That was fast. Yesterday, the SEC announced the filing of an enforcement action against Tesla CEO Elon Musk arising out of his ill-considered tweetstorm & subsequent comments about a potential “going private” transaction during the first two weeks of August. The SEC’s complaint makes it clear that Enforcement isn’t messing around – this is a Rule 10b-5 securities fraud case, unaccompanied by any non-scienter based allegations. Here’s an excerpt from the SEC’s press release:
On August 7, 2018, Musk tweeted to his 22 million Twitter followers that he could take Tesla private at $420 per share (a substantial premium to its trading price at the time), that funding for the transaction had been secured, and that the only remaining uncertainty was a shareholder vote.
The SEC’s complaint alleges that, in truth, Musk had not discussed specific deal terms with any potential financing partners, and he allegedly knew that the potential transaction was uncertain and subject to numerous contingencies. According to the SEC’s complaint, Musk’s tweets caused Tesla’s stock price to jump by over six percent on August 7, and led to significant market disruption.
Co-Director of Enforcement Stephanie Avakian added that taking care to provide truthful & accurate information is one of a CEO’s “most critical obligations” – and one that applies equally when communications are made via social media instead of through traditional media. Speaking of issues surrounding the use of social media – be sure to check out our new “Social Media Handbook.”
Musk’s predicament calls to mind another automotive industry visionary with whom he’s been compared – Preston Tucker. Check out this article for an overview of Tucker’s innovative “Tucker Torpedo” & the fallout from the SEC’s 1948 investigation into his company. Of course, let’s not get carried away – Tucker’s story had elements of tragedy to it, but Musk’s is pure farce.
Upping the Ante: SEC Seeks a D&O Bar Against Musk!
Elon Musk is one of the world’s wealthiest people, so financial penalties that might prove ruinous to anyone else may not provide that much of a sting. However, the potential raised by this portion of the SEC’s prayer for relief would definitely leave a mark:
Ordering that Defendant be prohibited from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act.
That’s a D&O bar, and it’s not unusual for the SEC to seek one – in fact, this ’Compliance & Enforcement’ blog says that they are sought in more than 70% of cases involving individual defendants.
But let’s face it, Elon Musk isn’t Joe Bagadonuts – we’re talking about a guy who figured out how to land a rocket standing up. There are few CEOs more closely identified with their companies than Elon Musk, and some question whether Tesla could survive without him. That means the SEC’s decision to pursue a bar raises the stakes for Musk, Tesla, and Tesla’s investors.
Poll: Should the SEC Seek a D&O Bar?
Please take a moment to participate in our anonymous poll:
This WSJ article speculates that the work that companies have done in order to comply with new accounting standards & address the financial statement impact of tax reform may have opened Pandora’s box when it comes to restatements. Here’s an excerpt:
During the first six months of 2018, 65 companies detected accounting mistakes significant enough to require them to restate and refile entire financial filings to regulators, compared with 60 companies for the same period last year, according to Audit Analytics. The Massachusetts-based research firm analyzed disclosures from more than 9,000 U.S.-listed going back to 2005, identifying companies that had to reissue their financials because prior documents were deemed no longer reliable.
The uptick came during a period when finance teams were overhauling corporate accounting paperwork to comply with the new U.S. tax law and new revenue accounting rules. In many instances CFOs and their staffs had to go over past financial reports to recalculate the value of tax credits or liabilities, or to assess how past results would look under new rules.
The article highlights two companies – Seneca Foods & Camping World Holdings – that restated financials based upon issues discovered during efforts to address the new revenue recognition standard (Seneca) and tax reform (Camping World).
We’ve previously blogged about Audit Analytics’ warning that the new revenue recognition standard might result in more restatements – so if this turns out to be a trend, they’ll have every right to say “we told you so.”
SEC Enforcement: A Very Expensive “Fish Story”
The SEC recently announced an enforcement action against SeaWorld & its CEO for alleged disclosure shortcomings associated with the impact of the documentary “Blackfish” on the company’s business. This Ning Chiu blog summarizes the proceeding. Here’s an excerpt:
News articles begin to speculate as early as August 2013 that there may be a link between the film and the company’s declining attendance. That fall, the company’s annual reputation study conducted by its communications department found that its score had fallen by more than 12% from the prior year. This finding was presented to the strategy committee that included the CEO, but was excluded from materials for a later meeting that the chairman of the board attended.
