unequal voting rights. Among investors, a large minority (43 percent) indicated that unequal voting rights are never appropriate for a public company in any circumstances. An equal proportion of investors (43 percent) said unequal voting rights structures may be appropriate for newly public companies if they are subject to automatic sunset requirements or at firms more broadly if the capital structure is put up for periodic re-approval by the holders of the low-vote shares.

Board Gender Diversity – ISS asked respondents if they would consider it problematic if there are zero female directors on a public company board. More than two-thirds (69 percent) of investor respondents said “yes.” The lion’s share of these respondents (43 percent) said that the absence of women directors could indicate problems in the board recruitment process, while 26 percent of investor respondents said that although a lack of female directors would be problematic, their concerns may be mitigated if there is a disclosed policy/approach that describes the considerations taken into account by the board or the nominating committee to increase gender diversity on the board.

Virtual Meetings – Survey respondents were asked to provide their views on the use of online mechanisms to facilitate shareholder participation at general meetings, i.e., “hybrid” or “virtual-only” shareholder meetings. About one out of every five (19 percent) of the investors said that they would generally consider the practice of holding either “virtual-only” or “hybrid” shareholder meetings to be acceptable, without reservation. At the opposite extreme, 8 percent of the investors did not support either “hybrid” or “virtual-only” meetings.

More than one-third (36 percent) of the investor respondents indicated that they generally consider the practice of holding “hybrid” shareholder meetings to be acceptable, but not “virtual-only” shareholder meetings. Another 32 percent of the investor respondents indicated that the practice of holding “hybrid” shareholder meetings is acceptable, and that they would also be comfortable with “virtual-only” shareholder meetings if they provided the same shareholder rights as a physical meeting.

Pay Ratio Disclosures – ISS asked respondents how they intend to analyze data on pay ratios. Somewhat surprisingly, only 16 percent indicated that they are not planning to make use of this new information. Nearly three-quarters of the investor respondents indicated that they intend to either compare the ratios across companies/industry sectors, or assess year-on-year changes in the ratio at an individual company or use both of these methodologies. Of the 12 percent of investors who selected “other” as their response, some of them indicated a wait-and-see approach while other comments indicated uncertainty or concerns regarding the usefulness of the pay ratio data. Among non-investor respondents, a plurality (44 percent) expressed doubt about the usefulness of such pay ratio data.

Say-on-Pay: Despite Few “Failures,” 12-14% Run Into Problems

Here’s the intro from this interesting blog by Davis Polk’s Ning Chiu:

Although the failure rate for 2017 say-on pay results achieved an all-time low of just 1.3%, the number belies the fact that more than 2,000 say-on pay proposals have either received negative recommendations from ISS or less than 70% support, or both, since say-on-pay resolutions started in 2011.

Approximately 12% to 14% of companies run into problems every year. As companies have become more proactive with shareholder engagement, the number of companies that received “against” recommendations from ISS and still achieved more than 70% support has increased in the last three years, while the number of companies with those negative recommendations that received less than 70% favorable votes have fallen. What may be most surprising to companies, however, is that about 10 to 15 companies each year received positive endorsement from ISS and still obtained less than 70% support.

Broc Romanek

September 25, 2017

Rule 147/Reg D CDIs: The Staff Giveth…and Taketh Away

Last week, Corp Fin tweaked a number of the Securities Act Rules CDIs to reflect the amendments to Rules 147 & 504, the repeal of Rule 505, & to make non-substantive changes that correct outdated references. It also gave the axe to several Reg D CDIs that do not directly relate to the SEC’s current rules.

