Monthly Archives: November 2017

November 15, 2017

ICOs: SEC Chair Hasn’t Seen One Yet That Wasn’t a “Security”

In July, the SEC issued a highly-publicized Section 21(a) Report detailing the circumstances under which digital assets – such as “tokens” or “coins” – may be regarded as securities. In a recent speech, SEC Chair Jay Clayton touched on securities law issues surrounding ICOs – but as this blog from Duane Morris’ David Feldman notes, it was his off-script remarks that were the most interesting:

Chairman Clayton went a bit further today, going off his script to say that he has yet to see an ICO that doesn’t have “sufficient indicia” of being a securities offering. He also mentioned that the trading platforms could face SEC scrutiny and might have to either register as national securities exchanges or make clear they have an exemption from doing so.

Pro tip – If Jay Clayton hasn’t seen a ICO that didn’t involve a securities offering, you should expect the SEC to be skeptical of arguments that “this one’s different.”

ICOs: Disclose That I’m Getting Paid? But I’m a Celebrity!

I’ve reached the conclusion that the SEC is totally out of touch (said with “tongue in cheek”). If the folks who worked there watched TMZ like the rest of us, they’d know better than to suggest that our nation’s celebrities should have to comply with the law like ordinary people.

Unfortunately, based on this recent statement addressing unlawful celebrity promotional activities for ICOs, everybody at the SEC must be watching C-SPAN. Here’s an excerpt:

Any celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion. A failure to disclose this information is a violation of the anti-touting provisions of the federal securities laws. Persons making these endorsements may also be liable for potential violations of the anti-fraud provisions of the federal securities laws, for participating in an unregistered offer and sale of securities, and for acting as unregistered brokers.

The reference to touting in the statement’s “parade of horribles” is interesting. Touting is prohibited by Section 17(b) of the Securities Act, but in recent years, it hasn’t featured prominently in the SEC’s enforcement efforts – that is, until last spring, when the Division of Enforcement conducted an anti-touting “sweep” targeting 27 firms and individuals. Of course, none of the defendants in those cases had their own television show, much less their own line of non-stick cookware. We’re posting memos about SEC enforcement actions in this area in our “ICOs” Practice Area.

ICOs: Most People Who’ve Heard of Coin Offerings Think They’re Illegal – and Plan to Invest

According to this LendEDU survey addressing public awareness of cryptocurrencies & initial coin offerings:

– 25% of Americans have heard of ICOs
– 21% of Americans believe that ICOs are illegal
– 15% of Americans intend to invest in ICOs

So, while roughly 85% of Americans who’ve heard of ICOs think they’re illegal, 60% of the members of that same group intend to invest in them. Now, I suppose some or all of that 15% could have come from the 75% of Americans whom the survey says have never heard of an ICO – but I’m not sure whether that’s better or worse…

Anyway, to me, this says 3 things:

– First, the SEC is going to have a heck of a time policing this stuff
– Second, the 60% deserve what they get
– Third, resistance is futile

Welcome to “DotCom II: The Tokening,” everybody! It’s a long way off, but we have just posted the flyer for this webcast: “The Latest on ICOs/Token Deals.”

John Jenkins

November 14, 2017

The Investors Speak: Want Support? Earn Our Trust

This survey from communications firm Edelman says that companies have to do a lot to earn the trust of institutional investors – but that it’s worth their effort.

The report says that institutions are a pretty jaded bunch. They have a negative outlook about the political & investment environment, think companies are unprepared for the business risks created by the political climate, and don’t trust government or the media. Institutions also are prepared to act as change agents – 87% say they’d support an activist if they think change is necessary, & nearly the same percentage think that the companies they invest in aren’t prepared for an activist campaign.