Musical acts and promotional partners started to cancel performances or withdraw from their marketing arrangements, which the SEC believes “should have provided confirmation” that the company’s reputation had been materially damaged by the film. Instead, in articles around the same time, the CEO expressly stated that he could not “connect anything” between the film and any effect on the company’s business. The company also stated in other media that there was “no truth” to the suggestion that the company’s reputation had suffered.
SeaWorld and its CEO agreed to settle the SEC’s charges without admitting or denying the allegations. The company paid a $4 million penalty and the CEO paid $850,000 in disgorgement and prejudgment interest and a $150,000 civil penalty.
Bad News: Give It to ‘Em Straight!
I guess you could say that the theme of today’s blogs is “bad news” – so this recent blog from Adam Epstein about how to deliver that kind of news to investors is probably a good way to close things out. The short answer is “give it to ’em straight.” Adam reviews all the ways he’s seen companies try to spin bad news, and says they just don’t work. Here’s an excerpt:
It doesn’t work. Smart investors have seen this movie before, and it ends badly. Every public company has bad quarters. Great companies face bad news directly, and succinctly, because nothing they say is going to undo the bad results. Every other path destroys trust and erodes value.
The blog acknowledges that sometimes a company’s bad quarter may distract from many other positive developments in the business. If that’s the case, the blog advises that instead of using those developments to spin bad news, management is better off to let those future results speak for themselves when announced.
Today is the “Say-on-Pay Workshop: 15th Annual Executive Compensation Conference”; yesterday was the “Proxy Disclosure Conference” (for which the video archive is already posted). Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” – on the home pages of those sites – will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: HTML5, Windows Media or Flash Player). Here are the “Course Materials.”
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s conference agenda; times are Pacific.
– How to Earn CLE Online: Please read these “FAQs about Earning CLE” carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see this “List: CLE Credit By State.”
Corp Fin Issues CDI on “Disclosure Simplification” Effectiveness
Last week, I blogged that it was unclear when the SEC’s new disclosure simplification rules become effective. Yesterday, Corp Fin resolved that issue with this new CDI:
Question 105.09: On August 17, 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. The amendments will become effective 30 days after publication in the Federal Register. Among the amendments is the requirement to presentthe changes in shareholders’ equity in the interim financial statements (either in a separate statement or footnote) in quarterly reports on Form 10-Q. Refer to Rules 8-03(a)(5) and 10-01(a)(7) of Regulation S-X. When are filers expected to comply with this new requirement?
Answer: The amendments are effective for all filings made 30 days after publication in the Federal Register. In light of the anticipated timing of effectiveness of the amendments and expected proximity of effectiveness to the filing date for most filers’ quarterly reports, the staff would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments. For example, assuming an effective date of October 25, a December 31 fiscal year-end filer could omit this disclosure from its September 30, 2018 Form 10-Q. Likewise, a June 30 fiscal year-end filer could omit this disclosure from its September 30, 2018 and December 31, 2018 Forms 10-Q; however, the staff would object if it did not provide the disclosures in its March 31, 2019 Form 10-Q. (Sept. 25, 2018)
So the Staff says that although the new rules apply to any filings after the effective date, companies can hold off one quarter on the “Statement on Stockholders Equity.” That’s good news, as this Gibson Dunn blog notes, companies with 12/31 fiscal year ends will be able to wait to make the new disclosure until after their 3rd quarter 10-Q. And no, the rules haven’t been published in the Federal Register yet…
SEC Charges 5 Companies With Foregoing 10-Q Auditor Review
Last week, the SEC charged five companies with failing to have their independent auditors review their 10-Q interim financials. This is the first time the SEC has brought enforcement actions for violations of the Regulation S-X interim review requirement – and resulted from a review of filings, Corp Fin comment letters and other metrics that indicated potential violations. Each company agreed to settle the SEC’s charges, with the agency collecting a total of $250k in penalties.
Corp Fin’s New Edgar Guidance for ABS
Recently, Corp Fin issued this set of 12 FAQs for Edgar filings by asset-backed issuers…
Today is the “Pay Ratio & Proxy Disclosure Conference”; tomorrow is the “Say-on-Pay Workshop: 15th Annual Executive Compensation Conference.” Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” – on the home pages of those sites – will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: HTML5, Windows Media or Flash Player). Here are the “Course Materials.”
