Yesterday, the SEC came out with two salvos against “informal” staff guidance. First, there was this statement from SEC Chair Jay Clayton reminding us that all Staff guidance is non-binding (ie. creates no enforceable legal rights or obligations for the SEC or other parties) because it hasn’t been subject to notice & comment under the Administrative Procedures Act. That statement noted that the SEC “will continue to review whether prior staff statements and staff documents should be modified, rescinded or supplemented in light of market or other developments.”
A few moments later, the 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. This Cooley blog does a nice job of explaining what the letters were about – here’s an excerpt:
By way of background, as fiduciaries, investment advisers owe their clients duties of care and loyalty with respect to services provided, including proxy voting. Accordingly, in voting client securities, an investment adviser must adopt and implement policies and procedures reasonably designed to ensure that the adviser votes proxies in the best interest of its clients.
The two now-withdrawn no-action letters indicated that one way advisers could demonstrate that proxies were voted in their clients’ best interest was to vote client securities based on the recommendations of an independent third party—including a proxy advisory firm—which served to “cleanse” the vote of any conflict on the part of the investment adviser. Historically, investment advisers have frequently looked to proxy advisory firms to fill this role. As a result, the staff’s guidance was often criticized for having “institutionalized” the role of—and, arguably, the over-reliance of investment advisers on—proxy advisory firms, in effect transforming them into faux regulators.
IM’s statement noted that the withdrawal would “facilitate” discussion at the roundtable. Based on some of the reactions to the withdrawal (see Commissioner Jackson’s statement), it may do more than “facilitate” – it may lead to “fisticuffs”…
My Ten Cents: What to Do With “Informal” Staff Guidance?
The movement against “informal” Staff guidance has been growing over the past decade. And it’s not just at the SEC – the GOP-led attacks have focused on all of the federal agencies. Here’s a few quick thoughts:
1. Government-Wide Movement – The DOJ was the first to emphasize it wouldn’t conduct “rulemaking by guidance” late last year – see this blog. As noted in this Cooley blog, a bunch of the banking regulators issued something along these lines earlier this week.
2. Chamber’s Influence – Having these proxy advisor no-action positions overturned has been a plank in the US Chamber’s platform for some time (for example, see pages 10-11 of this Chamber letter for their arguments about why the Staff should have never granted those letters). It wasn’t that long ago that I blogged that the Chamber seemed to be losing influence. Spoke too soon?
3. Impact on You – In practice, we rely heavily on the guidance that Corp Fin provides us – CDIs, no-action letters, Staff Legal Bulletins, FAQs, speeches and even informal comments at conferences. What does our world look like if we need to rely on a small group of SEC Commissioners to perform that function? Remember that the Commissioners are not even allowed to meet as a group except in very limited circumstances due to the Sunshine Act.
4. Shorter Adopting Releases Too? – As noted in this blog, it wasn’t even that long ago that one SEC Commissioner wanted the guidance provided by the Commissioners in the SEC’s adopting releases to be shorter!
5. Collector’s Items – This one is completely an “aside.” It’s hard to find the Egan-Jones and ISS letters online – these letters were issued by the Division of Investment Management. And I believe by withdrawing them, IM might have pulled them from their list of posted letters. Which makes sense since they are withdrawn. So the letters are now officially a “collector’s item.”
Poll: What Will You Do Without “Informal” Staff Guidance?
Please take a moment for this anonymous poll about a lack of informal SEC Staff guidance:
The “Ceres Investor Water Hub” – a working group of more than 100 investors that represent $20 trillion in assets – has published an “Investor Toolkit” to foster engagement with companies on water issues. Among other topics, it covers:
– Types of water risks – physical, regulatory, social – and how to assess materiality
– Shareholder resolutions & trends linked to water
– Database of proxy voting guidelines that integrate water issues
– Engagement tips for investors
– Recommendations for incorporating water issues into investment decisions
This Forbes op-ed from Ceres’ CEO Mindy Lubber notes that 81% of major U.S. companies in water-dependent sectors have water stewardship programs – though only 37% have set qualitative targets to better manage water resources. It doesn’t take too much imagination to predict that there’ll be more requests for disclosure in this area.