In short, institutional investors don’t have a lot of trust in key watchdogs of corporate conduct or in the companies in which they invest – and they’re prepared to take things into their own hands. All-in-all, this doesn’t sound like the recipe for a very pleasant “Investor Day” – but the report provides some insight into key areas that help build investor trust. According to the report:

– 69% of investors believe that the way a company treats its employees impacts their trust in the company
– 87% say the customer satisfaction plays a big role in their level of trust
– 86% say that a reputation for innovation builds trust
– 77% say that equal voting rights are an important measure of trust
– 99% trust a company with a clear strategy more than those without one

Other factors cited as helping to build trust include speaking out on social issues that impact business, providing guidance on future results, an active and engaged board, & efforts to keep shareholders informed.

So what’s the payoff? According to the report, trust drives valuation and investment decisions among institutions – 77% say they bought or increased their investment positions in companies that they trusted, while more than 70% did not invest or underweighted stocks of companies that they did not trust.

Proxy Advisors: Input Sought on “Best Practice Principles”

As Broc blogged back in 2014, a group of European proxy advisors put forward a set of “Best Practice Principles for Shareholder Voting Research.” That group – known as the “Best Practice Principles Group” – now includes ISS & Glass Lewis as signatories, & is soliciting input from companies & investors about on whether those principles need to be revised in light of market experience & regulatory changes.

Tomorrow’s Webcast: “M&A Stories – Practical Guidance (Enjoyably Digested)”

Tune in tomorrow for the webcast – “M&A Stories: Practical Guidance (Enjoyably Digested)” – to hear Withersworldwide’s Ridge Barker, Ropes & Gray’s Jane Goldstein, Morgan Lewis’ Keith Gottfried and our own John Jenkins share M&A “war stories” designed to both educate and entertain.

Here are the 15 stories that will be told during this program:

1. Dig Your Well Before You Are Thirsty
2. Diligence Isn’t Just About Looking for Problems, But for Opportunities Too
3. Expect the Unexpected
4. Keep Your Eye on the Ball
5. Keep Your Friends Close (And Your Enemies Closer)
6. Strategic Deals Require Creativity & Patience
7. The Speech the Director Never Delivered
8. Another Rat’s Nest
9. Don’t Attempt to Win the Championship Football Game With an All-Star Basketball Team
10. What Does Collegiality Really Mean?
11. The Board Book’s Tale: Bankers, Stick to the Numbers!
12. Preparing for Battle
13. Driving a Deal Is Not Unlike Filming a Movie
14. Assumptions Make an *%$ Out of You & Me
15. A Deal So Nice, We Did it Twice

John Jenkins

November 13, 2017

Tomorrow’s Webcast: “Shareholder Proposals – Corp Fin Speaks”

In the wake of Corp Fin’s new Staff Legal Bulletin No. 14I, we have scheduled a webcast for tomorrow, Tuesday, November 14th – “Shareholder Proposals: Corp Fin Speaks” – during which Davis Polk’s Ning Chiu will ask Corp Fin’s Matt McNair about how the new SLB should be applied in practice. This webcast is freely available – even to nonmembers.

As reflected in the memos posted in our “Shareholder Proposals” Practice Area, there are a number of open issues to consider after the SLB – particularly logistical issues about how boards can timely act to qualify for the Staff’s new “ordinary business” position…

Governance: Do Companies Really Need an LTSE to Think Long-Term?

Over on “The Mentor Blog,” Broc recently blogged about the Long-Term Stock Exchange – a proposed new stock exchange designed to promote a long-term approach to governance. Among other innovations, the LTSE would impose a moratorium on guidance and embrace tenure voting.

This recent blog from Andrew Abramowitz asks whether we really need a new exchange to accomplish a more long-term approach by companies:

What is less clear to me is why it has to be a new stock exchange that is the mechanism for implementing these changes. There is no reason why any company listed on the NYSE or Nasdaq cannot (with appropriate internal board and stockholder approval) voluntarily comply with all the requirements that LTSE imposes.

Assuming there could be broad agreement on a set of standards for long-term orientation – perhaps a group of law and business professors can create and update something like that – then any public company can voluntarily decide to adhere to those standards and publicize that fact.

