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."
Here’s news from Wachtell Lipton’s David Katz, Warren Stern & Kim Goldberg culled from this memo:
Reaffirming that the advisory “say-on-pay” vote required by the Dodd-Frank Act cannot be used to attack directors’ executive compensation decisions, the United States District Court for the District of Delaware recently dismissed a derivative complaint brought after a negative say-on-pay vote. The court, applying Delaware law, found that the plaintiff had not pleaded facts sufficient to show that demand would have been futile, or to state a claim upon which relief could be granted. Raul v. Rynd, C.A. No. 11-560-LPS (D. Del. March 14, 2013).
The complaint was filed in 2011, and was one of a number of similar lawsuits filed after Dodd-Frank’s requirement for advisory votes on compensation came into effect. The plaintiff challenged the board’s compensation decisions, alleging that increased compensation in a year when the company posted a net operating loss and negative shareholder return violated the company’s pay-for-performance philosophy and rendered the company’s compensation disclosures in its proxy statement misleading. The plaintiff asserted that the negative shareholder advisory vote rebutted the presumption of business judgment surrounding the board’s compensation decisions.
In dismissing the complaint, the court found that the plaintiff “misconstrue[d] the effect of the shareholder vote” and “mischaracterize[d]” the compensation plan, holding that the plaintiff’s allegations based on the advisory vote “fail to recognize the[] realities of Dodd-Frank” — namely, that the Act “explicitly prohibits construing the shareholder vote as ‘overruling’ the Board’s compensation decision” or altering directors’ fiduciary duties. The court further noted that the plaintiff’s “selective” characterization of the company’s compensation philosophy as “pay for performance” excluded the other goals discussed in the company’s proxy statement.
The Raul decision reinforces the Dodd-Frank Act’s bar on attempts to use the advisory shareholder vote to overrule directors’ business judgment on matters of executive compensation. The decision recognizes that directors should be permitted to determine appropriate compensation for executives in accordance with their company’s overall compensation philosophy — including such motivations as attracting, retaining, and incentivizing executives — without fear that they will be subject to liability should shareholders express disagreement with those judgments through an advisory say-on-pay vote.
Swiss to Vote Again on Executive Pay: Mandatory Pay Ratio Cap!
In the US, the corporate world is worried about disclosing pay ratios. In Switzerland, they are looking to cap CEO pay compared to the lowest paid employee at no more than 12:1. Here’s news from this excerpt of a WSJ article:
Switzerland is expected to vote later this year on a proposal to place further limits on executive pay, the latest effort to govern corporate compensation in a country that recently approved some of the world’s strictest say-on-pay rules. The Young Socialists, the youth wing of the left-leaning Social Democratic Party of Switzerland, have collected more than 100,000 signatures–the threshold needed to call a vote–in support of a referendum to limit executive salaries to 12 times those of a company’s lowest-paid employee. The campaign, dubbed the 1:12 Initiative for Fair Pay, is named for the organizers’ belief that no one in a company should earn more in one month than the lowest-paid employee makes in a year.
On Thursday, the Council of States, Switzerland’s upper house, will debate what recommendation it should give on the initiative, which voters are expected to consider in September or November. Two other government bodies have already recommended a rejection of the pay proposal.
The referendum will be the second time Swiss voters have been asked to weigh in on the country’s corporate-pay structure this year. This month they overwhelmingly approved the Minder Initiative, named for its creator, businessman and politician Thomas Minder, and also known as the “Rip-Off Initiative.” The plan allows the government to draft sweeping controls on compensation, such as requiring a binding shareholder vote on pay, as well as fines and jail time for violations.
And, as noted in this Reuters article, the Germans have started on work on their own set of new rules to rein in excessive pay…
More on our “Proxy Season Blog”
We continue to post new items regularly on our “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:
– Toronto Stock Exchange Mandates Annual Board Elections; Proposes Majority Vote Standard
– Checklist: Annual Meeting Location & Venue Considerations
– Is Your General Counsel an “Executive Officer”? Not Necessarily
– Binding Bylaw Proposals for Independent Chairman by Norges Bank
– US Proxy Season Review: ESG Proposals
I can’t profess to read all the proxies being filed – not the way that Mark Borges remarkably does when he analyzes their pay disclosures in his blog – but here are a handful I have peeked at:
We have posted the transcript for our recent webcast: “Conduct of the Annual Meeting.”