Here’s the tally of CDIs that were substantively updated or withdrawn:

Section 257. Rules 503 and 503T– Filing of Notice of Sales
– CDI 257.08

Section 258. Rule 504 — Exemption for Limited Offerings and Sales of Securities Not Exceeding $5,000,000
– CDI 258.03
– CDI 258.04 (withdrawn)
– CDI 258.05
– CDI 258.06

Section 259. Rule 505 — Repealed, effective May 22, 2017
– CDIs 259.01 – 259.05 (withdrawn)

Section 260. Rule 506 — Exemption for Limited Offers and Sales Without Regard to Dollar Amount of Offering
– CDI 260.02 (withdrawn)

Section 541. Rule 147 — Intrastate offers and sales
– CDI 541.02 (withdrawn)
– CDI 541.03

Section 659. Rule 505 – Exemption for Limited Offers and Sales of Securities Not Exceeding $5,000,000
– CDI 659.01 (withdrawn)

Corp Fin also made non-substantive changes to 22 Securities Act Rules CDIs. These CDIs don’t have updated dates – but are now marked by an asterisk (*) to indicate that they’ve been modified.

Check out this blog from Cydney Posner for more details on the CDIs with substantive changes.

Transcript: “Secrets of the Corporate Secretary Department”

We have posted the transcript for our popular webcast: “Secrets of the Corporate Secretary Department.”

Tomorrow’s Webcast: “Cybersecurity Due Diligence in M&A”

Tune in tomorrow for the webcast – “Cybersecurity Due Diligence in M&A” – to hear Andrews Kurth Kenyon’s Jeff Dodd, Lowenstein Sandler’s Mary Hildebrand and Cooley’s Andy Lustig discuss how to approach cybersecurity due diligence, and how to address and mitigate cybersecurity risks in M&A transactions.

John Jenkins

September 22, 2017

The SEC (& Corp Fin) Issue Boatloads of New Pay Ratio Guidance

Yesterday, the SEC – and Corp Fin – unleashed a torrent of guidance on the pay ratio rule – including this 7-page interpretive release, this detailed guidance from Corp Fin on calculating pay ratios – and one new, one revised & one withdrawn CDI.

This guidance is huge. For example, I am reading the interpretive guidance on sampling – and it appears to be far more expansive than what I’ve heard consultants have been recommending. In fact, I immediately lengthened the time allotted for the “sampling” panel during our upcoming comprehensive “Pay Ratio & Proxy Disclosure Conference” given that the standard for using sampling is now basically “not unreasonable & not in bad faith.” Over on, Mark Borges has blogged his initial analysis.

I think a lot more folks are going to be using sampling than before. And you will want to hear how to do it. Our “Pay Ratio” conference is just three weeks away!

So the interpretive release lays out the SEC’s views on the use of reasonable estimates, assumptions and methodologies – as well as the statistical sampling permitted by the rule. It also clarifies that companies may use appropriate existing internal records in determining whether to include non-US employees & in identifying the median employee – and provides guidance as to when widely-recognized tests may be used to determine whether workers are employees.

Corp Fin’s guidance on calculating pay ratios supplements the interpretive release. Topics addressed include:

– Ability of companies to combine the use of reasonable estimates with statistical sampling or other reasonable methodologies
– Examples of various sampling methods & the permissibility of using a combination of sampling methods
– Examples of situations where registrants may use reasonable estimates
– Examples of other reasonable methodologies & the permissibility of using a combination of reasonable methodologies
– Hypothetical examples of the use of reasonable estimates, statistical sampling & other reasonable methods

Finally, Corp Fin also updated the Reg S-K CDIs addressing pay ratio to reflect changes wrought by the new interpretive release:

Revised CDI 128C.01 was updated to add a reference to the new interpretive release – which clarifies that CACMs can be formulated with internal records that reasonably reflect annual compensation, even if the records don’t include every pay element, such as widely distributed equity
New CDI 128C.06 addressing the permissibility of referring to a pay ratio as an “estimate” was added
– Withdrawn CDI 128C.05, which addressed classification of a worker as an independent contractor v. an employee was withdrawn

Next Wednesday’s Webcast: “Pay Ratio Workshop – What You (Truly Really) Need to Do Now”

For those registered for the upcoming “Pay Ratio & Proxy Disclosure Conference,” tune in next Wednesday, September 27th – 2 pm eastern (audio archive goes up when the program ends; transcript available in a week or so) – for the third in a series of three monthly webcasts that serve as a pre-conference: “Pay Ratio Workshop: What You (Truly Really) Need to Do Now.” The first webcast was on July 20th; the second webcast was August 15th (transcript & audio archive available for both).