November-December Issue: Deal Lawyers Print Newsletter

This November-December issue of the Deal Lawyers print newsletter was just posted – & also sent to the printers – and includes articles on:

– Setting the Record Straight: Regulation G Doesn’t Apply to M&A Forecasts
– Structuring Asset Deals: “Traditional” vs. “Our Watch, Your Watch” Constructs
– Controlling Stockholders: Forging Ahead With “Entire Fairness”
(Or Playing It Safer)
– PRC Acquirors: How M&A Agreements Handle Risks & Challenges

Remember that – as a “thank you” to those that subscribe to both & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.

And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.

John Jenkins

November 10, 2017

Heavens! Senate Tax Bill Has Stuff That Was Just Deleted from House Bill!

Here’s the news from this FW Cook blog (also see this Davis Polk blog):

Yesterday evening, Senate Finance Committee Chairman Hatch released details of the Senate’s version of the Tax Cuts and Jobs Act. The most notable development for executive compensation is that the Senate bill generally contains the same executive compensation related provisions that were included in the first, and now outdated, release of the House bill (H.R. 1).

As previously reported, H.R. 1 was amended yesterday to remove Section 3801 of the bill, which provided for sweeping changes to the tax treatment of non-qualified deferred compensation, including stock options, under a new “Section 409B.”

For the moment, the new deferred compensation rules may be back on the table. The Senate Finance Committee meets for the first time on Monday, November 13 to begin consideration of the bill. Both the House and Senate versions are subject to further change, votes, and eventually reconciliation before final passage.

Broc Romanek

November 10, 2017

Farewell to Corp Fin Giant, Bill Morley

One of the giants from Corp Fin passed away earlier this week – Bill Morley. One of those rare gems that spent their entire career in the government, Bill served in various roles in Corp Fin over his 30 years – but he’s mostly remembered for being the Chief Counsel. One of his many roles was serving as the final arbiter of the shareholder proposal no-action letter process. Bill was considered “fair” by both sides. Not an easy feat to accomplish.

Here’s a remembrance from John Huber, who was Corp Fin Director in the ’80s: “He was my Chief Counsel after Peter Romeo went into private practice. As Chief Counsel, he was on top of no-action letters (reviewing each one before it went out), monitoring telephone calls/interps and keeping up-to-date with operations & rulemaking. At meetings when I asked what he thought, he would sometimes tell the group what the “least worst alternative” was. All that with the kindness & friendliness of a person who was indefatigable, never lost his temper and always cared about protecting investors. One of the best examples of the Corp Fin family.”

Bill retired in 1999. One of those guys that got pushed out by the Internet. Bill never wrote a single email – he didn’t want to learn new technologies. And when he was cleaning out his office, I walked by and realized there were boxes & boxes of historical documents sitting in his trash (we saved that stuff). Bill wasn’t sentimental about leaving at all. He was truly ready to enjoy life. To attend as many U. of Maryland lacrosse games as he could.

A year after retirement, Bill agreed to edit my new shareholder proposal treatise. Fifteen years of informal positions taken by Corp Fin where all up there, in his head. We met once a week for six months – I simply downloaded knowledge that no one else could match. The man sure knew his stuff. I’ve always treasured that time we spent together – such wonderful stories. There are no memorial plans yet – I will blog when we know more about that.

Here’s a 16-minute podcast that I taped with Bill in 2011, as he discussed his life in retirement – including:

– How did you wind up at the SEC?
– How do you recall the shareholder proposal process?
– Did you enjoy recruiting & hiring?
– What are among your fondest memories?
– What are you doing now?

Broc Romanek

November 9, 2017

House Tax Bill Amended! 3801 Struck (409A Stands Strong), But 162(m) Change Remains

It’s quite rare that I blog other than early in the morning. It’s too tempting to chase news across the day. But I thought I would throw up some big news regarding the earth-shattering House tax bill – even though it could be more complete if I waited til morning (including where we stand with the Senate version). Here’s the skinny about how the House made changes to its tax bill today (see this official summary):

1. The House has deleted the offending provisions about equity compensation from the bill (Section 3801 of the bill) – but it left in the provision allowing deferral of tax of stock options for private companies. And it sounds like the provision is modified that so it no longer applies to RSUs (it originally applied to both RSUs & options).