My Final Four picks are Michigan over Michigan State in the final, with Wisconsin and Miami also in the Final Four. No #1 seeds make it that far…
More on Annual Meeting Conduct
Supplementing our recent webcast on the topic, in this podcast, Carl Hagberg, an Independent Inspector of Elections and Editor of The Shareholder Service Optimizer, provides his thoughts about the conduct of the annual meeting, including:
– What is your biggest concern about tabulation issues for this proxy season?
– What should companies say – and do – at the annual meeting if the vote looks close?
– How should companies handle adjournments?
Survey Results: Voting Options for Registered Shareholders
It is our understanding that the SEC has asked transfer agents (and others that deal with registered shareholders) to ensure that – if their phone and Internet voting applications have a “vote with management” button – they must also have a “vote against management” button. [You may recall that I have blogged, Broadridge will eliminate the “vote with…” button, encourage beneficial holders to vote on individual items, and indicate that if the holder clicks on “submit” without selecting any items individually, proxies and vote instructions will be cast in accordance with board recommendations.]
Here are survey results about the state of preparedness for the record holder side of this development:
1. At this time, our company intends to deal with registered shareholders by:
– Including both “vote with” and “vote against” management buttons – 3%
– Not including either “vote with” and “vote against” management buttons – 33%
– Including just the “vote with” button (but not the “vote against” button) – 0%
– Doing whatever our transfer agent (or whomever handles our registered holders) tells us – 40%
– Not sure at this time – 24%
Each time a new no-action response emerges from Corp Fin, I take a quick look. Nearly every time, they are not newsworthy as they tend to not be all that exciting. But when this response to RingsEnd came out a few weeks ago, I was hesitant to blog about it because it was novel – yet no one else seemed to notice. More importantly, I was scared to blog because the Staff used to say they wouldn’t provide any guidance on Section 402 of Sarbanes-Oxley (hence the 25 law firm memo). Interestingly, former Rep. Mike Oxley – now at BakerHostetler – was involved in procuring the Staff position.
Here’s a description of the no-action letter from BakerHostetler:
In BakerHostetler’s Feb. 28 letter to the SEC staff, Messrs. Oxley, Gallagher and Reich sought guidance on Section 402 with regard to an innovative equity-based incentive compensation (EBIC) program that their client, financial services firm RingsEnd Partners LLC, developed with global financial institution BNP Paribas. The EBIC program contemplates that participating employees will receive company stock as incentive compensation and thereafter transfer those shares to an independently managed Delaware statutory trust. The trust could then obtain term loans from an independent banking institution, using some or all of the shares transferred to the trust as collateral. The letter notes that, in the absence of interpretive guidance on SOX 402, public companies have been reluctant to permit directors and officers to participate in the proposed program.
BakerHostetler contended that an issuer allowing its employees to participate in the EBIC program would not be extending or maintaining credit, or arranging for the extension of credit, in the form of a personal loan to employees subject to SOX 402. The lawyers noted that although a company would “need to perform certain ministerial tasks in order to allow its employees to participate in the EBIC program,” the company would “neither encourage nor discourage employee participation,” nor would the company “directly or indirectly make or guarantee the loans, or provide any extension of credit or other financial support” to the trust, its trustee, or trust beneficiaries (the employees). BakerHostetler argued that the legislative history suggests that under the final version of SOX 402, the phrase prohibiting a company from “arrang{ing} for the extension of credit” should be read no more broadly than prohibiting the company from providing a “loan guarantee or similar arrangement,” language found in earlier versions of SOX 402.
In the new guidance issued by the SEC, the agency’s staff wrote that an issuer that permits its directors and officers to participate in the plan “would not be deemed thereby, directly or indirectly, to be extending or maintaining credit, in the form of a personal loan to or for such individuals for purposes of Section 13(k) of the Securities Exchange Act of 1934” {SOX Section 402}. The SEC also wrote that an issuer that undertakes certain ministerial or administrative activities to permit its directors and officers to participate in the EBIC Program would similarly not be deemed, directly or indirectly, to be extending … or arranging for the extension of credit in the form of a personal loan to or for such individuals within the meaning of SOX 402.
