June 6, 2019

Survey Results: Drafting Proxies, Glossy ARs & Form 10-Ks

Here are the results of our recent survey on drafting annual reports, proxy statements, glossy annual reports & Form 10-Ks:

1. At our company, the lead for drafting our proxy statement is (ie. running the master):

– Corporate secretary’s department – 20%
– Legal department – 70%
– Accounting department – 2%
– IR department – 0%
– Outside counsel – 8%
– None of the above – 0%

2. At our company, the lead for drafting our glossy annual report is:

– Corporate secretary’s department – 4%
– Legal department – 7%
– Accounting department – 6%
– IR department – 46%
– Outside counsel – 2%
– None of the above – 35%

3. At our company, the lead for drafting our 10-K is:

– Corporate secretary’s department – 2%
– Legal department – 6%
– Accounting department – 90%
– IR department – 0%
– Outside counsel – 1%
– None of the above – 1%

4. At our company, the lead group for conducting our disclosure committee meetings for our proxy statement is:

– Corporate secretary’s department – 14%
– Legal department – 48%
– Accounting department – 18%
– IR department – 0%
– Outside counsel – 4%
– None of the above – 16%

5. At our company, the lead group for conducting our disclosure committee meetings for our 10-K and 10-Q is:

– Corporate secretary’s department – 2%
– Legal department – 17%
– Accounting department – 73%
– IR department – 1%
– Outside counsel – 1%
– None of the above – 6%

Please take a moment to participate anonymously in these surveys:

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Whistleblowers: Can In-House Lawyers Walk the Ethical Tightrope?

Under the attorney conduct rules adopted by the SEC following Sarbanes-Oxley, there are limited circumstances under which attorneys may be obligated to “report out” – i.e., blow the whistle to the SEC – on client misconduct. These obligations are not consistent with many states’ ethics rules, but the SEC brushed those concerns aside by saying that its rules preempted those standards. Now, according to this recent “Dimensions” article, the federal courts are starting to weigh in:

A California federal court held that in-house counsel could be a whistleblower under the federal statutes because the SEC rules preempt the state’s very strict duty of confidentiality. The case is on appeal and, the authors surmise, the holding will be limited because counsel reported internally, not to the SEC, before being fired (and thus falling outside the Dodd-Frank definition of a whistleblower).

Timing is also key to a case now pending in the Eastern District of Pennsylvania. In-house counsel seeks Dodd-Frank protection from retaliation for reporting to the SEC while still an employee. The company has counterargued that, prior to the report, it gave notice that counsel would be fired. A decision in the District of New Jersey denied Dodd-Frank protection to an attorney fired for reporting to FINRA, rejecting the argument that this was tantamount to reporting to the SEC, which supervises FINRA, while still employed.

The article notes that the 9th Circuit subsequently remanded the California federal court’s decision, affirming it in part and remanding it in part. This Sheppard Mullin blog has more details on the case.

Whistleblowers: Internal Whistleblower Rings the Bell for $4.5 Million

While lawyers may get tied-up in ethical knots for decades over whistleblower issues, for those who are unencumbered by such concerns, the SEC recently provided another example of just how lucrative whistleblowing can be. Late last month, it announced a $4.5 million award to a whistleblower, but as this excerpt from the SEC’s press release points out, this award had a unique fact pattern:

The whistleblower sent an anonymous tip to the company alleging significant wrongdoing and submitted the same information to the SEC within 120 days of reporting it to the company. This information prompted the company to review the whistleblower’s allegations of misconduct and led the company to report the allegations to the SEC and the other agency. As a result of the self-report by the company, the SEC opened its own investigation into the alleged misconduct.

Ultimately, when the company completed its internal investigation, the results were reported to the SEC and the other agency. This is the first time a claimant is being awarded under this provision of the whistleblower rules, which was designed to incentivize internal reporting by whistleblowers who also report to the SEC within 120 days.

As I blogged at the time, in 2018 the SCOTUS held that purely internal whistleblowers weren’t entitled to the protections of Dodd-Frank. Concerns were subsequently expressed that the decision would incentivize people to go to the SEC before the company was even aware of the potential problem.

That didn’t happen here – but because the whistleblower dropped a dime on the company to the SEC within 120 days of making an internal report, the person was credited with the results of the company’s investigation. As the SEC’s release noted, the policy establishing that 120 reporting period was intended to promote internal reporting, and in this case, it seems to have worked.

This WSJ article says that whistleblower lawyers are skeptical that this will be anything more than a one-off event, and that since internal whistleblowers are at risk for retaliation without Dodd-Frank’s protections, blowing the whistle to the SEC first is likely to remain the preferred path.

John Jenkins