Monthly Archives: December 2017

December 29, 2017

See Ya on the Other Side…

And Liz will be back in a few months…

Broc Romanek

December 28, 2017

Tax Reform: How to Cover in Your MD&A

Brink Dickerson of Troutman Sanders sent in these thoughts about tax reform & MD&A: The corporate tax rate change will have three primary impacts on MD&A drafting:

– Prospectively, the impact of the lower rate. This is a “known trend or uncertainty” that needs to be discussed even where a company does not typically address future tax rates in its SEC filings.

– Historically, the impact of the change in the tax rate change on tax assets and liabilities, which will show up in the year-end financial statements.

– Prospectively, changes in repatriation plans, which again is “known trend or uncertainty.”

Brink expects non-GAAP disclosure regarding both. And he also expects that the amounts likely will be self-reconciling. For example, he would expect to see statements such as:

Our tax expense for 2017 was $ _million. This amount reflects a reduction in our Deferred Tax Asset of $_million as a result of a decrease in the value of our U.S. federal net operating loss carryforwards due to the rate decrease included in the Tax Cuts and Jobs Act, offset by a $_million decrease in our Taxes Payable, similarly resulting from the rate decrease. In the absence of the changes in the Act, our tax expense for 2017 would have been $_million.

For 2018 we expect an overall tax rate (including federal, state and foreign taxes) of _%, but in the absence of the Act would have expected an overall tax rate of _%. Historically, we have considered substantially all foreign profits as being permanently invested in our foreign operations, and we had no intent to repatriate those funds. We currently are reconsidering that policy in light of the changes contained in the Act.

Brink also expects a more granular discussion of future tax rates in earnings calls – and he suggests that since the analysts certainly will ask about it, many companies will want to include a slide on taxes & tax rates and probably a few sentences in their earnings release as well.

House Passes Proxy Advisor Reform Bill

Last week, the House passed proxy advisor reform legislation (H.R. 4015, “Corporate Governance Reform and Transparency Act of 2017”) by a 238-182 vote. As I blogged last week, this is a rehash of proposed legislation that has been floated in recent years…

Cybersecurity: NIST’s Re-Proposal

Recently, NIST issued a re-proposal to update its cybersecurity framework. The original proposal was published at the beginning of this year. Comments are due by January 19th…

Broc Romanek

December 27, 2017

Deferred Tax Assets: Think the 8-K Coast is Clear? Don’t Forget Item 2.02!

Yesterday, I blogged about the SEC Staff’s new guidance on deferred tax assets and Form 8-Ks under Item 2.06. Note that a company may reach the conclusion that there is no impairment – or could rely on Item 2.06’s Instruction to defer the reporting of the impairment until the next quarterly report if the conclusion about the impairment is reached during a quarterly review.  The bottom line is that after the Staff’s guidance, it’s unlikely that we’ll see many companies decide that an Item 2.06 8-K filing is required.

However, as this Gibson Dunn memo points out, companies need to keep in mind the possibility of an Item 2.02 filing if they discuss the impact of tax reform on their fourth quarter results after the new year:

Item 2.02 of Form 8-K applies to more than just a company’s earnings release, and instead is triggered by any public disclosure of material non-public information regarding a company’s results of operations or financial condition for a completed quarterly or annual fiscal period. Thus, any disclosures regarding material tax accounting effects of the Tax Act that relate to, but are made after the end of, the fiscal period that includes December 22, 2017 could trigger a required Item 2.02 Form 8-K. For example, if an executive of a calendar year company publicly comments on material tax accounting effects of the Tax Act during the first week of January 2018, the company may need to furnish such disclosures on a Form 8-K.

Item 2.02 8-Ks are “furnished,” not “filed” – and while they’re not optional, a stumble here won’t impact a company’s S-3 eligibility.

Speaking of that, the concerns that companies had before the Staff’s guidance about the possible need for an Item 2.06 filing suggest that it’s probably a good time for a reminder about the safe harbor that applies for certain 8-K items, including Item 2.06. For these 8-K items, there is no Rule 10b-5 liability for failure to file (under Rule 13a-11(c)), and the company does not lose Form S-3 eligibility if the disclosure is made by the due date of the next quarterly filing (under General Instruction I.A.3). The safe harbor covers 8-K line items that – like Item 2.06 – require materiality assessments, and while it doesn’t excuse willful failures to file, it does provide a bit of a cushion for companies that get their initial materiality analysis wrong.

We are posting memos about the new SEC Staff guidance in our “Regulatory Reform” Practice Area.