The Board’s Role on Risk (& Risk Disclosures)
In this podcast, D’Anne Hurd, a risk mitigation consultant and long-time board member, explains how boards should handle risk and risk disclosures, including:
– What is the board’s role in deciding which risk factors to include in the 10-K?
– Is it a topic at board meetings or do directors send their own notes to the document drafter?
– Which board committee takes the lead on managing risk?
– How often should boards discuss risk? How should boards manage their time to ensure the topic is adequately tackled?
Struggling with your March Madness bracket? How about a strategy of picking winners based on which schools have the coolest alumni…
Transcript: “Projections, Prospects & Other Crystal Ball Provisions: Colliding with 20/20 Hindsight”
We have posted the DealLawyers.com transcript for the webcast: “Projections, Prospects & Other Crystal Ball Provisions: Colliding with 20/20 Hindsight.”
As noted in this article, the Senate Banking Committee voted in favor of Mary Jo White’s nomination as SEC Chair yesterday – the confirmation now moves to the full Senate…
As noted in this Weil Gotshal memo: “Companies should review their report and make efforts to correct any data that is incorrect before filing their 2013 proxy statement. Any corrections must be specifically linked to public disclosures – SEC filings, website disclosures or press releases. This pre-filing action is important because ISS’ proxy analysis report for the 2013 annual meeting will include the company’s QuickScore and ISS will not allow data verification during a “blackout period” between the filing of the proxy statement and the shareholder meeting date.”
Meanwhile, check out Davis Polk’s Ning Chiu’s analysis of how the Dow 30 fared with QuickScore…
Next SEC Commissioner? GOP Senate Economist?
As noted in this Bloomberg article, Michael Piwowar, the chief Republican economist for the Senate Banking Committee, is being vetted for an appointment to replace outgoing SEC Commissioner Troy Paredes…
More on our “Proxy Season Blog”
We continue to post new items regularly on our “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:
– National Fuel Sues Harvard Law Project Over Proof of Ownership (And Then Proposal Withdrawn)
– A Director Takes a Stand at Overseas Shipholding Group
– Delaware Compels Annual Meeting Without Audited Financials
– Animal Rights Group to Mount Proxy Contest
– UK Stakeholder Group Seeks Feedback on Engagement
In a recent study, Audit Analytics looked back over 12 years of restatements and, among other things, found:
– In the last four years, the quantity of restatements has leveled off and severity has remained low, but restatements have increased from accelerated filers for the third straight year.
– Going back to 2007, there have been 4,806 companies that have found errors in their financial statements requiring they be restated and corrected
– During 2009, 153 accelerated filers disclosed restatements, followed by 158 in 2010; 202 in 2011 and 245 in 2012.
– During 2011, Revision Restatements (restatements revealed in a periodic report without a prior 8-K, Item 4.02 disclosure that past financials can no longer be relied upon) represented about 65% of the restatements disclosed by 10-K filers. This percentage represents the highest percentage calculated since the disclosure requirement came into effect August 2004.
– The average number of issues per restatement for 2011 was 1.38, the lowest during the twelve years under review.
– The average number of days restated (the restatement period) was 534 days during 2012, the fifth year in a row with a period above but near 500 days.
The Latest Iran Sanction Disclosure Developments
In this podcast, Abram Ellis of Simpson Thacher explains the latest developments relating to Iran sanctions and disclosure (see his earlier podcast on this topic too), including:
– What are we seeing so far for Section 13(r) Iran disclosures?
– In your earlier podcast – conducted before this reporting season – there were some questions about the “who, what, why and how” of the new rule – especially since there was some but not a lot of guidance from the SEC – have we learned anything more recently?
– Have you been surprised by the developments so far?
– Anything else we should talk about?
Mailed: January-February Issue of The Corporate Counsel
We mailed the January-February issue of The Corporate Counsel that includes pieces on:
– The Focus on Rule 10b5-1 Plans: What to Do Now
– New AS 16: The Impact of “Early Adoption” on the Audit Committee Report
– Iran Disclosures: More Guidance and Early Results
– What to Do With “Late” Shareholder Proposals?
– Political Contributions Disclosure: The Next Wave of Disclosure Lawsuits?