The speakers for Wednesday’s webcast are:

Mark Borges, Principal, Compensia
Ron Mueller, Partner, Gibson Dunn
Dave Thomas, Partner, Wilson Sonsini
Amy Wood, Partner, Cooley

Register Now: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days. Register today.
Broc Romanek

September 21, 2017

Wow! Edgar Hacked!

Last night, SEC Chair Jay Clayton issued a statement on cybersecurity disclosing a 2016 hack of the SEC’s Edgar system.  Here’s an excerpt:

In August 2017, the Commission learned that an incident previously detected in 2016 may have provided the basis for illicit gain through trading.  Specifically, a software vulnerability in the test filing component of our EDGAR system, which was patched promptly after discovery, was exploited and resulted in access to nonpublic information.  We believe the intrusion did not result in unauthorized access to personally identifiable information, jeopardize the operations of the Commission, or result in systemic risk.  Our investigation of this matter is ongoing, however, and we are coordinating with appropriate authorities.

The statement did not indicate how long hackers may have had access to nonpublic information. A few years back, Broc blogged about “When Will the SEC’s EDGAR Get Hacked? (Or Has It Already?)” – and noted that if Edgar was ever hacked, the SEC hopefully would let us know.

Edgar’s test filing system represents an attractive target for hackers.  Test filings are routinely made by public companies in order to verify that the system will accept a live filing of their documents – but are not publicly available.  An intruder able to access those materials would have an advance look at SEC filings in essentially final form.

A July 2017 GAO report on the SEC’s information security practices said that the agency had improved the security controls over its key financial systems. However, the report also noted that the SEC had not fully implemented 11 recommendations from a 2015 GAO audit. These recommendations included “consistently protecting its network boundaries from possible intrusions, identifying and authenticating users, authorizing access to resources, auditing and monitoring actions taken on its systems and network, or encrypting sensitive information while in transmission.”

Cybersecurity is a high priority item for the SEC, and this event – along with the Equifax fiasco – is likely to only increase the emphasis on cyber issues.  So it’s worth reading Jay Clayton’s statement in its entirety. The disclosure of the intrusion was part of a much broader statement addressing the SEC’s efforts on cybersecurity – both internally, and in its regulatory & enforcement programs. Doug Chia at “The Conference Board” has blogged some thoughts on the implications of the hack – and on the SEC’s disclosure about it.

Governance: Want Less Litigation? Hire a Lawyer as CEO

This “Harvard Business Review” article says that if boards of companies operating in high-risk environments want to reduce litigation & manage it better, they should make their next CEO a lawyer:

We found that lawyer CEOs were not only associated with less litigation but, conditional on experiencing litigation, were also associated with better management of litigation. So companies run by lawyers, if sued, spent less on litigation and did better — they settled less often when sued and lost less often when cases went to court.

Before you dust off your resume & throw your hat in the ring for the next CEO opening, it turns out there’s a reason that lawyers represent less than one-tenth of S&P 1500 CEOs:

We found that CEOs with legal training were associated with higher firm value, but only in a subset of firms, specifically, in high-growth firms and firms with large amounts of litigation. Outside of this setting, however, the effect of CEOs with legal training on firm value was negative. So companies in, say, the pharmaceuticals and airlines industries performed better when run by lawyer CEOs, all else being equal, while companies in, say, printing and publishing performed worse.

The authors speculate that the difference has to do with lawyers’ risk averse nature – it’s a positive in companies that face a lot of regulatory & litigation risk, but a negative in other settings. So, don’t quit your day job just yet.