Why Do Some Companies Go Public Through Debt IPOs?
I don’t see much written about private companies issuing public debt, so this study caught my eye. Here’s an excerpt:
As compared to companies in the same industry that conduct an equity IPO in the same year, companies that go public via debt are typically significantly larger and more easily able to disclose their important performance data through their financial statements (versus non-financial disclosure). When the debt-first companies eventually go public by issuing equity, they face lower underpricing than companies without public debt.
Ownership structure (backing by a financial sponsor such as a venture capital or private equity firm) and the relative cost of information production in debt versus equity markets appear to be significant in explaining why these firms choose debt before equity and their subsequent decision to issue equity. Future research on IPOs should take into account that firms do not just face a simple choice between going public and staying private, but also an intermediate choice of issuing public debt but staying private.
More on “Proxy Season Blog”
We continue to post new items daily on our blog – “Proxy Season Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– More on “Shareholder Meetings: What to Do With a Tied Vote?”
– Shareholder Meetings: What to Do With a Tied Vote?
– 6 Reasons Why Corp Fin Denies Exclusion Under SLB 14I
– Icahn, Elliott & Activist Peers Grab the Mic in Meeting Season
– Management Proposals: Factors for Those That Just Eke By?
Check out the latest report from BarkerGilmore – a boutique executive search firm – about in-house counsel compensation trends. Among the findings:
1. The median salary increase has fallen 0.5% – to 3.8%
2. 41% of in-house counsel believe they’re underpaid
3. GCs at public companies earn a lot more than GCs at private companies, due to long-term incentives
4. On average, female in-house counsel earn 84% of what their male counterparts are paid – the gap is wider at the GC level
5. The lowest paying in-house jobs tend to be in the professional services industry
Investor Views on “Equity Choice Programs”
With only 2 weeks left before our “Proxy Disclosure Conference,” we thought we’d give you a taste of some of the practical nuggets from our “Course Materials” – which are now available to everyone who’s registered to attend the conference, whether in-person in San Diego or via live video webcast. Here’s one topic from Bob McCormick of CamberView:
While still used by just a small percentage of companies in their long-term incentive programs – mainly in the technology and bio-pharmaceutical industries – equity choice programs are growing in popularity. Shareholders will have an open mind about equity programs that allow for some measure of choice by the employee of the type of equity award they will receive subject to some basic parameters:
1. Irrespective of the type of award, shareholders will want to see a significant part of the long-term equity awards tied to one or more performance metrics.
2. Shareholders will expect that the performance metrics will be both tied to long-term corporate strategy and subject to transparent, challenging targets.
3. Some shareholders and proxy advisors may not consider options to be inherently performance-based so, if stock options are one of the equity choices, there should be accompanying disclosure that describes the board’s rationale for including options as one of the equity choices. The disclosure should include the board’s views on the benefits of the use of options including why the board considers that options provide a strong performance incentive that is linked to long-term corporate performance.
4. Purely time-based awards may be acceptable if complemented by performance based awards but most shareholders prefer performance based awards make up the largest percentage of the grants.
5. All awards should be subject to substantial (e.g. at least three years) performance/vesting periods.
6. Awards types and amounts should not allow employees to game the system by opting for the type of award with a higher value.
7. Companies should consider whether excluding senior executives is desirable to avoid investor reaction to the executive team’s equity choice based on the executives’ views on the company’s performance prospects.
As you probably know, the SEC maintains a library of blank forms on its website – including all three of the Section 16 forms. It has come to our attention that the SEC currently has an outdated Form 4 posted – one that harkens back to pre-Sarbanes-Oxley days. This form is outdated, even though it has the first-blush appearance of being current with an OMB approval date in the top right corner of September 2018!