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s conference agenda; times are Pacific.
– How to Earn CLE Online: Please read these “FAQs about Earning CLE” carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see this “List: CLE Credit By State.”
Airbnb’s IPO? Dependent on Rule 701 Changes?
According to this CNBC report and Fortune article, Airbnb’s IPO – which is rumored to be happening next year – could be partially dependent upon the SEC allowing the hosts of Airbnb properties to be allowed to “participate” in the IPO by obtaining equity before the IPO happens, which would require changes to how Rule 701 works.
Right now, only employees & investors can obtain options or equity directly from pre-IPO companies. Airbnb wants their “gig economy” hosts to join the ranks of those that can get into the ownership ranks early.
My initial guess was that Airbnb’s request was in the form of an interpretive letter request to the Corp Fin Staff. But after this article used the term “comment letter,” I realized that these media articles were motivated by Airbnb submitting a mere comment letter in response to the SEC’s recent 701/S-8 concept release – and that the company had distributed the letter to some media outlets because the letter wasn’t posted on the SEC’s site at the time of the articles (it now is; there are a total of five comment letters submitted so far).
In any case, there is little chance that the SEC gets to the “final rule” stage until late 2019 at the earliest since it typically takes quite a while for the SEC to issue a proposing release after a concept release – and then another chunk of time between proposal and adoption of a rule change…
Podcast: California’s Board Diversity Law
In this 18-minute podcast, Shelly Heyduk of O’Melveny & Myers discusses a new law that will require the boards of California-headquartered public companies to satisfy specific gender diversity requirements, including:
– What’s the status of this legislation?
– What will the law require, and what companies will it apply to?
– Do you think there will be legal challenges to the law?
– Given the length of time that it takes to recruit new directors, should California companies be searching now for new nominees?
Last month, John blogged about a President Trump announcement asking the SEC to study the possibility of companies moving from quarterly to semi-annual reporting. John blogged that this wasn’t a new idea – and he indicated that making this change likely wouldn’t promote a longer-term focus, nor perhaps even result in companies foregoing reporting quarterly results. I’m jumping in now with these additional thoughts:
1. With semi-annual reporting, there would be a higher risk of insider trading since blackout periods would be far longer.
2. Semi-annual reporting would create more 10b5-1 plan business because blackout periods would be longer.
3. Bigger investors would get an advantage over smaller ones because they would likely get access to more nonpublic information.
4. As noted in this blog, Cooley’s Cydney Posner summarizes this article that indicates that cost-savings from the elimination of two quarterly reports would be partly offset by higher fees for the semi-annual reports. It appears that any cost-savings would benefit smaller companies the most.
5. Funny how things can change with time. Long ago, it was Republicans pushing for more frequent reporting. For example, this SEC report was conducted under a Republican regime. See #10 in the summary in particular.
Foregoing Quarterly Reports: Some Opinions
Here’s a bunch of articles discussing the idea of foregoing quarterly reports:
On Friday, the SEC announced that its proxy process roundtable is set for Thursday, November 15th. We still don’t know the participants – nor specific agenda topics…
Wow! I just got my hands on this year’s annual report from United Therapeutics. It includes something unlike anything I have ever seen. So creative. The annual report includes a playful video player – uniquely entitled “Annual Rapport 2017” – which includes a USB cord so that you can charge the video device and play it again.
The video starts with an actor talking about victim-shaming in clinical responses to dinosaur aggression in paleozoic New Jersey. Then the video goes on to explain what an annual report is (nice “shout out” to US Steel for the first annual report in 1903) – and then through the “elements” of the annual report. All done with some nice play-acting by an actress from “Saturday Night Live.” Makes it more interesting for sure.
My favorite part is clicking on the “Shareholder Letter” button – which results in an arrow pointing to the letter in paper tucked under the opposite side of the video player.
Looks like United Therapeutics also has fun with their website – the IR page has a zombie theme (scroll to the bottom). The company’s CEO seems dynamic – see this WaPo article about her.
Cap’n Cashbags Loves UTHR’s “Annual Rapport”!