– Delaware Chancellor–“Malpractice for Most Issuers Not to Have a Shareholder Rights Plan in Place”
– Adding General Solicitation to Rule 506–Maybe Not as Simple as a (b) and (c)
Act Now: Get this issue rushed to when you try a 2013 No-Risk Trial today.
Here are the results from our recent survey on shareholder engagement:
1. Before our annual meeting, our company actively seeks engagement with this number of institutional shareholders:
– More than 50 – 0%
– 26-50 – 12%
– 21-25 – 12%
– 10-20 – 12%
– 6-10 – 24%
– 1-5 – 6%
– None – 36%
2. Before our annual meeting, our company has actual engagement with this number of institutional shareholders:
– More than 50 – 0%
– 26-50 – 6%
– 21-25 – 0%
– 10-20 – 12%
– 6-10 – 24%
– 1-5 – 29%
– None – 29%
3. Before our annual meeting, our company typically receives unsolicited requests from this number of institutional investors:
– More than 5 – 0%
– 3-5 – 6%
– 1-2 – 24%
– None – 71%
4. If we receive unsolicited requests from institutional investors for engagement, our company:
– Always will engage with those investors – 60%
– Will engage some of the time with those investors – 33%
– Never will engage with those investors – 7%
Take a moment for our “Quick Survey on Separating 401(k) SPD & Prospectus” and “Quick Survey on End-User Exception for Swaps.”
Effective Board Diversity Change: Start with Baby Steps
In this podcast, Sylvia Groves of Governance Studio describes her efforts to diversify boards, including:
– Why do you think a diversity problem still exists in the boardroom?
– What is your “Diversity One Policy” idea?
– How is that better than “pink quotas”?
– How would your idea work in practice?
Mailed: January-February Issue of “The Corporate Executive”
We have mailed the January-February Issue of The Corporate Executive, and it includes pieces on:
– A Heads Up: IRS Comments on Excess Withholding
– Automatic Exercise at Expiration: Has the Time Come?
– Option Expiring When the Market Is Closed
Act Now: Get this issue rushed to when you try a 2013 No-Risk Trial to The Corporate Executive.
We continue to post oodles of resources in our “Conflict Minerals” Practice Area, but I thought it was worth highlighting these FAQs from Scott Kimpel and Brian Hager of Hunton & Williams since they address issues that I keep hearing about:
Why do the final rules leave so many terms undefined and create so many interpretive issues?
We believe a number of factors contributed to the tone and structure of the final rules. As a threshold matter, the final rules involve a diverse array of issues such as human rights, international relations, global politics, supply chain management, chemistry, metallurgy and manufacturing technology. These topics are far afield from the agency’s core experience and historical role as a securities regulator, and placed the Commissioners and agency Staff on a steep learning curve.
Second, though hundreds of commenters provided input and many multi-stakeholder groups were formed, commenters reached little consensus on many of the key issues. In the absence of consensus, the Commission was left having to make difficult choices on a topic in which it has little historical familiarity, and many of the underlying concepts of the rules defy easy explanation or simple definition.
Third, given the broad scope of the rules and their impact throughout the global supply chain, it simply was not possible or feasible to address every hypothetical situation involving every industry affected. Fourth, we believe the Commission sought to take a principles-based approach, rather than a rules-based one, to many of the interpretive questions so that over time industry and market practices would gain acceptance.
Finally, given the large number of human rights groups and other nongovernmental organizations that are closely monitoring issues concerning labor and supply chain issues generally, as well as the conflict minerals issue more specifically, we believe the Commission sought to use the influence of these groups to help shape emerging industry practices and to act as a counterbalance, were certain companies or industries to stray too far from emerging best practices.
Will the Commission or the Staff issue any further interpretive guidance?
The release accompanying the final conflict minerals disclosure rules is 356 pages in length. Some SEC officials initially stated that while the SEC has received numerous questions and requests for clarification regarding the final rules, the SEC Staff did not have any plans to issue additional guidance (e.g., FAQs) because the release accompanying the final rules provides extensive guidance to reporting companies.
Conversely, at an industry conference in November 2012, two senior officers from the SEC’s Division of Corporation Finance suggested that some guidance might indeed be forthcoming. Nevertheless, recent turnover in senior staff at the SEC and the nomination of a new SEC chairman call into question the imminence of any guidance from either the Commission or the Staff. Because the Commission chose to remain silent on many key issues, we question whether the Staff would be in a position to reopen issues when the Commission itself did not reach consensus on them.