For those too young to remember, before Sarbanes-Oxley was enacted in 2001, Form 4 had a due date tied to the end of each month. The outdated form contains Table II language (see Column 9) about “owned as of the end of the month” – rather than language that should read “owned after the reported transaction.” And the heading for Column 10 should actually say: “Ownership Form of Derivative Security: Direct (D) or Indirect (I)”. So make sure you’re not using this blank form as it doesn’t comport with the SEC’s rules. I imagine the SEC will correct this mistake soon…
Gibson Dunn’s Mike Titera notes that because the templates for Section 16 forms are actually controlled by the SEC’s website (unlike other forms that are filed by uploading the document via Edgar), it appears that no one can actually file the old Form 4 on the SEC’s “Forms” page.
With the traffic to the transcript for our recent webcast – “Insider Trading Policies & Rule 10b5-1 Plans” – bearing out that this is the most popular program of the year, I thought I would share some of the practical guidance I learned:
Alan Dye, Partner, Hogan Lovells LLP and Editor, Section16.net: It’s become increasingly clear in recent years that a company’s announcement of a cyber breach can have a material adverse effect on both the company and the company’s stock price, so the challenge in the cybersecurity context is twofold.
First, having a process that allows the technical people who understand when a hack has been attempted or has occurred, and who understand what its consequences might be, to be in a position to identify quickly (in light of the SEC’s release) whether there has been an attempted hack in the company’s data systems that could have resulted in a material breach.
Second, escalating those potential material breaches to a level where the general counsel and other senior managers who are in a position to assess potential materiality can make that assessment and decide whether either disclosure is required, or in this context, a trading blackout is appropriate.
In practice, neither of those steps is necessarily easy. For many companies, an attempted breach of the security systems is a daily occurrence. Most of those occurrences turn out to be insignificant. If every one of those incidents led to an immediate blackout or an escalation of the issue to senior executive levels to assess materiality, the window might never open and the process itself could consume inordinate amounts of time.
The balance that companies try to achieve is to make that process both efficient and effective, without overburdening the process. Companies should consider the development of an incident response plan. Many companies are already considering or implementing an incident response plan.
The incident response plan is separate from the insider trading policy. I don’t think the insider trading policy needs to be bogged down with processes for addressing cybersecurity breaches. What the incident response plan does is establish a process at the technical staff level, so the IT group can identify incidents that might constitute a material breach. The incident response plan also includes escalation protocols. Once a potential material breach has been identified, then the breach is escalated so that the general counsel, senior management, or whoever is going to make the assessment of materiality, and whether to open or close the window, can make that assessment.
That process is not unique to or isolated to the insider trading policy, but it generally is and should be integrated into the company’s disclosure controls & procedures, since a breach raises disclosure issues as well as insider trading policy issues.
That process is going to succeed only if the general counsel and senior management, once an incident has been escalated, understand IT systems and understand the tech-speak that tends to come from the people in the IT department, well enough to make a judgment about its materiality. Some companies go so far as to engage in tabletop exercises, where after they’ve developed and put in place an incident response plan, they simulate a breach and an escalation. That process can familiarize both the technical staff who escalate the issue, and the executives and the GC who must make the determination whether that breach might be material, with the appropriate terminology and the analysis that needs to be undertaken.
It’s a nascent area of insider trading policies, so I don’t pretend to know how it’s all going to play out. There hasn’t yet been any case, to my knowledge, where an incident response plan has been put in place and led to either closing or opening the window. I have seen some simulation exercises and they can be puzzling, initially, to those of us who don’t speak “tech” when it comes to cybersecurity exercises.
Howard Dicker, Partner, Weil, Gotshal & Manges LLP: A company should also consider specifically, by prohibiting or warning against, an employee’s participation in a so-called “expert network.” An expert network is not about artificial intelligence or machine-based learning. Rather, it typically involves a firm. There are companies or firms out there that connect hedge funds and other investors with subject matter experts or industry experts.