Financial Reporting: Accounting for Disasters

This pales in comparison to the devastating human toll that our nation and our neighbors have experienced in the unprecedented series of hurricanes, wildfires & earthquakes that we’ve seen over the past several weeks – but for public companies, there’s also a financial reckoning that has to be made.

This Deloitte memo highlights the financial reporting implications of disasters for entities reporting under U.S. GAAP – which can include accounting for asset impairments, income statement classification of losses, insurance recoveries, and additional exposure to environmental remediation liabilities.

John Jenkins

September 20, 2017

The Kid & the “Proxy Season Disclosure Treatise”

I was excited to get my “feet wet” by editing the new 2018 Edition of the popular “Proxy Season Disclosure Treatise.” It just came back from the printers – and you can order now so that you receive it hot off the press! This “Detailed Table of Contents” lists the numerous topics so you can get a sense of the Treatise’s practical nature.

It’s huge – 33 chapters & 1650 pages! And so lovable that even a small child can enjoy it, as borne out by this 30-second video:

Links to Exhibits: Where To Put The Exhibit Index

When the SEC amended its rules to require links to exhibits, it also amended Rule 102(d) of Regulation S-T & Rule 601(a)(2) of Regulation S-K to require the exhibit index to “appear before the required signatures in the registration statement or report.” We’ve been getting lots of questions about what this means: Does a separate list still need to precede the exhibits themselves?

Thankfully, Bass Berry’s Jay Knight contacted the SEC’s Office of Chief Counsel – and updated his blog to reflect the Staff’s informal answer to this question:

It’s permissible to combine the exhibit table with the exhibit index and only present one list of exhibits with hyperlinks, and a separate exhibit index is not required.

I think this is a good, practicable outcome and should dispense with the notion of having two lists of exhibits. Here’s an example of the approach applied on an 8-K.

Equifax Data Breach: Securities Class Action Liability?

Last week, Broc blogged about the possible “insider trading twist” in the Equifax data breach. That, along with an alleged 17% decline in Equifax’s stock price following news of the breach, might provide unusually strong fodder for a securities class action.

At least one of these lawsuits has been filed – and more will likely follow. Check out this analysis from Kevin LaCroix:

The recent Equifax securities class action lawsuit arguably represents the exceptional case where the company’s share price declined significantly after the announcement of the data breach. The share price decline following Equifax’s data breach announcement undoubtedly reflected the fact that the company’s business model depends on maintaining the confidentiality of the customers’ sensitive financial information. The sheer magnitude of the breach likely was also a factor; although the Equifax breach is not the largest data breach of all times, it may represent one of the highest profile breaches involving sensitive personal information.

The alleged insider trading may also make the Equifax case more attractive to prospective litigants. To be sure, the company has claimed that the officials were not aware of the breach when they traded. In addition, the sales themselves are relatively small and reportedly only involve small portions of the officials’ holdings. Nevertheless, the plaintiffs undoubtedly will try to argue that the officials sought to capture trading profits by trading in their shares before the news of the breach was publicly released.

The fact that the insider trading took place after the breach had been discovered but before the breach was publicly disclosed highlights the danger involved when a company delays publicly disclosing that it had sustained a cybersecurity incident. The company’s press release states that the company delayed disclosing the breach while it conducted a forensic examination of the breach to determine its scope. One of the issues that undoubtedly will be examined in great depth in the wake of Equifax’s data breach disclosure is the question of how quickly companies should disclose information about the breach, particularly if the cause, scope, and seriousness of the breach is unknown when a company discovers that it has been hacked.

How the Equifax case ultimately will fare remains to be seen; in particular it remains to be seen whether the specifics of the plaintiffs’ allegations are sufficient for the case to survive motions to dismiss. Notwithstanding the lack of success plaintiffs typically have had with data breach-related shareholder derivative lawsuits, Equifax may seek to file derivative lawsuits against company officials as well.

The potential insider trading aspect of this situation also highlights the need for well-implemented pre-clearance & special blackout procedures. Take a moment to participate anonymously in our “Quick Survey on Blackout Periods.” We have over a dozen related survey results posted in our “Insider Trading” Practice Area – as well as other resources, like this timely Dorsey memo.

