Broc Romanek is Editor of CorporateAffairs.tv, TheCorporateCounsel.net, CompensationStandards.com & DealLawyers.com. He also serves as Editor for these print newsletters: Deal Lawyers; Compensation Standards & the Corporate Governance Advisor. He is Commissioner of TheCorporateCounsel.net's "Blue Justice League" & curator of its "Deal Cube Museum."
Last week, the PCAOB released this Staff report with observations about how the CAMs are looking so far. Here’s an excerpt from this blog by Stinson’s Steve Quilivan:
As a starting matter, the PCAOB’s report seems to implicitly and perhaps explicitly assume that its audit standard requiring the reporting of CAMs provides “more useful and timely information.” That assumption is not backed up with any empirical data or observations.
The PCAOB apparently reviewed 12 of 189 audit reports through November 30, 2019 containing CAMs and there is no information about whether this observation set is statistically significant. The report promises that fuller analysis will follow. The observations reported by the PCAOB are general in nature and far from startling or, perhaps to many, useful.
Open Commission Meeting: Resource Extraction & Accredited Investors/QIBs
According to this notice, the SEC will hold an open Commission meeting this Wednesday to propose resource extraction rule changes and also to propose changes to the “accredited investor” and “QIB” definitions.
State of the SEC: A Few Nuggets from the Chair’s Testimony
Recently, SEC Chair Jay Clayton delivered this 33-page testimony to the Senate Banking Committee in a hearing about SEC oversight. Here are a few nuggets:
1. The SEC has 4400 employees. I’m always intrigued by keeping track of that stat for some reason. 140 positions were filled over the agency’s last fiscal year.
2. 34 rulemakings were advanced – quite a big number considering the government was closed for a month.
3. Proxy plumbing rulemakings took place. Been a lot of talk about proxy plumbing for over a decade. But this year saw a lot of concrete action.
4. Facilitating capital formation – a lot of action also took place here over the past year. “Testing the waters,” Fast Act, etc.
5. Human capital disclosure – on page 9, the Chair offers his own personal observation on this topic. Clearly, he believes in modernizing this area of disclosure.
Contingency Disclosures: Corp Fin’s Comments on Boeing
In this blog, Bass Berry’s Jay Knight analyzes how Corp Fin recently commented upon Boeing’s contingency disclosures. It serves as a nice reminder about the Fast Act rule changes…
Last week, the NYSE proposed a rule change to allow listed companies to sell newly issued primary shares on its own behalf directly into the opening trade. As noted in this Davis Polk memo, this change could make the direct listing route more attractive to companies that need to raise capital, although it is an open question whether companies will be able to achieve the desired pricing & distribution of shares in a way comparable to that done in a traditional underwritten IPO.
Some are worried about the investor protection issues raised when the traditional IPO process is not utilized – but others note that there are a number of misconceptions about direct listings, including that a direct listing is even a “capital-raising” activity (see more from this Fenwick & West piece). We’re posting memos in our “Direct Listings” Practice Area – and here are some media pieces:
This “Financial Times” article reveals how being a whistleblower can ruin your career. Here’s an excerpt:
These individuals worked for four of the most renowned names in the business world: EY, Deloitte,
KPMG and PwC. They are among 20 former employees from the Big Four accounting firms who
have spoken to the Financial Times about their experience of harassment, bullying and
discrimination in the workplace over the course of a year’s investigation into how these firms treat
whistleblowers within their ranks.
The FT identified a disturbingly common pattern in terms of how complainants were treated: most
initially felt ignored, then isolated and were eventually pushed out. Legal clauses aimed at silencing
them swiftly followed; nine of those interviewed said they were pressured into signing restrictive
non-disclosure agreements. Others were asked to sign but resisted.