These experts speak directly to the hedge funds and receive an hourly consulting fee. Some company employees may be interested in earning extra money this way. Some of the largest SEC insider trading cases have involved expert networks, and the allegations were of company employees tipping information not only about their own company, but also about company customers.
The employees involved were not senior executives who were subject to blackout periods and pre-clearance policies, but rather non-executive employees with a high degree of responsibility within the company. The information shared might not have been obviously MNPI, but it was obviously confidential.
I find that employee and director education and training is particularly critical for avoiding inadvertent disclosures of confidential information, and the related potential liabilities, costs, and damages to the employee, director and the company.
A few months ago, I blogged that National Association of Manufacturers (NAM) had launched an “anti-ESG campaign.” Now, 45 companies that sit on NAM’s Executive Committee & Board are caught in the middle of that organization’s beef with ESG advocacy. Walden Asset Management & CalSTRS announced that they have led more than 80 investors to write letters that urge the companies to distance themselves from NAM’s effort to limit engagements. Here’s an excerpt:
We believe your company may have a very different perspective than that expressed by MSIC & NAM and that your continued affiliation with them could pose reputational risks to your company. Thus, we urge you, as a member of the leadership team of NAM, to question your Association’s research funding priorities and its working alliance with MSIC. In addition, we are interested in your answers to the following questions about your company’s positions on these issues:
– Are you aware of the new NAM paper and its attack on the efficacy of shareholder resolutions and ESG investing factors?
– What are your views on the priorities and objectives of NAM’s, new partner, Main Street Investors, and its work to discredit shareholder resolutions?
– Will you help clarify for the record and the investing public where the company stands on the right of investors to file shareholder proposals and your thoughts on efforts to significantly limit the ability to present such proposals?
If your company’s position differs from that of the MSIC’s stated mission, we ask the company to communicate with NAM’s management your disagreement with the positions being taken by Main Street Investors and urge NAM to distance itself from these positions. We also request that you state this publicly to inform concerned investors.
Gender Pay Gap: Heightened Employee Focus
Here’s something I recently blogged on CompensationStandards.com’s “The Advisors Blog”: We’ve blogged about how activist shareholders increasingly want companies to disclose how they analyze & address gender pay inequity – and about mandatory gender pay reporting for companies with a UK presence. But companies also need to prepare for employee questions. A new Pearl Meyer survey shows that 62% of companies are – or expect to be – fielding gender pay questions from their workforce. Some think that the #MeToo movement has been the “tipping point” to elevate discussions that have been brewing for years.
The survey also shows that employee understanding of pay practices is mediocre at best. Only 8% of respondents believe the quality of their pay communications is “excellent.” Here’s some other key findings:
– In the last two years, almost half of the companies surveyed (48%) have increased compensation communication
– A majority of companies (52%) don’t share information about base salary ranges with all employees
– About two-thirds of managers are trained to have formal compensation conversations with their direct reports, but the majority (70%) of those surveyed believe those conversations are not effective
– Less than a quarter of respondents believe employees can appropriately compare their compensation to colleagues (21%) or compare their compensation to similar positions in other organizations (22%)
– Of the 62% who are or expect to receive questions about gender pay equity, a majority have clear and detailed information ready to share or are currently drafting their responses.
Perks: “If You’ll Be My Bodyguard”
And here’s something else that I recently blogged on CompensationStandards.com’s “The Advisors’ Blog”: I can only speculate about what it’s like to be a VIP tech CEO. One part that doesn’t sound too appealing is having a personal security detail. Because if someone is attacking Mark Zuckerberg, they’re probably after more than his $350 t-shirt. But if there’s a bright side, it’s that you don’t have to pay your bodyguards out of your own pocket – they’re pricey! This article looks at how much a few well-known companies spend on security & travel for high-profile executives – and how they describe those “perks” in their proxy statements:
1. Facebook – $7.3 million for CEO security & $1.5 million for CEO use of private aircraft ($2.7 million for COO)
2. Amazon – $1.6 million for CEO business & travel security
3. Oracle – $1.5 million for Executive Chair home security ($104k & $0 for the co-CEOs)
4. Salesforce – $1.3 million for CEO security
5. Google – $636k for CEO security and $48k for CEO use of chartered aircraft
6. Apple – $224k for CEO security and $93k for air travel
7. Qualcomm – $138k for Chair’s “insurance premiums, security & home office” and $153k for Chair use of corporate aircraft
8. IBM – $178k for CEO use of corporate aircraft
A member emailed to point out that there’s a reason security is expensive:
I met an executive’s bodyguard once. Former cop & one of the friendliest, most down to earth people I’ve ever met. He was very devoted to the executive, for whom he’d worked for nearly 30 years. However, it was also clear to me that this guy knew 6 ways to kill you with a paper napkin.