Shareholder Proposals: Corp Fin Rejects Apple Despite SLB 14I

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

The SEC Staff decided that a no-action letter by Apple citing the recently issued SLB 14I was not excludable based on the information presented. The Staff noted that “We are unable to conclude, based on the information presented in your correspondence, including the discussion of the board’s analysis on this matter, that this particular proposal is not sufficiently significant to the Company’s business operations such that exclusion would be appropriate. As your letter states, ‘the Board and management firmly believe that human rights are an integral component of the Company’s business operations.’ Further, the board’s analysis does not explain why this particular proposal would not raise a significant issue for the Company.”

Also see this blog by Steve Quinlivan. A total of four no-action responses were issued to Apple last week…

Broc Romanek

December 26, 2017

SEC Staff Issues Guidance on the ‘Deferred Tax Assets’ Sleeper”

Everyone is calling it a “holiday gift” (including this Cooley blog). One member wrote: “There are accounting departments throughout America who now know for sure that Santa’s full name is Santa E Claus. I have had clients absolutely freaking out about this – before the SEC’s guidance – because they felt they had no way to get their arms around the deferred tax valuation allowance number in time for an 8-K.”

Following up on my blog about the topic of deferred tax assets being impaired & the need to consider whether an Item 2.06 Form 8-K is required, the SEC issued this statement on Friday – along with a new Staff Accounting Bulletin No. 118 (from OCA & Corp Fin) and CDI 110.02 (from Corp Fin). These provide sorely-needed guidance about the impact of the signed tax legislation on financials – particularly deferred tax assets – including resolving some debated issues about how to handle disclosure (including Item 2.06 8-Ks).

This Steve Quinlivan blog notes some recent disclosures about the new tax law – and here is an example of a company filing a stand-alone Item 2.06 8-K in connection with the new law…

SEC Staff’s Tax Reform Guidance: The Open Issues (& Practical Considerations)

As we post the inevitable flood of memos about this new SEC Staff guidance in our “Regulatory Reform” Practice Area, this Gibson Dunn blog identifies some of the open issues left by the guidance:

Many Tax Act accounting and disclosure issues remain to be addressed over the coming months during companies’ measurement periods, some of which may require guidance or consultations with regulators such as the Commission and the Treasury/Internal Revenue Service. For example, the Staff’s guidance does not expressly address the implications of filing a new Securities Act registration statement or conducting an offering off of an already effective registration statement during a company’s measurement period.

The Gibson Dunn blog also addresses “practical considerations” when it comes to Reg FD, Item 2.02 8-Ks and non-GAAP measures. Here’s their note about that last one:

Non-GAAP Financial Measures. To the extent that a company has not reflected the impact of the Tax Act in its financial statements (either on a provisional basis or as a result of having completed its assessment of such effect), and instead reports its financial results based on the tax laws as in effect immediately before enactment of the Tax Act, such disclosures continue to qualify as GAAP as a result of SAB 118.

However, to the extent that a company has completed or provisionally provided for its assessment of the tax accounting effects of an aspect of the Tax Act and reflected those effects in its financial statements, but then backs out that impact to address period-over-period comparability, the company should be mindful of the non-GAAP rules. For example, if a company has accounted for the impact of a provision of the Tax Act in its year-end financial results, but then states what its results would have been “excluding the impact of the Tax Act,” the company is presenting a non-GAAP financial measure that triggers the GAAP/non-GAAP presentation and reconciliation requirements of Regulation G and Regulation S-K Item 10(e).

In our “Regulatory Reform” Practice Area, we continue to post memos about how the tax legislation implicates a variety of business considerations outside of the SEC Staff’s guidance…

Broc Romanek

December 22, 2017

SEC Commissioner Nominees: Confirmed

Last night, the Senate confirmed the nominations of Rob Jackson and Hester Peirce to serve as SEC Commissioners by unanimous consent. And before that happened, here was the news courtesy of Snell & Wilmer’s Jon Cohen (also see this Cooley blog):

I see that Senator Baldwin has backed off her threat to block the nominations of Robert Jackson and Hester Peirce after receiving their responses to the questions Senator Baldwin posed. It is also worth noting that Kara Stein’s term has ended and she is holding over. Mike Piwowar’s term will end this coming summer. And Robert Jackson, if confirmed, will take over a term ending June 5, 2019. This leaves a lot of room for this Administration to influence the composition of the SEC.

Broc Romanek

December 21, 2017

Rulemaking by Guidance: DOJ Says “Bye-Bye”

Many conservative groups have criticized federal agencies for allegedly using “guidance” as a substitute for the traditional “notice & comment” rulemaking process.  In recent years, these complaints have gotten some traction in federal court & in Congress, but many agencies – including the SEC – continue to rely heavily on the use of guidance as part of their oversight activities.