2. The changes to Section 162(m) still stand (Section 3802 of the bill). I think that’s a done deal, assuming they can get the rest of the bill passed. It’s clearly a revenue raiser and if the corporate tax rate is only 20%, companies probably don’t care about the deduction as much anyway. I’m sure it’s a trade-off many companies are willing to make.

So the upshot is that all of Section 3801 is struck – so no changes to the taxation of NQDC – and 409A still stands, so no big changes to the taxation of options & RSUs. And this is a week of my life I can never get back. We’ll be posting the new horde of memos that are sure to come in our “Regulatory Reform” Practice Area on…

Broc Romanek

November 9, 2017

Retail Shareholders: Vote Levels Decrease Further

Yesterday, SEC Chair Clayton gave a speech about transparency – here’s an excerpt about the lack of retail voters:

I have become increasingly concerned that the voices of long-term retail investors may be underrepresented or selectively represented in corporate governance. For instance, the SEC staff estimates that over 66% of the Russell 1000 companies are owned by Main Street investors, either directly or indirectly through mutual funds, pension or other employer-sponsored funds, or accounts with investment advisers. And, if foreign ownership is excluded, that percentage approaches approximately 79%. Yet it is not clear whether in our rulemaking processes the views and fundamental interests of long-term retail investors are being advocated fully and clearly, either by individual investors or groups that represent them.

Since I arrived at the agency, I have made concerted efforts to reach Main Street investors across the country, and this has resulted in productive conversations with individuals, as well as those who advocate for them. Many others at the SEC, including Rick Fleming, our Investor Advocate, and the Office of Investor Education and Advocacy, concentrate on retail investors generally and have outreach efforts focused on investors who are teachers, students, serve in the military, or live in retirement communities.

A majority of Main Street America’s dollars are invested in vehicles where the investor – the person with their money at risk – is not the voting shareholder. Often voting power rests in the hands of investment advisers who owe a duty to vote proxies in a manner consistent with the best interests of the fund and its shareholders. A question I have is: are voting decisions maximizing the funds’ value for those shareholders?

In situations where the voting power is held by or passed through to Main Street investors, it is noteworthy that non-participation rates in the proxy process are high. In the 2017 proxy season, retail shareholders beneficially-owned 30% of the shares in U.S. public companies; however, only 29% of those shares voted. This may be a signal that our proxy process is too cumbersome and needs updating.

Meanwhile, NY Times’ Gretchen Morgenson wrote this column recently entitled “Small Investors Support the Boards. But Few of Them Vote”…

Has “Notice & Access” Caused Retail Holders to Stop Voting?

Here’s a note from Lynn Turner: “The proxy retail investor participation rate use to be much higher but dropped dramatically when the SEC took action to eliminate distribution to investors of paper proxies and ballots a decade ago with ‘e-proxy.’ If the SEC wants to increase retail investor interest and voting, the could likely get a good start by undoing their previous mistake! Many people told the SEC at the time that they were making a mistake. History has now proven those people right.

Interesting that the retail investors in this country holding equities are typically older people who have lived long enough to build up larger investment balances. Those are the people who you have to reach to get to vote. In our general elections, many of those use paper mail in ballots which has increased participation in voting. Unfortunately, the SEC took an opposite tack several years ago and chose to reduce participation by retail investors. Their objective was achieved as Chair Clayton notes his speech.”

Novel Ways to Boost Retail Voting: The BofA Story

Some companies with sizable retail bases have found novel ways to boost retail voting. Remember this podcast with Peggy Foran & Ed Ballo about Pru’s “Trees (& Totes) for Votes” program.