Earlier this year, we blogged about evidence from insider gifts that backdating was alive and well. Now a recent study says that there’s a new twist on option backdating – instead of manipulating the timing of equity awards, CEOs are supposedly manipulating the market price of the shares on the award dates.This Stanford article about the study says insiders are reaping the same windfalls that they received when awards were backdated in the old fashioned way.
Here’s an excerpt quoting one of the authors of the study, Stanford Prof. Robert Daines:
In Dating Game 2.0, however, many top executives appear to be reaping the same kinds of windfalls with a new variant on the original scam. Instead of manipulating the dates of option grants to match a dip in the stock price, companies appear to be manipulating the stock price itself so that it’s low on the predetermined option date and higher right afterward.
“I was surprised, because it sounded too cynical at first,” says Daines, who teamed up with Grant R. McQueen and Robert J. Schonlau at Brigham Young University. “But we tested for all kinds of benign explanations and none of them fit the data. The unusual stock patterns happen so often, and they exactly fit with the self-interest of the CEOs and senior executives. Either the CEOs are incredibly lucky or they are manipulating stock prices.”
So how are companies supposedly manipulating the market price? Would you believe “bullet-dodging” & “spring-loading”:
The researchers found concrete evidence for both bullet-dodging and spring-loading in corporate “8-K” disclosures, which companies are required to file when important new developments occur between regular quarterly reports. At companies that issued lots of stock options, the disclosures before an option grant were more likely than not to drive shares down and those that came after an option date were more likely to send prices up. The same pattern showed up with company-issued “guidance” about upcoming earnings and with accounting decisions that effectively shift profits from one quarter to the next.
The more things change, the more they stay the same.
How to Respond to ESG Research Providers
If you are involved with a public company and you haven’t yet heard from an ESG research provider – don’t worry, you will. With ESG becoming more important to institutional investors, many are turning to these providers for assessments of public companies’ ESG performance. The problem is that there are more than 150 of these outfits – and many of them want you to respond to detailed questionnaires. So the question becomes – should you respond to these guys, and if so, how?
This Westwicke Partners blog has some helpful advice on that front. Here’s an excerpt on the pros & cons of responding to these questionnaires:
If you receive a questionnaire from one (or a dozen) of these ESG research providers seeking information on your company’s ESG disclosure and practices, it’s important to consider a few pros and cons of responding:
– Pro: Responding allows your company to better ensure the accuracy of the data used to determine your rating.
– Pro: Responding may set your company apart from those that decline to participate. Many ESG providers give higher ratings to companies that provide more ESG-related disclosures, and some even denote which companies did not respond to their questionnaires.
– Con: Responding can be a significant drain on your organization’s time and resources. Some questionnaires are estimated to take 1,000 hours to complete and require input from as many as 30 employees across multiple departments.
The blog also has pointers on determining how best to participate in the data-gathering process & handling inbound questionnaires from ESG research providers.