Liz Dunshee

September 19, 2017

Course Materials: The “Pay Ratio Employee Considerations” Guide

For those registered for the upcoming “Pay Ratio & Proxy Disclosure Conference,” we have just posted this invaluable set of course materials: The “Pay Ratio Employee Considerations” Guide. For many companies, the biggest issue related to the new pay ratio rule is how to message employees who might be angry about how their pay relates to the pay ratio median – not to mention the CEO’s pay package.

We decided to release these course materials early since so many are grappling now with the type of issues addressed in this “How to” manual. This topic will be addressed numerous times during the two days of the upcoming “Pay Ratio & Proxy Disclosure Conference” in mid-October – and it will also be addressed in our third pre-conference webcast coming up next week (on Wednesday, September 27th).

More Course Materials: “How to” Pay Ratio Manual (w/ 138 Practice Nuggets) – For those registered for the upcoming “Pay Ratio & Proxy Disclosure Conference,” we have just posted this invaluable set of course materials: “How to” Pay Ratio Manual (w/ 138 Practice Nuggets). This is 55-pages of practice pointers that you need now to prepare for pay ratio.

We decided to release these course materials early since so many are grappling now with the type of issues addressed in this “How to” manual. Just like the upcoming “Pay Ratio & Proxy Disclosure Conference” in October will comprehensively address these – and many more – issues. This comprehensive pay ratio event is one that you can’t afford to miss. Also remember that our third pre-conference webcast is September 27th.

Register Now: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days. Register today.

Sustainability Reporting: Internal Controls

The push for sustainability reporting continues to gain momentum – see last month’s blog about the G20 recommendations. But one largely unresolved question is how to go about verifying the data that would be included in this type of disclosure. This 55-page white paper examines how to use COSO’s internal controls framework to improve confidence in sustainability performance data. Here’s a teaser:

Sustainability performance (or related nonfinancial data) has unique characteristics. It is less tangible and more qualitative than financial performance data—although sustainability data is often quantifiable, as reported by companies in sustainability and corporate social responsibility (CSR) reports. It is also more forward-looking, covering multiple time periods, and often more manually sourced.

To improve confidence in sustainability performance data, a different “lens” on assurance and materiality may need to be taken relative to financial data, with professional judgment at the forefront. We believe the COSO principles on effectiveness—controls that are present, functioning, and integrated—could apply to all types of performance data, including sustainability, using professional judgment.

Yet “sustainability” has many—and often confusing or conflicting—definitions. Is it sustainability of the enterprise, thereby impacting reputation and “license to operate”? Is it about specific sustainability measures like climate control or deployment of human capital? Does it capture ESG measures? Is it all of the above?

Despite the confusing and sometimes conflicting lexicon, which we don’t attempt to solve in this paper, there is one important commonality: Sustainability performance data, combined with financial data, is important for the organization to manage and to (voluntarily) communicate its value-creation capacity and capability to global stakeholders.

If you’re grappling with sustainability tracking & reporting, tune in for our October 10th webcast: “E&S Disclosures: The In-House Perspective.”

Say-on-Frequency: Remember to File Your “Decision” 8-K/A!

Many companies held a “say-on-frequency” vote in 2017. If you fall in that category and haven’t already disclosed your frequency decision – now’s the time! Here’s an excerpt from this Davis Polk memo:

If the company does not report its decision in the initial Form 8-K, the due date for the Form 8-K/A is the earlier of 150 days after the annual meeting and 60 days before the next Rule 14a-8 shareholder proposal deadline, as disclosed by the company in its proxy statement. This deadline is rapidly approaching for many companies that held annual meetings in May 2017.