Not too long after I blogged about how nothing much happens at open Commission meetings, an interesting thing happened – the SEC Chair cited “fishy” comment letters submitted by alleged retail investors ahead of the agency’s proxy advisor rulemaking. This Bloomberg article broke the story by contacting the purported authors of the comment letters. Here’s the intro of the article:
When Securities and Exchange Commission Chairman Jay Clayton handed a policy win to corporate executives this month, he pointed to a surprising source of support: a mailbag full of encouragement from ordinary Americans. To hear Clayton tell it, these folks are really focused on the intricacies of the corporate shareholder-voting process. “Some of the letters that struck me the most,” he said at a commission meeting in Washington, “came from long-term Main Street investors, including an Army veteran and a Marine veteran, a police officer, a retired teacher, a public servant, a single mom, a couple of retirees who saved for retirement.” Each bolstered Clayton’s case for limiting the power of dissenting shareholders.
But a close look at the seven letters Clayton highlighted, and about two dozen others submitted to the SEC by supposedly regular people, shows they are the product of a misleading — and laughably clumsy — public relations campaign by corporate interests.
The two Bloomberg reporters called up the folks listed as the authors of the letters – and the article details a number of responses indicating that the letters were not genuine. The submission of fake letters on rulemakings is more common than you would think (see this old WSJ article) – but it’s not typical that an agency head is touting them publicly (see this article)…
How Much Diligence Should the SEC Chair Conduct Before Touting a Comment Letter?
My answer is “at least some.” An inspection of these letters pretty quickly reveals clues that something is not right. Consider the excerpt from this Matt Levine column:
What is particularly bad here is that “at least 20” of the fake letters contain “an out-of-context phrase inserted into the SEC’s mailing address”: If you’re writing a letter to the SEC, you put the SEC’s address at the top just for old time’s sake (of course you don’t mail it, you just submit it online), and for some reason the person mass-writing these letters inserted the phrase “A Coalition of Growth Companies” into the address that he or she cut and pasted into all the fake letters. Oops!
Matt’s suggested solution to this issue is noted in his column:
The obvious solution here is to explicitly allow fictional comment letters. Of course the SEC already allows fictional comment letters, in the sense that it doesn’t seem to do any identity checking, and we have talked before about how lots of comment letters are blatantly fictitious. Many fictitious comment letters seem to be submitted for the sake of numbers: It is nice to say “a hundred ordinary investors wrote in to support this,” or whatever, but that’s rarely true and should not be taken seriously. But other fictitious letters are like these letters; they are submitted for the sake of their argument, and for a certain ordinary-investor flavor that comes from a talented writer of fiction trying to channel what he thinks an ordinary investor would actually feel and say. Why not let those fiction writers practice openly?
Why not submit a letter from like the Coalition of Giant Company CEOs saying “as CEOs, we like this rule, but we also think it’s in the interests of ordinary investors, and to give you a sense of that here’s what we imagine an 83-year-old Army veteran might hypothetically have to say about it.” And then you write the fake letter, and the SEC can say “we too can easily imagine that an elderly veteran might say ‘how disgusted I am that my financial investments are being used as a political pawn,’” etc. etc. etc., it loses almost none of its rhetorical effect for being fake. Just admit that it’s all fake!
For anyone out there who enjoys “creative writing,” maybe you could get into writing fictional comments to regulatory proposals. I doubt it’s a lucrative gig – but maybe it could be? Provide your anonymous input in this poll:
Recently, the SEC published its latest Reg Flex Agenda – both the “Active” agenda and the “Long-Term Actions” agenda (combined, they are also known as the “Unified Agenda”). When it comes to rulemaking that might be proposed over the next year, it was interesting to see that clawbacks made the list! But pay-for-performance did not. The near-term agenda includes:
1. Auditor independence (April ’20)
2. Clawbacks (September ’20; this would be a second proposal – the first one was back in ’15)
3. Earnings releases/quarterly reports (September ’20; the SEC “requested comments” in January – the next step would be an actual rule proposal)
4. Accredited investor definition (September ’20…though Bloomberg reported that a proposal could be coming soon).
Two years ago, the Reg Flex Agenda was changed so that it came in two flavors: “Existing Proposed & Final Rule Stages” (together known as “Active”) – and “Long-Term Actions.” That has now been slightly changed so that there are three categories – “Pre-Rule Stage” (only one item in this category); “Proposed Rule Stage”; and “Final Rule Stage” – in the “Active” bucket.