Ultimately, the Staff’s guidance must have some legal basis, and it could be difficult to find that basis when the Commission has made a policy choice in favor of a principles-, as opposed to rules-, based approach on many of these issues. In the absence of further official clarification or direction on these questions, reporting companies should closely observe their peers and industry groups to keep abreast of any consensus or industry standards that begin to develop.
What about packaging?
The lack of a definition of “product” in the rules raises several related questions, including whether a product’s packaging is considered part of the product and, therefore, whether it is covered by the rule. As an example, if a reporting company sells a food product in a tin can, but the food product itself does not contain a conflict mineral, should the tin can be considered in the company’s conflict minerals analysis?
The SEC has not issued any guidance on this topic, and the adopting release for the final rule does not discuss packaging. Some commentators draw an analogy to the SEC’s exclusion of merely ornamental conflict minerals (e.g., gold embellishment) as not “necessary to the functionality” of certain products; however, others believe that a blanket exclusion of packaging would be too broad and could potentially undercut Congressional intent.
Unless the SEC issues further guidance, or an industry standard develops, reporting companies will be forced to rely on the facts and circumstances of a product and its packaging and make their own determinations. The critical question is whether the packaging is necessary to the functionality or production of the product. For example, if the tin in the can is necessary to prevent spoilage, then an argument could be made that the packaging is an integral part of the product. On the other hand, the availability of alternative packaging that does not include conflict minerals could also factor into the analysis.
Another consideration is whether the packaging itself has any intrinsic value. For example, disposable packaging presumably has little or no value, contrasted with a commemorative gold box that presumably does. A potential offshoot of this uncertainty is that reporting companies are likely to explore ways to replace conflict minerals in packaging (as well as in their core products).
How will the rules be enforced?
The SEC has not announced any particular enforcement program, and it is not yet clear how much of a priority the Staff will place on reviewing filings in 2014, but by analogy we can draw from the experiences surrounding other new disclosure regimes that have been implemented in recent years. In the absence of official guidance from the Commission or the Staff, it would not be uncommon for Commissioners or senior staffers to give speeches and presentations at industry events laying out their preferences and expectations for a new set of rules.
After the first wave of filings, it is possible that examiners in the Division of Corporation Finance could issue individual comment letters to specific registrants, or the Division as a whole may issue more comprehensive disclosure guidance highlighting best practices or areas where large numbers of registrants appear to have missed the mark. Given the two- and four-year transition periods contained in the final rules, the Staff’s process of providing feedback may occur more gradually than other recent amendments to public company disclosure rules, such as the rules on Compensation Discussion & Analysis, in which the Staff was very active in providing specific comments and publicizing its more general reactions after the first reporting cycle.
In all but cases involving egregious violations of the rules, we would not expect the Division of Corporation Finance to make a large number of enforcement referrals to the Division of Enforcement in the short to medium term. Over the longer term, it is possible that the Division of Enforcement will seek to bring enforcement cases against registrants that are perceived as materially flaunting the rules. As part of the Division of Enforcement’s recent reorganization, a special unit focusing exclusively on the Foreign Corrupt Practices Act has been formed.
This unit has been steadily improving working relationships with foreign regulators and developing increasingly sophisticated techniques for investigating transnational violations of the securities laws. These relationships and techniques would be readily transferable to future investigations of cases involving the conflict minerals rules. Outside of SEC enforcement, a private right of action exists under Section 18 of the Exchange Act for shareholders who perceive irregularities in the filed reports, and we should expect the advocacy and NGO community to also be very outspoken in publicly highlighting perceived violations of the rules.