Here’s a 1-minute video from Cap’n Cashbags displaying the United Therapeutics annual rapport:
This September-October issue of the “Deal Lawyers print newsletter” was just posted – & also mailed – and includes articles on:
– #MeToo Clauses Being Added to Merger Agreements
– Shareholder Activism: Evolving Tactics
– Delaware Emphasizes Duty to Make Proper Disclosures to Stockholders
– Delaware Provides Insight on Minority Shareholders as Controllers
– Indemnification: Because We Have to Fight About Something
Right now, you can subscribe to the Deal Lawyers print newsletter with a “Free for Rest of ‘18” no-risk trial. And remember that – as a “thank you” to those that subscribe to both DealLawyers.com & 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 DealLawyers.com – 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 DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – 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.
Since the SEC adopted the “disclosure simplification” rules over a month ago, a number of members have asked when the rules take effect. For starters, the adopting release hasn’t been published in the Federal Register yet – which is unusual because the average period of time between the SEC adopting a rule & it being published in the FR is typically a week or so. And it’s been over a month now. So what gives?
Dave Lynn guesses that, due to the many technical rule & form changes in the release, there might be some errors in the regulatory text that Corp Fin is trying to work out or the release got kicked back to the Staff because it doesn’t pass the FR style guide (or they are waiting for space in the FR – but that is less likely given the length of time that has passed). Dave’s read is that because the adopting release doesn’t say anything about relating to periods beginning – or ending – on or after the effective date, then the changes will just apply to anything that gets filed after the effective date.
And the excerpt below from this Gibson Dunn blog explains why the effective date matters – because companies might need to make new disclosures for their first 10-Q after these rules changes become effective:
Ironically, the first effect of the Final Rules that companies may encounter is one that requires additional disclosure. The Final Rules require Form 10-Q to contain a statement of changes in stockholders’ equity and to disclose the amount of dividends per share for each class of shares with respect to the interim period, pursuant to revised Rule 3-04 of Regulation S-X. Previously, this information was only required in Form 10-K.
The adopting release for the Final Rules notes that “[t]he extension of the disclosure requirement in Rule 3-04 of Regulation S-X may create some additional burden for issuers . . . because it will require disclosure of dividends per share for each class of shares, rather than only for common stock, and disclosure of changes in stockholders’ equity in interim periods,” but the SEC staff “expect[s] this burden will be minimal, as the required information is already available from the preparation of other aspects of the interim financial information such as the balance sheet and earnings per share.” The required analysis of changes in stockholders’ equity for the “current and comparative year-to-date periods, with subtotals for each interim period,” can be presented in a note to the financial statements or in a separate financial statement.
The Final Rules become effective 30 days from publication in the Federal Register. As of the date of this blog post, the Final Rules have not been published in the Federal Register. Moreover, the adopting release does not indicate (1) whether the amendments should be applied only to periodic reports covering periods ending on or after the effective date, or (2) whether the amendments should be applied to all periodic reports filed after the effective date.
Accordingly, assuming the Final Rules are published in the Federal Register sometime this month, it is unclear whether companies with a September 30 quarter-end will be required to include the new disclosures in their upcoming 10-Qs. We understand that the SEC staff expects to issue guidance on the applicability of the Final Rules, but in the meantime, companies should be mindful of the new requirements and the procedures they will need to have in place to comply with them.
SEC Provides Hurricane Florence Relief
As has happened for other natural disasters, the SEC provided relief yesterday to victims of Hurricane Florence – including companies who need deadline extensions (including S-3 eligibility needs). There’s the SEC’s order – and these interim final temporary rules – so that you can see if you’re eligible. Of course, if you’re eligible, you likely don’t have power & can’t read this…
Senator Warren’s New “Climate Change Disclosure” Bill
Here’s the news from Davis Polk’s Ning Chiu in this blog:
The “Climate Risk Disclosure Act,” introduced by Senator Warren, would require the SEC to issue rules for every public company to disclose:
– Its direct and indirect greenhouse gas emissions
– The total amount of fossil-fuel related assets that it owns or manages
– How its valuation would be affected if climate change continues at its current pace or if policymakers successfully restrict greenhouse gas emissions to meet the Paris accord goal; and
– Its risk management strategies related to the physical risks and transition risks posed by climate change
The SEC can tailor the rules to different industries, and impose additional requirements on companies in the fossil fuel industry.