FCPA: 2nd Cir. Rejects “Monty Python” Approach to Foreign National Liability
This Drinker Biddle blog notes that the 2nd Circuit recently shot down the DOJ’s attempt to extend the scope of FCPA jurisdiction over foreign nationals. Here’s an excerpt:
The Second Circuit ruled on August 24 in United States v. Hoskins that the Foreign Corrupt Practices Act (FCPA) does not apply to foreign nationals who do not have ties to United States entities for bribery crimes that take place outside of U.S. borders. In doing so, the court rejected the government’s broadened theory of prosecution against Lawrence Hoskins, a U.K. citizen and former executive of the U.K.-based subsidiary of Alstom S.A., a global company headquartered in France that provides power and transportation services.
I’m no FCPA expert, but it sure seems like the DOJ was pushing the envelope in this case. The government’s position reminded me of the old Monty Python “Tax on Thingy” sketch – where at one point Terry Jones says that “to boost the British economy I’d tax all foreigners living abroad.” We’re posting memos in our “Foreign Corrupt Practices Act” Practice Area.
The Browns have been so dependably inept for so long that they’ve lent their name to a new word to describe staggeringly incompetent behavior – “Brownsing.” So, I guess I shouldn’t have been completely surprised when the SEC announced that (now former) Browns LB Mychal Kendricks had been charged with insider trading. But as jaded as I am about my favorite team, this was something new:
The SEC alleges that after meeting at a party, Mychal Kendricks began receiving illegal tips from Damilare Sonoiki, an analyst at an investment bank who had access to confidential, nonpublic information about upcoming corporate mergers. Kendricks allegedly made $1.2 million in illegal profits by purchasing securities in companies that were soon to be acquired and then selling his positions after the deals were publicly announced, in one instance generating a nearly 400 percent return on his investment in just two weeks.
In return for $1.2 million in alleged profits, Kendricks lost a $3.5 million payday from the Browns, will undoubtedly face a significant civil penalty from the SEC, and – because the US Attorney’s Office in Philly has also brought criminal charges – potentially faces up to a year in prison. Yes, this is some next-level Brownsing for sure.
Kendricks isn’t the first NFL player to get on the wrong side of the securities laws. Former NY Giants DB Will Allen pled guilty last year to charges brought in connection with his role in an investment scheme targeting athletes. In 1999, Hall of Fame QB Fran Tarkenton consented to an injunction against future violations of the securities laws, including Rule 10b-5, for his role in an alleged fraud scheme.
Materiality Definition: FASB Goes Back to SAB 99
We’ve previously blogged about FASB’s controversial efforts to amend the definition of “materiality” for purposes of financial statement disclosure. At the end of August, FASB amended Accounting Concepts Statement No. 8 to address materiality.
This recent blog from Cydney Posner says that with the amendment, FASB has hopped into Marty McFly’s DeLorean & traveled about a decade back in time. Here’s the intro:
In 2015, FASB sent a number of stakeholders into a tizzy when it issued two exposure drafts, part of its disclosure framework project, intended to “clarify the concept of materiality.” After hearing from any number of preparers, practitioners and other commenters, FASB has now reversed course.
According to FASB, the “main amendment” in Amendments to Statement of Financial Accounting Concepts No. 8, issued at the end of August, “reinstates the definition of materiality that was in FASB Concepts Statement No. 2, Qualitative Characteristics of Accounting Information, which was superseded in 2010.” In other words, it’s back to SAB 99.
Elad Roisman Confirmed as SEC Commissioner
Yesterday, the Senate confirmed former Senate Banking Committee staffer Elad Roisman to serve as an SEC Commissioner. Once he is sworn in, his appointment means that the SEC will finally have a full slate of 5 Commissioners – at least for now. Commissioner Kara Stein is expected to leave her post at year end.
While media reports indicate that President Trump is likely to nominate Commissioner Stein’s former aide Allison Lee to fill Kara’s upcoming vacancy, that hasn’t happened yet. CNN Congressional Correspondent Phil Mattingly tweeted that it was interesting that Commissioner Roisman’s nomination was not paired with a nominee recommended by the Democrats, as often has been the case..