After JOBS Act, Confidential Filers Rise
Last month, this WSJ article noted that nearly 75% of the companies that filed IPO registration statements between last April and the end of ’12 were deemed to be emerging growth companies. And 60% of these EGCs filed their registration statements through the EGC confidential process…
Here is an interesting article about the US Court of Appeals for the DC Circuit, noting that no new judge have been appointed since 2006 due to Senate gridlock. There are 3 or 4 vacancies and if President Obama can get his two current nominees confirmed, Srikanth Srinivasan and Caitlin Halligan, the balance of power could be altered. Here is Sandra Day O’Connor’s take on one of the nominations…
Scott Kimpel of Hunton & Williams gives us this news: Yesterday, the Senate Banking Committee held its confirmation hearing of Mary Jo White to be the next SEC Chair. In her written testimony, Ms. White noted her frequent interaction with – and strong admiration of – the SEC during her tenure as US Attorney for the Southern District of New York. She touched on several themes:
– The Commission has a tripartite mission (protect investors; maintain fair, orderly and efficient capital markets; facilitate capital formation), but the three component parts should not be viewed as in conflict with each other.
– Our markets are continuously evolving, and the Commission must remain vigilant to monitor the markets .
– She pledged to complete, “in as timely and smart a way as possible,” the rulemaking requirements of the Dodd-Frank Act and the JOBS Act.
– Ms. White noted the importance of rigorous economic analysis in rulemaking and promised to continue the efforts of the Commission to ensure that the agency performs robust analysis in connection with rulemaking without undermining its ability to protect investors.
– The Commission’s enforcement program will continue to be a priority, promising to be “bold and unrelenting” and twice committing to be “aggressive” in pursuing wrongdoers.
– Noting the unique issues raised by computerized and algorithmic trading, she pledged to ensure the SEC stays abreast of issues concerning high-speed trading and alternative trading venues such as dark pools and continues to build the capability to “see around the corner and anticipate issues.”
– She also left open other areas of possible focus, but made passing reference to a number of contemporary topics such as further reform of money market mutual funds, uniform fiduciary standard for broker-dealers and investment advisers, increased attention on credit rating agencies and making public company disclosures “more meaningful and understandable.”
How Contentious Was Mary Jo White’s Hearing?
And here’s more news from Scott Kimpel: During her opening remarks to the Committee, Ms. White repeated many of these themes, often reading directly from her written testimony. Flanked by her husband, John White, and Tim Henseler, the SEC’s Acting Director of the Office of Legislative & Intergovernmental Affairs, Ms. White did not face harsh questioning and appeared to have the support of most, if not all, the Committee members in attendance. (As an aside, the SEC’s OLIA has been heavily involved in preparing Ms. White for her confirmation, a service they perform for all nominated commissioners. In advance of a confirmation hearing, OLIA typically seeks to obtain the actual questions to be asked at the hearing, or at least a general direction for them, from Congressional staff, who usually oblige.)
Senators from both sides of the aisle were complimentary of Ms. White and praised her career both in government and private practice. The Senators visited a number of issues with Ms. White:
– As to her potential conflicts of interest given her and her husband’s broad legal practices, Ms. White assured the Committee that she would appropriately manage actual and potential conflicts of interest with the help of the SEC’s ethics counsel. As a practical matter, her partnership at Debevoise will impact her ability to participate in certain enforcement cases where the firm or her prior clients (clients she devoted substantial attention to, not all clients of the firm) are across the table from the SEC. But she should not face significant limitations on her ability to participate in rulemakings. Nor, as Ms. White noted, is her recusal list “out of the ordinary” in size when compared to other commissioner nominees.
– On the topic of rulemakings, Ms. White repeatedly pledged to act quickly to clear the log jam of backlogged Dodd-Frank and JOBS Act rulemakings, giving due care to thoughtful cost-benefit analysis in the process.
– Though she was hesitant to commit to any particular timetables or details for specific rulemakings, several Senators obtained soft assurances that Ms. White would pay special attention to initiatives concerning further reform of money market funds, a uniform fiduciary standard for broker-dealers and investment advisers, executive compensation disclosure under Dodd-Frank, the Volcker rule, conflicts of interest for credit rating agencies, crowdfunding and so-called Regulation A+ under the JOBS Act, and the possibility of a pilot program for smaller public companies seeking to trade at minimum increments larger than one penny to permit broader bid-ask spreads as a means for creating greater interest in emerging growth stocks.
– As to enforcement, Ms. White reiterated that a strong program would also be a priority, that she would “proceed quite vigorously” and that no institution is “too big to charge”.
– On questioning about the so-called revolving door between government and the private sector, Ms. White reconfirmed that she does not necessarily embrace the policy views of her private clients, and will be an advocate for the retail investor.