That’s why this recent memo from Attorney General Jeff Sessions is big news – it basically says that the DOJ is out of the “rulemaking by guidance” business. Here’s an excerpt from the press release accompanying Sessions’ memo:

In the past, the Department of Justice and other agencies have blurred the distinction between regulations and guidance documents.  Under the Attorney General’s memo, the Department may no longer issue guidance documents that purport to create rights or obligations binding on persons or entities outside the Executive Branch.

The press release says that the Attorney General’s Regulatory Reform Task Force will review existing DOJ documents and will recommend candidates for repeal or modification in the light of the memo’s principles.

It’s unknown whether the SEC or other agencies will feel compelled to follow the DOJ’s lead – but coming on the heels of the GAO’s recent decision that banking agencies’ leveraged lending guidelines were actually rulemaking subject to the Congressional Review Act, the AG’s action is another sign that agency guidance practices are being viewed with a jaundiced eye in DC.

Bye-Bye Buybacks? (Maybe Not)

Bad news for all you financial engineers out there – this WSJ article says that it looks like stock buybacks may be falling out of favor:

Companies in the S&P 500 are on pace to spend $500 billion this year on share buybacks, or about $125 billion a quarter, according to data from INTL FCStone. That is the least since 2012 and down from a quarterly average of $142 billion between 2014 and 2016.

Buybacks have been popular in recent years, in part because tepid economic growth limited perceived investment opportunities as well as expected returns on new plant and expanded operations. Adding to their appeal, repurchases can make shares more attractive to investors by lowering the share count and accordingly increasing earnings per share. The post crisis surge in buybacks has been frequently cited by stock-market bears as a sign that the market’s eight-year-long advance has been driven more by financial engineering than by long-term growth.

The article says that companies’ decisions to ease up on the throttle when it comes to buybacks are a result of an improving global economy, rising consumer & investor sentiment, and concerns about the staying power of this year’s stock market rally.

Wait a sec. . . According to this MarketWatch article, reports of buybacks’ demise may be greatly exaggerated. In fact, they appear to have exploded this month – perhaps hinting at what companies intend to do with the increased cash they expect to have on hand post-tax reform.

Bye-Bye CEOs?  One in Three Gets Pushed Out

Earlier this year, I blogged about the research firm called “exechange” – and the “Push-out Score” model it uses to analyze the extent to which CEO departures were voluntary or involuntary.  Based on the firm’s analysis of more than 200 changes in top management of public companies, a whole lot of CEOs are getting kicked to the curb.  Here’s an excerpt from the firm’s recent study:

exechange uses a scoring system with a scale of 0 to 10 to determine the likelihood of a forced executive change. A Push- out Score of 0 indicates a completely voluntary management change, and a score of 10 indicates an overtly forced departure. The Push-out Score incorporates facts from company announcements and other publicly available data, including the age of the outgoing manager, time in office and share price performance. The system also interprets the sometimes-cryptic language in corporate communications, using a proprietary algorithm.

Around 36 percent of the Push-out Scores of CEO departures in the U.S. from the past 12 months reached values between 6 and 10, which suggest strong pressure on the outgoing CEO. Every third CEO in the U.S. steps down under pressure.

Mel Brooks’ version of Louis XVI said it was “good to be da King” – and a quick glance at any summary comp table says that there’s plenty of evidence for that.  However, this report suggests that Shakespeare’s Henry IV also was on to something when he said, “uneasy lies the head that wears a crown.”

John Jenkins

December 20, 2017

ICOs: This is What a Warning Shot Looks Like

Last week, SEC Chair Jay Clayton issued another cautionary statement on cryptocurrencies & ICOs. The statement covers a lot of ground – and it zeroes in on the professionals involved in these deals & their actions following the SEC’s 21(a) Report:

Following the issuance of the 21(a) Report, certain market professionals have attempted to highlight utility characteristics of their proposed initial coin offerings in an effort to claim that their proposed tokens or coins are not securities. Many of these assertions appear to elevate form over substance. Merely calling a token a “utility” token or structuring it to provide some utility does not prevent the token from being a security.

Tokens and offerings that incorporate features and marketing efforts that emphasize the potential for profits based on the entrepreneurial or managerial efforts of others continue to contain the hallmarks of a security under U.S. law. On this and other points where the application of expertise and judgment is expected, I believe that gatekeepers and others, including securities lawyers, accountants and consultants, need to focus on their responsibilities. I urge you to be guided by the principal motivation for our registration, offering process and disclosure requirements: investor protection and, in particular, the protection of our Main Street investors.