Narcissism: Not a Desirable Part of a CEO’s Skill Set
This Stanford article says that a recent study concluded that companies led by overconfident, self-centered risk takers are likely to face a lot of lawsuits. Here’s an excerpt:
In an article published in Leadership Quarterly, O’Reilly and colleagues Bernadette Doerr and Jennifer A. Chatman of the University of California, Berkeley, show that narcissistic CEOs subject their organizations to potentially ruinous legal risks as well. Not only are they more likely to become embroiled in protracted litigation, but their personality traits make them less sensitive to objective assessments of risk. Narcissists are less willing to take advice from experts and to settle lawsuits — even when it’s likely that the company will lose.
I’ve gotta say, I’m pretty skeptical about this study – after all, this management style worked well for Hank Scorpio.
Securities Litigation: #MeToo Class Actions the New Normal?
Last week, a shareholder class action was filed against CBS following revelations of alleged sexual harassment by CEO Les Moonves. Over on the D&O Diary, Kevin LaCroix recently blogged that these lawsuits may represent the “new normal” for shareholder litigation. Here’s an excerpt:
The securities suit against CBS follows a now growing list of companies that have been hit with D&O lawsuits following revelations of sexual misconduct by one of the firm’s executives. Earlier this summer, National Beverage Corp. was hit with a securities suit following allegations that its CEO had sexually harassed company employees. Earlier suits have arisen involving Wynn Resorts and 21st Century Fox.
Kevin says it is increasingly clear that the accountability process arising out of revelations of sexual misconduct won’t just target the wrongdoer, but also other executives who allegedly facilitated the misconduct or turning a blind eye.
The main topic was the plan to revisit the thresholds that trigger the SOX 404(b) requirement to provide an auditor attestation report on internal control over financial reporting. One thing is pretty clear from this speech: odds are excellent that relief from SOX 404(b) is in the offing for more small companies.
First, Clayton focused on a point that he viewed as “often misunderstood”: that even those companies that are not now required to obtain a SOX 404(b) auditor attestation must still “establish, maintain and assess the effectiveness of ICFR, and, even if not engaged to report on ICFR, independent auditors are still responsible for considering ICFR in the performance of their financial statement only audits. In considering ICFR, independent auditors can better plan their audits and provide management and audit committees with observations about the company’s ICFR. I believe this scaled approach has proven to be appropriate for smaller reporting companies and again reflects the perspective that one size regulation of public companies does not fit all.”
To support that last point, he highlighted the difference in size between the 50th largest exchange-listed company (market cap of approximately $100 billion) and the median exchange-listed company (market cap of less than $1 billion). Moreover, he pointed out, many companies could benefit from relief as there are more than 1,200 exchange-listed companies with a market cap of less than $250 million. (In connection with the expanded definition of “smaller reporting company”—an expansion similar to the one likely under consideration here—the staff estimated that 966 additional companies would be eligible for SRC status in the first year. See this PubCo post.)
Other potential beneficiaries of relief, according to Clayton, are companies with little or no revenue, such as many biotechs. In those cases, he asserted, the money that would otherwise be used for the SOX 404(b) attestation “could instead be used to hire new scientists to advance life-enhancing or life-saving developments.” He concluded by reminding us that he had directed the staff to come up with potential amendments to reduce the number of companies subject to SOX 404(b), while, of course, maintaining appropriate investor protections.
The SEC Conducts Far More Town Halls These Days…
As part of the ongoing effort to promote capital formation, it seems that one of the priorities of SEC Chair Jay Clayton is to engage with small businesses across the country and to conduct town halls with entrepreneurs & retail investors (which Jay started calling “Main Street” investors before the “Main Street Investor Coalition” was formed).
In fact, all five Commissioners attended a town hall in Atlanta in June – and Corp Fin Director Bill Hinman joined Jay recently at a “fireside chat” with the Tennessee Governor at Nashville’s “Wildhorse Saloon”. I don’t recall a Corp Fin Director attending a town hall before – but it’s possible that happened in the past…
By the way, the SEC has a whole page devoted to Chair Clayton’s “fireside chats” – with videos going back to last summer…
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