Ms. White appears to have broad support in the Senate and she is not expected to face any difficulty in being confirmed if her nomination moves from the Committee to the full Senate. No definitive timing as to when the Committee might vote on her nomination or when full Senate confirmation might then occur has been announced.
Elisse Walter, the current SEC chairman, has not announced her plans if Ms. White is confirmed. Chairman Walter’s term ended in June 2012 and she may holdover until December 2013. Commissioner Paredes is the next Commissioner whose term expires, in June 2013. He likewise has not announced next plans, but several candidates are rumored to be in the running for his seat (a Republican one) as well as Ms. Walter’s (a Democratic one).
Broc’s aside: I’m not surprised that Mary Jo didn’t get badgered over Wall Street ties despite a slew of media articles in the days leading up to the hearing about the topic, such as this NY Times article and this blog. This Washington Post article called it right. By the way, did you see that outgoing SEC Chair Mary Schapiro has joined GE’s board…
How Did the Consumer Financial Protection Bureau Hearing Go?
And here’s more news from Scott Kimpel: The Committee simultaneously held its confirmation hearing yesterday on Richard Cordray to be Director of the Consumer Financial Protection Bureau. Mr. Cordray faced some more difficult questioning and the entire Bureau is the subject of a complicated debate about its mission and structure. But again, Senators from both sides of the aisle were personally complimentary of Mr. Cordray. It is unclear if Mr. Cordray’s parallel nomination will have any impact on the timing of Ms. White’s confirmation.
This March-April issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Checklist: Deal Confidentiality Pledges & Reminders
– Be Careful What You Wish For: When Drafting Indemnification Clauses, You May Get Exactly (and Only) What You Ask For
– Divisional Acquisitions: A Clean Break?
– “Short Slate” Rules: A Recap
– Crown Jewels: Restoring the Luster to Creative Deal Lock-Ups?
If you’re not yet a subscriber, try a 2013 no-risk trial to get a non-blurred version of this issue on a complimentary basis.
Last week, I blogged that Senator Richard Shelby (R-AL) has introduced two new Dodd-Frank bills, one of which would stop any Dodd-Frank rulemaking in its tracks. After the bills were introduced, as noted in this blog, Senate Banking Committee Chair Tim Johnson (D-SD) said it did not appear that Shelby’s bills were sufficiently bipartisan to merit committee consideration.
So you have one GOP Senator trying to stop all Dodd-Frank rulemaking. And now you have a group of House Republications berating the SEC for not moving fast enough on JOBS Act rulemaking. As noted in this article, this letter to the SEC criticizes the agency for considering rulemaking about political contributions disclosures when some of the JOBS Act deadlines have not yet been met. And this blog from Jim Hamilton says there is bi-partisan House legislation coming that would impose a deadline on the SEC to adopt the Reg A provisions of the JOBS Act.
Meanwhile, this National Journal article tries to explain “What’s Behind the Endless Delays on New Rules for Wall Street?” And finally this Washington Monthly article will finish the job and demoralize you about how our government really works (you’ve seen some of this movie before: Sen. Shelby working behind the scenes to kill a law in the regulatory process)…
The SEC Plans to Launch an XBRL RoboCop!
Recently, this Financial Times article described how the SEC plans to activate within the next nine months a new software program designed to analyze XBRL tags for unusual accounting practices. Here’s a blog on the topic…
Not-So-Happy Anniversary, XBRL
In this article, CFO.com details how four years of XBRL have resulted in limited use by investors and analysts, as evidenced by this recent study. And here’s a piece about how little financial executives think about XBRL…
Last week, the PCAOB issued a rare rebuke to a Big Four auditor as PricewaterhouseCoopers was faulted for failing to promptly address quality control problems in audits occurring in 2007 and 2008. The rebuke came after the PCAOB had reviewed the remediation efforts of PwC in response to the nonpublic portions of the Board’s March 2009 and August 2010 inspection reports. Learn more in this GoingConcern blog, WSJ article and Reuters article.
And as AccountingWeb.com recently blogged, this comes on the heels of another PCAOB report on US auditors’ performance, in which the the Board found a reduced rate of “significant audit performance deficiencies” compared to its last review in 2007. However, the PCAOB did note that problems persist with almost half of the audit firms inspected having at least one “significant audit performance deficiency.” The PCAOB called out small firms and big firms alike in its report. Here’s a list of auditors that failed to address quality control criticisms satisfactorily.