As I’ve blogged, studies that show many investors are now taking ESG seriously. For example, in this “Proxy Season Blog”, I noted that State Street’s Rakhi Kumar was encouraging boards to become more familiar with SASB and the growing importance of ESG scores in driving investment.
So it’s not a big surprise that proxy advisors have begun incorporating ESG ratings into their reports & recommendations. Broc blogged about how ISS is starting to do this through its “E&S QualityScore” (aided by its slew of recent acquisitions in the ESG space). Now, Glass Lewis has announced that it’s taking a step in that direction. It will soon start displaying SASB standards in its research reports and on its voting platform – which is a nice boost for SASB in light of all the competition in the “ESG disclosure framework” space. Here’s more detail (also see this blog from Davis Polk):
Guidance on material ESG topics from the Sustainability Accounting Standards Board (SASB) will be integrated into Glass Lewis Proxy Paper research reports and its vote management application, Viewpoint. As a SASB Alliance Organizational Member since mid-2017 Glass Lewis is familiar with the value provided by SASB’s industry-specific standards, and has now been granted the right to display this content directly within its standard proxy research as well as its vote management platform.
As such, users of Glass Lewis’ services will be able to easily identify whether items are aligned with the SASB standards, helping inform the clients’ proxy voting and engagement activities. SASB’s information will be incorporated into Glass Lewis’ products in advance of the 2019 season after the SASB standards are codified, and available for thousands of companies across Glass Lewis’ global coverage universe.
ICOs: Court Says Coins Might Be “Securities”
About a year ago, the SEC brought its first ICO enforcement action – against the promoters of RECoin, which was supposedly a cryptocurrency backed by real estate, but (spoiler alert) wasn’t actually backed by real estate, and didn’t actually provide investors with any form of token or currency.
Now, the same defendant is fighting litigation in the first-ever federal district court case on ICOs – where the issue is whether federal securities laws can be used to prosecute ICO fraud. And wouldn’t you know, he’s not faring so well. Last week, the judge denied his motion to dismiss, in which he’d argued that the ICO didn’t involve “securities.” This Proskauer blog describes the judge’s reasoning (also see these memos):
The definitions of “security” in the relevant securities laws includes “investment contracts,” and whether the investment schemes at issue in this case are investment contracts is a question reserved for the ultimate fact-finder, which will be required to conduct an independent Howey analysis based on the evidence presented at trial.
At the motion to dismiss stage, the court must decide whether the “elements of a profit-seeking business venture” are sufficiently alleged in the indictment such that, if proven at trial, a reasonable jury could conclude that investors provided the capital and shared in the earnings and profits, and that the promoters managed, controlled and operated the enterprise. Judge Dearie concluded that such elements were sufficiently alleged in the indictment, and that if such allegations were proven, they would permit a reasonable jury to conclude that Zaslavskiy promoted investment contracts.
We don’t know for sure what’ll happen at trial, but the defendant’s argument seems a little shaky. Particularly because RECoin wasn’t a “utility token” that could be used in transactions – it was supposedly an investment in tokens that represented interests in assets. And it probably doesn’t help that a Florida magistrate judge recently applied the Howey test to another sketchy ICO – and ruled against the promoters (as described in this DLA Piper memo). But the bigger question is what impact the holding and dicta in these cases will have on ICOs that don’t involve fake tokens and imaginary asset interests.
Are ICOs Insurable?
If you’re in the cryptocurrency service space – e.g. security, custody, transfers, investments – or even if you just accept cryptocurrency for payment, it might be time to have a chat with your insurance broker. This “D&O Diary” blog says that you might even be able to get coverage for ICOs and D&O exposure, in addition to business risks. It’s timely advice, since last week the SEC reminded everyone that the legal risks of ICOs aren’t limited to ICO promoters – e.g. unregistered broker-dealers are also fair game for an enforcement action.