That boldface type isn’t from me – it’s from Jay Clayton. This is what a warning shot looks like, folks – and if you’ve been talking yourself into concluding that your client’s coin offering is different than all the rest, think again.

ICOs: SEC Halts ICO Offering

Just to make sure nobody missed the message, on the same day that Chair Clayton’s statement was issued, the SEC announced that it had entered a C&D order halting an ICO on the basis that it involved an unregistered public offering.

The SEC’s order is worth reading – if for no other reason than to drive home the point that a token can be a security even if it has some “utility”:

Even if MUN tokens had a practical use at the time of the offering, it would not preclude the token from being a security. Determining whether a transaction involves a security does not turn on labeling – such as characterizing an ICO as involving a “utility token” – but instead requires an assessment of “the economic realities underlying a transaction.” Forman, 421 U.S. at 849. All of the relevant facts and circumstances are considered in making that determination.

Interestingly, the issuer of the token contended in its offering materials that it had conducted a “Howey analysis” and that the tokens did not “pose a significant risk of implicating federal securities laws.” The SEC thought otherwise.

ICOs:  Meanwhile, Over at the Plaintiffs’ Bar…

I recently blogged that the plaintiffs’ bar has jumped in on the ICO fun – and this recent blog from Kevin LaCroix at the “D&O Diary” highlights another new securities class action suit involving a coin offering.  A company called Centra apparently raised $30 million in a token offering that was completed in October 2017.  As this excerpt notes, that’s when things got interesting:

On October 27, 2017, shortly after the company completed its ICO, Centra was the subject of an unflattering profile in the New York Times entitled “How Floyd Mayweather Helped Two Young Guys From Miami Get Rich”). Among other things, the article disclosed that on Oct. 5, the company’s co-founders, Sam Sharma and Raymond Trapani, had been indicted by a Manhattan grand jury in connection with their testimony in a July trial involving drunk-driving charges against Sharma.

The article also detailed that Sharma and Trapani had no prior professional experience associated with the debit cards they hoped to build. Their prior business experience consisted of running a luxury rental car company. The Times was also unable to confirm with the major credit card companies the supposed business arrangement Centra had described on its website.

The company subsequently announced that the two founders were stepping aside – and a class action lawsuit was filed on December 13th…

– John Jenkins

December 19, 2017

Tax Reform: Challenges of Assessing the Impact on Your Financials

Here’s the intro from this blog by Cooley’s Cydney Posner:

The potential passage of the new tax bill is giving some finance departments conniptions, according to Bloomberg BNA, and they’re hoping that the SEC will address the problem. The SEC? Yes. While companies are happy to see the tax breaks, some companies, especially large multinational companies, are anxious about whether they will be able to accurately determine the impact of the tax changes on their financial statements in time to file their annual and quarterly reports with the SEC. The obvious concern is that, if the SEC doesn’t extend the filing deadline, companies could risk making material misstatements.

According to this article in the WSJ, the “two most time-consuming accounting tasks for CFOs will be estimating the tax liability related to offshore cash and reassessing the value of their deferred tax items.” And there could be unintended consequences, for example, a reduction in deferred tax assets could affect debt covenants, one commentator cited in the article advised. Longer term, commentators suggested, some companies could entirely reconfigure their operations to obtain the greatest tax benefit.

See this MarketWatch piece entitled “These companies will take a huge profit hit from lower tax rates”…

Transcript: “Your Upcoming Pay Ratio Disclosures”

We have posted the transcript for our recent webcast: “Your Upcoming Pay Ratio Disclosures.” Tune in for our next pay ratio webcast on in a few weeks, January 10th: “The Latest: Your Upcoming Pay Ratio & Proxy Disclosures.”

Transcript: “M&A Stories – Practical Guidance (Enjoyably Digested)”

We have posted the transcript for our recent webcast: “M&A Stories: Practical Guidance (Enjoyably Digested).” Here are the 15 stories that were 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

This program was so popular that we just calendared another “M&A Stories: Practical Guidance (Enjoyably Digested)” for May…

Broc Romanek

December 18, 2017

Reg Flex Agenda: The New-Fangled One Is Here!

Last week, the SEC published its latest Reg Flex Agenda – this one in the new “more realistic” style that SEC Chair Clayton has been talking about. We’ll see if this new style winds up being truly more predictive – and less aspirational – than the ones before it. The Reg Flex Agenda comes in two flavors: “Existing Proposed & Final Rule Stages” (aka “Active”) – and “Long-Term Actions.” The new style moves a number of rulemakings from “Active” to “Long-Term” status – so that seemingly would be more realistic.