Note that there have been a number of proposals issued by the SEC in recent months and those are listed under the “Proposed Rule Stage” rather than the “Final Rule Stage” like other proposed rulemakings – perhaps because the comment periods for those more recent proposals are still open…
SEC’s OCA Issues SAB 119 on Credit Losses
Recently, the SEC’s Office of Chief Accountant issued Staff Accounting Bulletin #119 about credit losses to update existing Staff guidance regarding methodologies and supporting documentation for measuring credit losses, in light of the recent FASB standard on credit losses (ASU 2016-13, codified at ASC Topic 326). Hat tip to Maynard Cooper’s Bob Dow for alerting us to this development…
Cap’n Cashbags: Wage Cuts Across the Board (Except Me)
A member recently said this about my “Cap’n Cashbags” videos: “I will say this for you – you have a singular cinematic style. The Cap’n Cashbags films are a unique combination of post-World War I German Expressionism & mid-1970s “Superfriends” cartoons.”
In this 25-second video, Cap’n Cashbags is just hanging out with his fellow CEO pals who serve on his board’s compensation committee – talking about wage cuts for all workers (except himself):
We just posted the transcript for our recent webcast – “Shareholder Proposals: What Now” – that featured Corp Fin’s David Fredrickson, Davis Polk’s Ning Chiu, Morrison & Foerster’s Marty Dunn and Gibson Dunn’s Beth Ising. Check it out!
ISS Posts Preliminary Updates to Its Compensation Policies!
As noted in this Davis Polk blog, ISS recently released its “preliminary” updates to its compensation policies – which consists of 8 FAQs. Check out the Davis Polk blog for some analysis…
Our December Eminders is Posted!
We have posted the December issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
This is the hardest blog I’ve written in my 17 years of blogging. My love letter to you. After pouring my heart & soul into our community for 17 years, I’m heeding the many signs that it’s time for a change. My last day in this job will be the end of this month.
So as hard as it is to leave y’all, I know in my ‘heart of hearts’ that it’s time to go. And that change starts with a nice, long break before I decide where my journey takes me next. The next few months are what I’m calling my “Epic Time of Yes.”
What will I miss the most? You. I will miss the daily dialogue – mainly by email – with so many of you. I cherish our friendship, our kinship, our love for securities law & corporate governance. I’m hesitant to name any names because there are many hundreds I would mention specifically. I hope we stay in touch. Either via LinkedIn or my gmail account (broc.romanek@).
I want to thank Jesse Brill for believing in me (his family owns the company; not me). Back in 2002, he hired someone who didn’t realize he had the skill set he apparently had. Until a year ago, I was responsible for our marketing, led our strategic direction, engaged in quiet sales efforts & participated in many other behind-the-scenes functions that helped make this job so enjoyable. Of course, the “in-front-of-the scenes” stuff was fabulously rewarding too. In this job, I have worn so many hats – journalist, event planner, publisher and of course, corporate lawyer – that whenever I filled out a form that asked for my occupation, I always paused before deciding which label to assign to myself.
I particularly like to cultivate creativity. I’m proactive in the way that I accomplish that – and I’m happy to share if you’re ever curious about how you can do so too. I recently received what I consider the kindest compliment – that I have a knack for building community. That’s the motto upon which I built the websites for this company from the first day I arrived. I’m proud of the innovations that I have brought to our events – I employed novel ways to make conferences not only bearable, but enjoyable. I think my “Blue Justice League” – a business casual game – is still ahead of its time. And I have heard nothing but rave reviews about the practical way I’ve put together our treatises, handbooks, checklists & paperbacks. Not to mention the sheer number of pages I’ve drafted for those things. Throw in the crazy total of blogs, podcasts, webcasts. The statistics are staggering.
Of course, I couldn’t have done it without the assistance & inspiration of our wonderful team. Dave Lynn and Alan Dye have been invaluable, both as colleagues and friends. Randi Morrison, Julie Hoffman, Linda DeMelis and Susan O’Reilly before they left us. The founder of course, Jesse Brill (and his son Nathan) – and his cohort Mike Gettelman. Barbara Baksa, Mark Borges and Mike Melbinger.