Failure to comply with these Form 8-K deadlines results in a loss of Form S-3 shelf eligibility. In 2011, many companies overlooked the requirement to disclose their decision on the frequency of say-on-pay votes, assuming that since the shareholder advisory vote matched the board’s recommendation, no further disclosure was necessary. Because the SEC staff recognized that many companies simply hadn’t understood this disclosure requirement, the staff routinely granted waivers of the shelf eligibility defect. It is not yet clear how the staff will handle similar waiver requests this year.

Liz Dunshee

September 18, 2017

The Big News! SEC Won’t Delay Pay Ratio!

It’s big news – although not surprising if you’ve been paying attention. On Friday, at the ABA Annual Meeting, Corp Fin Director Bill Hinman said that the SEC won’t be delaying the implementation of pay ratio (as always, speaking for himself & not the Commission). Bill also mentioned that Corp Fin would be issuing guidance on the pay ratio rules at some point in the near future. It’s still possible that Congress could delay – or repeal – the pay ratio rule. But I wouldn’t make that bet…

Time to Prepare Now! “How to” Pay Ratio Manual (w/ 138 Practice Nuggets) – For those registered for the upcoming “Pay Ratio & Proxy Disclosure Conference,” we have just posted this invaluable set of course materials: “How to” Pay Ratio Manual (w/ 138 Practice Nuggets). This is 55-pages of practice pointers that you need now to prepare for pay ratio.

We decided to release these course materials early since so many are grappling now with the type of issues addressed in this “How to” manual. Just like the upcoming “Pay Ratio & Proxy Disclosure Conference” in October will comprehensively address these – and many more – issues. This comprehensive pay ratio event is one that you can’t afford to miss. Also remember that our third pre-conference webcast is September 27th.

Register Now: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days. Register today.

Comment Letters: Corp Fin’s New “SWAT”

Here’s the intro from this blog by Stinson Leonard Street’s Steve Quinlivan:

The Office of the Inspector General has issued an evaluation of the Division of Corporation Finance’s disclosure review and comment process. The report begins with a description of the Division’s comment process. Perhaps the most interesting part is the report notes that the Division is developing a new system to improve and streamline certain aspects of the disclosure review process. The new system is called the System for Workflow Activity Tracking, which is referred to as SWAT.

SWAT will automate certain aspects of the review process such as providing notifications of filing review status to other review team members. In addition, according to Division officials, SWAT will generate a draft comment letter based on comments input into and approved within the system. The reviewer or another designated member of the relevant Assistant Director’s staff will review and revise the draft letter to ensure that it meets the Division’s policies for format, tone, and content. Once the draft letter is approved, a final comment letter will be generated within SWAT.

Small & Emerging Companies: Final Report From SEC’s Advisory Committee

Last week, the SEC’s “Advisory Committee on Small & Emerging Companies” held its 22nd – and final – meeting. At least with that Committee name. Per Chair Clayton’s opening remarks, the 6-year-old Committee is going to morph into the “Small Business Capital Formation Advisory Committee” – and the SEC is also creating a new “Office of the Advocate for Small Business Capital Formation.”

According to this Cooley blog, the Committee recommended that the SEC continue to address three main topics:

1. Facilitating Exempt Offerings: This includes a recommendation for regulatory certainty & clarifying guidance for finders, private placement brokers and platforms. The Committee also wants the “accredited investor” definition to capture as many households as possible, while remaining simple to interpret & apply.

2. Reporting Companies: The Committee recommended that smaller reporting companies get the accommodations afforded to emerging growth companies and that the cap for smaller reporting company status be raised.

In addition, the Committee recognized the benefit of board diversity and recommended that the SEC require companies to disclose not just their diversity policy, but directors’ diverse characteristics – as self-reported by directors.

3. Market Structure: Insufficient liquidity is an ongoing concern for smaller companies. The Committee wants the SEC to move forward with creating a separate secondary market for accredited investors to trade small-cap equities – as well as federal preemption for Tier 2 Reg A issuers that are current in ongoing reports.

The Committee also recommended ongoing analysis of tick size – wider trading increments may encourage more support for small & mid-cap equities and improve liquidity.

Broc Romanek