The “Existing Proposed & Final Rule Stages” rulemakings include those rules that are in the proposal stage which the SEC intends to tackle – and those that it hopes to propose – over the coming year. For those proposals that are already outstanding in this category, there is a prediction as to when a final rule might occur. There’s only a few Corp Fin items with this status. For example, the SEC hopes to adopt final rules for its Reg S-X proposal by October 2018 – the same timeframe applies to changing the “smaller company” definition.

The “Long-Term Actions” rulemakings include those proposals that the SEC isn’t likely to tackle in the near term. That includes leftover Dodd-Frank rulemakings like pay-for-performance, clawbacks and hedging. It includes a lot more stuff too – such as universal proxy, disclosure effectiveness, board diversity, proxy plumbing (an “oldie” that is back on the Reg Flex Agenda) – you name it. Even conflict mineral amendments and filing fee processing. There is no set timeframe for any of these – the next action is “to be determined.” And that’s the smart way to play it because the timeline for any rulemaking is so difficult to predict. See this Cooley blog

ISS Updates 3 Sets of Pay FAQs

Last week, ISS updated these three documents (updates noted in yellow):

U.S. Equity Compensation Plans: FAQs
U.S. Compensation Policies: FAQs
Pay-for-Performance Mechanics

Tax Reform: Reconciliation Doesn’t Further Tweak Pay Provisions

Here’s news from Winston & Strawn’s Mike Melbinger and his blog on

In case you are wondering, the Conference Committee version of the Tax Cuts and Jobs Act, which is likely to be the final version the House and Senate vote on and then deliver to the President is identical to the final versions that previously came out of the House and Senate in that it:

– Reduces corporate tax rates [think acceleration of deductions!]
– Does not touch 409A or deferred compensation
– Eliminates the performance-based compensation exception to Section 162(m)
– Extends the $1 million cap of Section 162(m) to certain private companies that file reports with the SEC
– Extends the $1 million cap of Section 162(m) to the company’s CFO
– Applies the “once a covered employee always a covered employee” rule to anyone who was a covered employee of the company after December 31, 2016 (even to payments made after death)
– Includes new Code Section 83(i), which allows for the deferral of taxation of certain broad-based stock awards at private companies

These changes apply to taxable years beginning after December 31, 2017, except to compensation paid pursuant to a written binding contract that was in effect on November 2, 2017, and that was not modified in any material respect on or after that date. There is still time to act!

Broc Romanek

December 15, 2017

NYSE Proposes to No Longer Require Hard Copies of Proxy Materials

As Cooley’s Cydney Posner blogged recently, the NYSE has proposed to amend Section 402.01 of the NYSE Listing Manual to provide that listed companies would not be required to provide hard copies of proxy materials to the NYSE, so long as they were included in an SEC filing available on Edgar.

If the proxy materials were available on Edgar but not filed under Schedule 14A (such as proxy statements of foreign private issuers), they may be more difficult for the NYSE to spot – so the company would be required to provide the NYSE with information sufficient to identify the filing not later than the date on which the proxy materials were sent or given to any security holders…

James Kim: Life as a Compensation Consultant

In this 26-minute podcast, James Kim of FW Cook discusses his exciting career, including:

1. How did you wind up getting into the compensation consultant industry?
2. What do you tell people that you do when you first meet them?
3. What are your remembrances of Bud Crystal?
4. What are the hot topics that you’re grabbling with now?
5. Are your clients preparing for the coming pay ratio rule?
6. What are the hardest parts of your job?
7. What are the best parts of your job?
8. What advice would you give to someone new in your field?

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…

Conflict Minerals: Gold Still a Problem

Yes, the “conflict minerals” disclosure requirement still exists – for now – though there’s been a lot of ink spilled to consider whether it’s accomplishing its intended purpose. In the meantime, this depressing GAO report finds that armed groups still exert a lot of control over DRC gold mines. Here’s an excerpt from Cydney Posner’s blog:

While progress has been made recently “in reducing the presence of armed groups at tantalum, tin, and tungsten mine sites,…the widespread availability of gold in remote, difficult-to-access areas of the eastern DRC and the lack of a functioning traceability system allow armed groups to operate at gold mine sites with minimal government and international oversight. The DRC, US, and various international organizations have commenced initiatives to encourage the responsible sourcing of gold, but there are still few mines validated as conflict free, and there are few incentives for responsible sourcing.

Broc Romanek