And in our HQ, too many to name – but I will give props to the ones that have been around the longest: Karen, Adam, Mike, Serge, Jacob, Denise, Sun Mi, Raychelle, Ron, Brian and Albert. I have sent more emails to Anne Triola than anyone in the world, our terrific webmaster – I’ll be visiting her in Seattle soon enough. And I will sorely miss the delightful Nona who does our typesetting.
Knowing that I am leaving Liz and John has been the hardest part of this difficult decision. They say good managers hire people that are smarter than they are. I certainly got that right. Working with them the past few years has been truly special. You are in good hands.
Anyway, after my extended holiday, I’m sure I will be wide-eyed & primed for a new adventure. I’m not sure yet whether that will be something that falls within our community – it might, it might not. Luckily, my wife & I recently cut our last tuition check so I’m in no rush to figure that out. I know that I bring passion and a yeoman’s effort to whatever I put my mind to – so hopefully I’ll find a situation that can help bring out the best in me.
In every end, there is a new beginning. Namaste.
“If Not For You”
I’m into all sorts of music. I like to think that I live through “theme songs” that I hear in my head each day. Today’s theme song is George Harrison’s “If Not For You” (written by Bob Dylan). Here’s an excerpt:
If not for you
Babe, I couldn’t even find the door
I couldn’t even see the floor
I’d be sad and blue, if not for you
If not for you
Babe, the night would see me wide awake
The day would surely have to break
It would not be new, if not for you
If not for you, my sky would fall
Rain would gather, too
Without your love I’d be nowhere at all
I’d be lost, if not for you
We’ve been covering the Administration’s gradual squeeze on regulatory guidance for some time (here’s our latest from April). As noted in this DLA Piper memo, President Trump signed two ‘Executive Orders’ recently that limit the practice of “regulation by guidance.” Here’s the “improved agency guidance” order that requires each agency to post its guidance documents on an indexed, searchable website after the OMB has issued implementing guidance about how to accomplish that (here’s a comprehensive Davis Polk memo on this order).
And here’s the “enforcement” order that seeks transparency and fairness in the use of agency guidance in civil administrative enforcement and adjudication. As this King & Spalding memo notes, there are a number of complex processes & exceptions in the orders that will require agencies to take a bit of time to promulgate new procedures.
The “improved agency guidance” order doesn’t apply to “independent regulatory agencies” – so the SEC isn’t required to comply with it. But pages 30-32 of this Davis Polk memo note that agencies like the SEC still might voluntarily comply with some – or all – of its directive. I’m not sure if the “enforcement” order applies to the SEC (but again, even if it doesn’t – the SEC may voluntarily comply with it) – if you can figure that out, let me know…
With 40 proxies filed under the new hedging disclosure rules, this FW Cook memo notes these stats:
– 100% have hedging policies in place
– 62% have hedging policies that cover directors and all employees
– 58% disclose policies that prohibit both transactions in company stock with a hedging function and derivative transactions generally
– 60% include their hedging disclosure only in the CD&A
I tend not to pay attention to the content that the SEC’s Office of Investor Education puts out because most of it seems targeted at people who think pro wrestling is real. These new short “educational” videos might prove my point (here’s the related press release)…
A member recently complained that the SEC seems to have changed how Edgar search results are displayed for “current & former names.” Here’s the note:
Have you noticed this change lately in Edgar search results? It used to be that when you ran a ‘historical name’ search, the search results would let you know both the former and current names. But no longer – now you only can see the most current company name on the ‘search results page.’ To get the full corporate history, you have to click into the issuer’s profile.
Take for example the “SPAC Thunder Bridge Acquisition, Ltd.” – when you search for this name in the “company search page,” you get a list that includes the correct company – but ONLY under their newly acquired name, which is “Repay.”
Then, only at the “Repay” landing page can you see the former name of the company. This was not the case before as you used to get the full corporate history with all of the former names on a ‘search results page’ without having to take a gamble on the new company’s name and its current profile. We’ve only noticed this change over the last few days. This change makes a difficult life that more difficult for those practitioners & researchers forced to conduct Edgar searches.