Of course, you’ll have to jump through some hoops to get coverage, in the form of extensive underwriter diligence as well as negotiations on policy limits. This “D&O Diary” blog cautions that coverage will be different from what you’d get in a traditional IPO – and elaborates on the attributes of an “insurable ICO”:
– The company is institutionally/VC backed and has already undergone fundraising
– The company is already an established corporate with an experienced management team & a good track record
– The insurer has been able to fully evaluate all of the relevant exposures, including systemic exposures
– The company can justify that the project underpinning the ICO cannot be achieved or the issue solved without blockchain technology
– The company is able to provide a white paper, regulatory authorizations, evidence of compliance controls, legal opinions, audit reports, banking agreements and outsourced service agreements
For the many of you that have registered for our Conferences coming up next Tuesday, September 25th, we have posted the “Course Materials” (attendees received a special ID/PW yesterday via email that will enable you to access them; note that copies will be available in San Diego). The Course Materials are better than ever before – with numerous sets of talking points. We don’t serve typical conference fare (ie. regurgitated memos and rule releases); our conference materials consist of originally crafted practical bullets & examples. Our expert speakers certainly have gone the extra mile this year!
Here is some other info:
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take a few hours to post the video archives after the panels are shown live). A prominent link called “Enter the Conference Here” – which will be visible on the home pages of those sites – will take you directly to the Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: HTML5, Windows Media or Flash Player).
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here are the conference agendas; times are Pacific.
– How to Earn CLE Online: Please read these “FAQs about Earning CLE” carefully to see if it’s possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see our “CLE Credit By State” list.
– Register Now to Watch Online: There is still time to register for our upcoming pair of executive pay conferences – which starts on Tuesday, September 25th – to hear Keith Higgins, Meredith Cross, etc. If you can’t make it to San Diego to catch the program in person, you can still watch it by video webcast, either live or by archive. Register now to watch it online.
– Register to Watch In-Person in San Diego: Starting this Saturday, you will no longer be able to register online to attend in San Diego – but you can still register to attend when you arrive in San Diego! You just need to bring payment with you to the conference and register in-person. Through the end of this Friday, you can still register online to attend in-person in San Diego. And you can always register online to watch the conference online…
E&S Proxy Disclosure: Good Examples
In our “Q&A Forum” (#9598), we were recently asked which companies did a good job providing proxy disclosure about their E&S situation. There are many to choose from – but we mentioned these:
– State Street
– Citigroup
– Prudential
– Jet Blue
– Entergy
Lead Audit Engagement Partners? Not Many Women
Here’s the lowlights from this new report from the CFA Institute based on the new “lead audit engagement partners” disclosure made by companies in their proxies this year (the report covers much more ground than gender of the lead partners):
– Only 15% of lead engagement partners of the S&P 500 were female
– Only 11% of lead engagement partners of the S&P 100 were female
– Percentages of female lead engagement partners by S&P 500 firms were Deloitte (20.8%), PwC (16.3%), EY (12.9%), and KPMG (10.6%)
– 30% of the S&P 500 were audited by PwC, 31% by EY, 20% by Deloitte, and 19% by KPMG
– We found no female partners among the 36 longest tenured engagements (those over 75 years) in the S&P 500
– We found only 6 female partners in the 107 companies with auditor relationships exceeding 40 years
On Friday, I blogged about how the SEC’s Division of Investment Management issued this statement that – ahead of the upcoming “proxy plumbing” roundtable – it was withdrawing two no-action letters granted in 2004 to ISS and Egan-Jones Proxy Services. In that blog, I gave some initial thoughts that related mainly to SEC Chair Clayton’s statement about informal Staff guidance in general. Here’s some of my thoughts about IM’s withdrawal in particular:
1. What Does This Mean for the “Proxy Plumbing” Roundtable? – I worry that this means that the upcoming “proxy plumbing” roundtable (date not set yet; likely in November) – and perhaps the SEC’s “proxy plumbing” project as a whole – will focus mainly on proxy advisors. There is so much more to tackle than just proxy advisor reform, as Commissioner Jackson articulated nicely in his statement last week.
2. Any “Real World” Impact? – I doubt IM’s withdrawal of the two no-action letters will cause investors to suddenly drop their use of proxy advisors. It’s standard practice for an adviser to avoid a conflict by delegating the responsibility to someone who doesn’t have the same conflict.
3. Withdrawal Didn’t Change the Law? – There is a solid argument that last week’s withdrawal of the ’04 letters hasn’t really changed the law. That “conflicts” law was on the books before the letters were issued – see this ’03 adopting release (in particular, see the section about resolving conflicts of interest). The letters didn’t create a safe harbor. In fact, the letters probably never should have been issued because the requests were motivated by a competitive spat between Egan-Jones and ISS.