More recently, Bank of America’s Ross Jeffries & Gale Chang talked to Carl Hagberg – as reflected in this article in Carl’s “Shareholder Service Optimizer” – about how BofA’s campaign to donate $1 if a shareholder voted produced real results. The number of BofA accounts voting went up 8% with this unique campaign (nearly 50k more voters). Nice!

Here’s an older piece from Carl entitled “A Short-List of Incentives That Might Get More Folks to Vote Their Proxies…

Broc Romanek

November 8, 2017

Survey Results: Reg FD Policies & Practices

Here’s the results from our recent survey on Regulation FD policies & practices (here’s other Reg FD surveys conducted over the years):

1. Our company has a written policy addressing Regulation FD practices:
– Yes, and it is publicly available on our website – 5%
– Yes, but it is not publicly available on our website – 64%
– No, but we are in the process of drafting such a policy – 7%
– No, and we do not intend to adopt such a policy in the near future – 24%

2. For Regulation FD purposes, our company believes:
– Our website is a “recognized channel of distribution” – 29%
– We are still studying whether our website is a “recognized channel of distribution” – 17%
– Our website is not a “recognized channel of distribution” – 52%
– I don’t even know what this question means – 2%

3. Compared to our insider trading policy, our Regulation FD policy:
– Has the exact same parameters – 34%
– Our Regulation FD policy imposes a quiet period that starts earlier than our insider trading policy – 6%
– Our Regulation FD policy imposes a quiet period that starts later than our insider trading policy – 25%
– Our Regulation FD policy imposes a quiet period that lasts longer than our insider trading policy – 6%
– Our Regulation FD policy imposes a quiet period that lasts shorter than our insider trading policy – 28%
– We don’t have a Regulation FD policy – 26%

Please take a moment to participate anonymously in these surveys: “Quick Survey on Director Compensation” – and “Quick Survey on More on Blackout Periods.” And if you’re into Reg FD, read my “Broc Tales Blog“…

Reg FD in Japan: Coming Soon?

I found it interesting that Japan just introduced its own version of Reg FD. Better late than never…

Equifax: Special Committee Finds Insiders Properly Pre-Cleared Trades

Back when I blogged about the Equifax cybersecurity breach – and the question arose whether senior executives had pre-cleared trades in the company’s stock – I wrote: “At this point – as the LA Times article notes – we don’t know if these officers were aware of the breach before they made the sales and/or whether the company’s pre-clearance procedures were adequately followed.”

Equifax now has released this special committee report dealing specifically with this pre-clearance of insider trades. And after reviewing 55,000 documents & 62 interviews with the parties involved, it found that the insiders involved did indeed properly pre-clear the trades according to the company’s policy. That certainly is good news.

Broc Romanek

November 7, 2017

Next Tuesday’s Webcast: “Shareholder Proposals – Corp Fin Speaks”

In the wake of Corp Fin’s new Staff Legal Bulletin No. 14I, we have scheduled a webcast for next Tuesday, November 14th – “Shareholder Proposals: Corp Fin Speaks” – during which Davis Polk’s Ning Chiu will ask Corp Fin’s Matt McNair about how the new SLB should be applied in practice.

As reflected in the memos posted in our “Shareholder Proposals” Practice Area, there are a number of open issues to consider after the SLB – particularly logistical issues about how boards can timely act to qualify for the Staff’s new “ordinary business” position…

Rule 701 & E-Delivery: Corp Fin’s New CDI

Yesterday, Corp Fin issued this new CDI 271.25 under the ’33 Act rules:

Question: To protect against the unauthorized disclosure of Rule 701(e) information, may companies that are using electronic delivery to satisfy Rule 701(e) disclosure requirements implement safeguards with respect to electronic access to Rule 701(e) information?

Answer: We understand that some companies satisfying their Rule 701(e) delivery obligations electronically have concerns about the potential disclosure of sensitive company information. Standard electronic safeguards, such as user-specific login requirements and related measures, are permissible. The use of a particular electronic disclosure medium either alone or in combination with other safeguards, such as the use of dedicated physical disclosure rooms that house the medium used to convey the information required to be disclosed, should not be so burdensome that intended recipients cannot effectively access the required disclosures.