Corp Fin’s David Fredrickson Joins Next Thursday’s “Shareholder Proposals” Webcast
I’m excited to announce that David Fredrickson – Corp Fin’s Chief Counsel – has joined next Thursday’s webcast panel to discuss shareholder proposals. For the webcast – “Shareholder Proposals: What Now” – David joins Davis Polk’s Ning Chiu, Morrison & Foerster’s Marty Dunn and Gibson Dunn’s Beth Ising.
They will discuss Corp Fin’s new approach for processing shareholder proposal no-action requests, the expected impact of Staff Legal Bulletin 14K and the potential impact of the SEC’s new rulemaking proposals on shareholder proposals.
More on “Prohibited? Using the SEC’s Logo”
A while back, I blogged about how it was probably illegal to use the SEC’s logo without the agency’s permission – but that it’s often used online anyway. I didn’t know the law – I guessed that either federal agencies trademarked their logos with the Patent & Trademark Office (known around town here as the “PTO”) – or that a federal law just made it illegal. Keith Bishop of Allen Matkins did a little homework & found 15 U.S.C. Sec. 1017, which provides:
Whoever fraudulently or wrongfully affixes or impresses the seal of any department or agency of the United States, to or upon any certificate, instrument, commission, document, or paper or with knowledge of its fraudulent character, with wrongful or fraudulent intent, uses, buys, procures, sells, or transfers to another any such certificate, instrument, commission, document, or paper, to which or upon which said seal has been so fraudulently affixed or impressed, shall be fined under this title or imprisoned not more than five years, or both.
Neither Keith nor I know much about this area, but this statute appears to require fraud or wrongful conduct – and it doesn’t seem to make allowances for use online. Being a California guy, Keith also found that if a logo is implying government approval or connection, it could violate California Bus. & Prof. Code Sec. 1733.6…
Yesterday, ISS announced its new policy updates for next year. In addition to firming up its board diversity policy (which is effective for the upcoming proxy season), clarifying its policies on independent chair & share repurchase proposals and making a few other changes, the policy updates for the US create two distinct policies for newly public companies that address: (1) problematic governance provisions – e.g. supermajority voting for bylaw or charter amendments, classified boards and (2) multi-class capital structures with unequal voting rights.
The multi-class policy now includes a framework for addressing acceptable sunset requirements for problematic capital structures in newly public companies. ISS says that a number of considerations will be taken into account when assessing the reasonableness of a time-based sunset provision – but sunset periods beyond seven years from the date of the IPO will not be considered reasonable.
The Corp Fin logo is lost! Have you seen it? Back in the ‘aughts,’ I remember Corp Fin introducing its own logo. It looked pretty similar to the well-known SEC logo. However, I can’t recall that logo ever being used – and after scouring the Web, there’s no trace of this logo. Where has it gone? At the time, it wasn’t so strange since Enforcement had its own logo (many thanks to Bruce Carton of the “Securities Docket” for digging that one up) which I believe is not available anywhere on the Web except for the below:
SEC’s Enforcement: Do Stats Matter?
Every year, the SEC’s Enforcement Division releases stats about the number of actions it has brought, etc. – here’s the latest stats that were released last week (and here’s what the Enforcement co-Directors said about them). It’s good fodder for the media. But why does Enforcement do it? They’ve made this annual announcement well before our current “Big Data” era – when analytics drives so many corporate decisions.
I would argue that some of the motivation is driven by the fact that Congress requires some proof that its money is going to good use. The SEC is not self-funded – and the Senate & House Committees that oversee the SEC need something to hang their hat on. Of course, the stats can’t improve every year – at some point, they have to fall to earth. That’s when the SEC argues that quality is better than quantity – such an argument was made just last year.
Anyway, here’s a Debevoise & Plimpton memo covering the latest stats. And here’s a speech by SEC Commissioner Hester Peirce about them – this excerpt from the beginning is pretty funny:
It is hard to believe that 2019 is almost over. When I think back on the year, one defining theme is broken windows. Why is 2019 the “Year of the Broken Window”? I live in an condominium building with a lobby that has three sides of floor to ceiling windows. Three times this year, I have come down into the lobby to find one of these large windows broken. The first time was the routine, upset resident taking a soul-satisfying, hand-crushing whack at a window. The second two incidents though were a bit less commonplace.