The ’03 adopting release was a Commission action, not a Staff one. I should also note that last week’s withdrawal didn’t extend to Staff Legal Bulletin No. 20. That 2014 bulletin – issued by both IM and Corp Fin – provides guidance to advisers on voting client proxies and retaining proxy advisory firms, and makes reference to both of the withdrawn no-action letters. SLB #20 promises to be a big topic of conversation during the proxy plumbing roundtable.
4. How Much Do Companies Rely on Proxy Advisors? – As I’ve blogged several times over the years, be careful what you wish for if you’re hoping for the demise of proxy advisors (a different issue than conflicts). If proxy advisors disappear, that means there will be a need for more shareholder engagement as companies try to ascertain how their biggest shareholders intend to vote. And even if companies are willing & able to staff up their corporate secretary departments to facilitate that, that might not be the case for investors themselves. In other words, your phone calls may go unanswered – and you may get deep into the proxy season without a firm sense of knowing how your votes will turn out. I blogged about this initially way back when – and again a year later.
Do Courts Give Deference to SEC Staff Guidance?
As for the notion that SEC Staff guidance doesn’t carry the force of law, that may be true – but there are cases that indicate Staff guidance has some influence with the judiciary. For example, here’s an excerpt from Ganino v. Citizens Utilities (US Court of Appeals – 2nd Cir.; 9/00):
With respect to financial statements, the SEC has commented that various “[q]ualitative factors may cause misstatements of quantitatively small amounts to be material.” SEC Staff Accounting Bulletin (“SAB”) No. 99, 64 Fed.Reg. 45150, 45152 (1999) (to be codified at 17 C.F.R. pt. 211, subpt. B) (representing interpretations and practices followed by the SEC’s Division of Corporation Finance and the Office of the Chief Accountant in administering disclosure requirements of federal securities law).6 Of particular relevance to this action are the following:
- whether the misstatement masks a change in earnings or other trends
- whether the misstatement hides a failure to meet analysts’ consensus expectations for the enterprise[.]
Id. Unlike, for example, a rule promulgated by the SEC pursuant to its rulemaking authority, see 15 U.S.C. § 78w(a), SAB No. 99 does not carry with it the force of law. See, e.g., Christensen v. Harris County, 529 U.S. 576, 120 S.Ct. 1655, 1662-63, 146 L.Ed.2d 621 (2000) (explaining that interpretations contained in opinion letters, like those in policy statements, agency manuals, and enforcement guidelines, which are not, for example, the result of a formal adjudication or notice-and-comment process, lack the force of law); General Elec. Co. v. Gilbert, 429 U.S. 125, 141, 97 S.Ct. 401, 50 L.Ed.2d 343 (1976) (stating that courts may give less weight to guidelines than to administrative regulations which Congress has declared shall have the force of law or to regulations which, under the enabling statute, may themselves supply the basis for imposition of liability) (superseded by statute on other grounds).
Nonetheless, because SEC staff accounting bulletins “constitute a body of experience and informed judgment,” Skidmore v. Swift & Co., 323 U.S. 134, 140, 65 S.Ct. 161, 89 L.Ed. 124 (1944), and SAB No. 99 is thoroughly reasoned and consistent with existing law-its non-exhaustive list of factors is simply an application of the well-established Basic analysis to misrepresentations of financial results-we find it persuasive guidance for evaluating the materiality of an alleged misrepresentation. See Christensen, 529 U.S. 576, 120 S.Ct. at 1663 (quoting Skidmore, 323 U.S. at 140, 65 S.Ct. 161); Gilbert, 429 U.S. at 125, 97 S.Ct. 401.
Another example is U.S. v Miller, 833 F.3d 274 (D.C. Cir., Mar. 15, 2016): “We defer to [The SEC staff Guidance in Release 1092] because of the SEC’s expertise and the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control.” (internal cites and quotes omitted).
Tomorrow’s Webcast: “Blockchain in M&A”
Tune in tomorrow for the DealLawyers.com webcast – “Blockchain in M&A” – to hear Potter Anderson’s Chris Kelly, Matt O’Toole and Mike Reilly discuss the implications of blockchain technology for M&A transactions – as well as what it may mean for busted deals & the inevitable litigation that follows. Please print these “Course Materials” in advance.