The PCAOB Inspection reports are critical of PwC audit partners for not supervising those staff doing the vast majority of the work. In one instance cited below, it notes the partner only spent 2% of the hours put in on the audit. That is a significant issue that would affect audit quality and the credibility of the audit report.
A few years ago, the PCAOB proposed that investors be told the name of the audit partner, as is done in Europe and other parts of the world. This could be done either through the partner signing the report, as is the typical custom, or having the auditors name be disclosed as some have proposed.
Investors are asked to vote on and ratify the auditor as part of the proxy voting process for many companies. Yet today, the PCAOB continues to withhold from investors, the name of the companies whose audits the PCAOB inspection reports call into question, those audits of questionable quality and credibility, and which have not been done in accordance with professional standards. The PCAOB has also failed to act on the proposal to provide investors with transparency as to who the audit partner is. As a result, despite all the criticism leveled by the PCAOB against PwC in today’s report, investors are left totally unable to discern which of these audits they should be concerned about, when voting on the auditor ratification. The PCAOB is simply forcing investors to “fly blind” on that vote.
While SOX does prohibit the PCAOB from disclosing certain information on an auditor that arises as a result of an inspection, it does not prohibit in any fashion the PCAOB from disclosing the name of the Company. And it would not prohibit the disclosure of the names of these partners who perform poorly if the PCAOB were the Board ever to act on its own proposal. Rather, a majority of the PCAOB board members have decided to act in a manner that reduces transparency with respect to audit quality for investors.
Francine McKenna on Audit Industry Developments
In this podcast, Francine McKenna of re:theauditors delves into some of the latest audit industry developments, including:
– Why should audit committees care about PCAOB inspection reports?
– How can the audit committee learn more about a PCAOB inspection report? Should they ask the auditor? The PCAOB?
– In what instances can a PCAOB inspection report be used in litigation against the auditor by the client or shareholder plaintiffs?
– Is it the audit committee’s responsibility or the auditor’s to make sure the firm is independent? What if the auditor uses its member firms all over the world to complete the audit? What can happen if the audit firm is not independent?
– What role does an external auditor play when there’s a corporate investigation? Can the auditor be hired to perform an investigation of fraud or illegal acts? Should the auditor be hired to perform a corporate investigation? Advantages and disadvantages?
And Janice Brunner & Ning Chiu note in this Davis Polk blog: “The New York City Bar Association Financial Reporting Committee has asked the NYSE to consider revising its rules regarding the extent to which audit committees shoulder the burden for risk management oversight. NYSE requires audit committees to discuss policies with respect to risk assessment and risk management. Commentary to these rules indicates that the audit committee is not required to be the sole body responsible for risk assessment and management, but it must discuss guidelines and policies to govern the process by which this activity is undertaken.
The Financial Reporting Committee letter expressed concern that the NYSE rules not only call upon audit committees to assume oversight responsibility for risks beyond those associated with financial reporting, but also that the level of responsibility the committees must undertake is unfortunately ambiguous. The letter argues that audit committees are already burdened with their existing duties and also do not possess particular expertise in broader subjects of risk management that may expand to operational and environmental risk, for example. The letter suggests perhaps a more useful approach would be to vest in the entire board the responsibilities for the allocation of risk management oversight instead. “
Webcast: “What the Top Compensation Consultants Are NOW Telling Compensation Committees”
Tune in tomorrow for the CompensationStandards.com webcast – “What the Top Compensation Consultants Are NOW Telling Compensation Committees” – to hear Mike Kesner of Deloitte Consulting, Jan Koors of Pearl Meyer & Partners, Blair Jones of Semler Brossy and Eric Marquardt of Pay Governance “tell it like it is. . . and like it should be.” The topics include:
– What is ISS QuickScore & How Relates to SOP
– Weaknesses in ISS’ Pay-for-Performance Assessments
– How ISS Overvalues Options
– The Use of Peer Groups
– How to Demonstrate Pay-for-Performance Alignment
– Severance and Pay-for-Performance
– Fighting ISS Recommendations
– Moving Away From a Relative TSR Program
– Clawbacks