One morning, I came down around 7 a.m. to find a van nose-first in the lobby. Rather than rounding the semicircular driveway in front of the building, the van headed straight into the lobby. Texting while driving? Medical emergency? Brake failure? I am not sure which, but I did feel bad for the driver, who, although apparently uninjured, was obviously unhappy. Misery loves company, however, and this driver got company. A couple months later, I once again came down in the morning to find a shattered window. No vehicle this time. It had already been cleared out of the lobby. From the condo rumor mill, I gleaned that an early morning car chase had ended with one of the vehicles in my building’s lobby.
A “whodunit”! We haven’t blogged about one of those in a while. You will recall that WeWork – the gift that keeps on giving to this blog – withdrew its IPO registration after facing much criticism when its S-1 became publicly available. One of the consequences of the failure of WeWork’s IPO to see daylight was that Corp Fin’s comment letters (& the company’s responses) would never be made public. Here’s the SEC filing history for WeWork – showing the progression from a draft confidential filing – to filing the S-1 – to filing a withdrawal request for the S-1 before it ever became effective. Note that the comment letters & responses are not posted there.
Apparently, the WSJ somehow got their hands on that file, which became the basis for this article that excerpts specific comments from Corp Fin’s comment letters to WeWork – and analyzes some of the company’s responses. Here’s the intro to that WSJ article:
Just weeks before WeWork expected its stock to begin trading publicly, the startup was still wrangling with the Securities and Exchange Commission over a controversial key financial metric and a litany of other concerns about its planned multibillion-dollar IPO.
On Sept. 11 — after the initial public offering prospectus had been public for nearly a month, and after the SEC had already made dozens of demands about the document—the regulator sent the shared-workspace company a list of 13 still-unresolved concerns, according to previously unpublished correspondence reviewed by The Wall Street Journal. The back-and-forth shows that WeWork was scrambling to clean up big problems as its IPO was crumbling. The timing was indicative of the chaotic management that gave investors pause and ultimately led the company to pull the offering and Chief Executive Adam Neumann to step down under pressure.
The WSJ article doesn’t note how they obtained this “previously unpublished correspondence.” So we have no idea how that happened. Here are some of the possibilities:
1. One of the investment banks? They also had a big loan deal going down & some commercial lenders are infamous for leaking. But still a long shot. Odds: 1000 to 1.
2. Some lawyer on the deal team? Not in a million years. That’s a career killer. Odds: 1 million to 1.
3. Someone at WeWork? It’s not in their best interest – but the place is dysfunctional. Odds: 4 to 1.
4. Someone at the SEC? The deal was such a turd burger & the prospectus so outrageous that perhaps the SEC wanted to have something in the public domain that could show it was doing its job. But I would fall off my chair if Corp Fin provided this file (given its policy of not posting comment letters until after a registration statement is declared effective) – unless it was told to do so by the SEC Chair, etc. But it is possible that someone high up wanted this stuff out there. Odds: 50 to 1.
5. Maybe the WSJ made a FOIA request to the SEC? This seems the most likely by far. Except FOIA requests typically take quite a while to process. Odds: 2 to 1.
At the end of the day, this isn’t an important development. Just something novel to note. Even if Corp Fin gave the comment letter file to the WSJ, I would argue that it has that discretion – it simply is making an exception to its own informal policy. And there really isn’t much of a policy reason to keep its comments hidden – even if the IPO never went off. The more transparency, the better…
Poll: Issuing 100 Comments on an IPO?
Back when I served in Corp Fin, I once issued a comment letter with over 100 comments in it on the legal side. It was a family majority-owned REIT IPO, a company that was rife of conflicts of interest – and the prospectus needed many more risk factors, etc. I felt a little guilty about issuing so many comments at the time – but not so much anymore.
In this anonymous poll, imagine you worked in Corp Fin – how would you feel if you issued 100 comments:
survey tool
Transcript: “M&A in Aerospace, Defense & Government Services”
We have posted the transcript for our recent DealLawyers.com webcast: “M&A in Aerospace, Defense & Government Services.”