For example, we would expect that physical disclosure rooms would be accessible during ordinary business hours upon reasonable notice. Once access to the required information has been granted, however, the medium used to communicate the required disclosure should provide the opportunity to retain the information or have ongoing access substantially equivalent to personal retention. [November 6, 2017]

It’s Done: 2018 Executive Compensation Disclosure Treatise

We just wrapped up Lynn, Borges & Romanek’s “2018 Executive Compensation Disclosure Treatise” — and it’s been printed. This edition has a major update to the key chapter on the new SEC’s pay ratio rules (now 120 pages long!) & more – this includes the latest pay ratio guidance from the SEC in September. All of the chapters have been posted in our “Treatise Portal” on

How to Order a Hard-Copy: Remember that a hard copy of the 2018 Treatise is not part of a membership so it must be purchased separately. Act now as this will ensure delivery of this 1650-page comprehensive Treatise soon. Here’s the “Detailed Table of Contents” listing the topics so you can get a sense of the Treatise’s practical nature. Order Now.

Broc Romanek

November 6, 2017

House’s Tax Reform Bill: Would Dramatically Alter Executive Pay!

Last week’s tax bill from House Republicans would have a tremendous impact on executive pay if enacted into law. We’re posting memos in the “Regulatory Reform” Practice Area on – but here’s a teaser from Skadden that will blow you away:

If enacted, the newly proposed “Tax Cuts and Jobs Act” would effectively put an end to many of the most widely used forms of executive compensation:

– Deferred compensation and stock options would disappear

– Use of performance-based compensation would be severely limited

– Compensation over $1 million to senior executive officers would be nondeductible for public companies and subject to an excise tax for tax-exempt organizations.

Of course, the tax reform bill released by the House Republicans today (November 2) is likely to change, perhaps drastically, in the coming days.

House Passes Two Bipartisan Bills to Facilitate Offerings

Here’s news from this Davis Polk memo:

On November 1, the House passed two bills designed to encourage capital formation by extending JOBS Act testing-the-waters provisions to all companies, codifying the SEC’s earlier expansion of confidential submission of draft registration statements by a non-emerging growth company for its IPO and during the one-year period after going public, and modifying the definition of an accredited investor to make more individuals eligible to participate in private placements.

The bills were passed on a bipartisan basis and echo proposals that were part of the Financial Choice Act passed by the House in June 2017 and the Treasury Department’s recent regulatory reform report on capital markets. We expect the bills would likely be passed and signed into law if they reach the Senate floor for a vote.

Farewell to Walter Schuetze

I note the sad news of the passing of Walter Schuetze. Walter served both the profession & public admirably. He was a courageous & staunch advocate for improving financial reporting through the use of fair value accounting.

As noted in this bio, Walter had an amazing career – one of the original founding members of the FASB. A leader of the KPMG’s National Accounting Technical Office, and the Chair of the AICPA’s Accounting Standards Committee. Served as both the SEC Chief Accountant and SEC Enforcement’s Chief Accountant. He will be missed by many.

Farewell to Dean Hunt

Sadly, former SEC Commissioner Dean Hunt passed away too. Here’s what the SEC’s statement says:

Appointed to the Commission in 1996 at the dawn of the digital age and a truly transformative era of our capital markets, Ike was a powerful voice for making sure our mission of protecting investors, fostering fair and efficient markets, and facilitating capital formation remained timeless in the face of dramatic change.

Always a thoughtful advocate for the rule of law and its fair and consistent application, Ike started his legal career as an SEC staff attorney in 1962. From then, whether in private practice, academia, or serving at the Commission, Ike set a shining example for generations of SEC staff to follow. We thank Ike for his passion and distinguished public service, and offer his family and friends our deepest condolences.

Broc Romanek