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."
I’ve been following the Swiss saga pretty closely – but now that the people have spoken and passed new laws last Sunday, I’m still amazed and all I can say is “wow.” Here’s a slew of articles about the Switzerland development so you can read what happened for yourself:
Nasdaq Proposes Listed Companies Have Internal Audit Function
Here’s news from Leonard Street’s Steve Quinlivan’s blog: The SEC has published for comment Nasdaq’s rule proposal that Nasdaq listed companies have an internal audit function. The rule proposal is as follows:
“Each Company must establish and maintain an internal audit function to provide management and the audit committee with ongoing assessments of the Company’s risk management processes and system of internal control. The Company may choose to outsource this function to a third party service provider other than its independent auditor. The audit committee must meet periodically with the internal auditors (or other personnel responsible for this function) and assist the Board in its oversight of the performance of this function. The audit committee should also discuss with the outside auditor the responsibilities, budget and staffing of the internal audit function.
A Company listed on Nasdaq on or before June 30, 2013, must establish an internal audit function by no later than December 31, 2013. A Company listed after June 30, 2013, must establish an internal audit function prior to listing.”
In its rule filing, Nasdaq notes the NYSE, in Listed Company Manual Section 303A.07(c), has a similar requirement.
Here’s a blog from Duane Morris’ Oliver Rust too on the subject…
Nasdaq Creates New Private Market for Unlisted Securities
As noted in this blog by Gunster’s Robert White, Nasdaq has entered into a joint venture with SharesPost to provide a “private” market for unlisted securities…
A member pointed out that Frontline recently ran this “Untouchables” episode that investigates why Wall Street’s leaders have escaped prosecution for any fraud related to the sale of bad mortgages.
Thanks to Stephanie Bignon, Nishchay Maskay & Keir Gumbs of Covington & Burling, we have posted notes from PLI’s recent SEC Speaks conference about the Corp Fin and Enforcement panels – in addition to other sets of notes from this conference – in our “Conference Notes” Practice Area.
New Iran Disclosures: Over 60 Companies So Far
Over the past few weeks, over 60 companies have disclosed activities involving Iran or certain so-called bad actors. As noted in this memo, it appears from these recent disclosures that multinational issuers with worldwide operations across multiple affiliates have undertaken significant time and expense in collecting data about potentially reportable activities that issuers have never before been required to publicly disclose – including transactions with customers, vendors, and other business partners.
FINRA Plans to Revise QIB Standards on Debt Securities
As noted in this memo, FINRA has proposed changing the markup rule so that it applies to QIBs.
Yesterday, Senator Richard Shelby (R-AL) introduced two Dodd-Frank bills. One bill is labeled a technical corrections bill but it includes exemptive authority for Section 953 – ie. pay versus performance and pay disparity – so that the SEC could adopt a rule exempting “small issuers” (see Section 11.3.c).
The other bill is called the “Financial Regulatory Responsibility Act of 2013” (guess “Even More JOBS Act” was already taken; Shelby introduced a similar bill in 2011). Based on a quick read (and a big hat tip to Lynn Turner for his analysis!), it appears to impose such stringent cost-benefit hurdles that I doubt any rulemaking would ever get off the ground. Remember that GAO recently reported that over half of the required rulemaking under Dodd-Frank has yet to be conducted.
Under Section 3, the bill requires a complete an extensive cost-benefit analysis – before an agency can even propose a rule! Normally, conducting a cost-benefit analysis is part of the proposal process and during that process, the agencies asks for input from the public and those affected, as to what the costs and benefits would be from the proposed rule. In addition, the bill requires agencies to compare quantified benefits with quantified costs – and if quantified costs outweigh the quantified benefits, the bill in essence stops the proposal before it is proposed. Bear in mind that the benefits of legislation often cannot be readily quantified.
The bill also requires agencies to provide all of its data & analysis to the public so that they can perform the cost-benefit analysis themselves (Section 5). And under Section 8, it makes challenges easier to bring in the US Court of Appeals for the DC District (which is the court that has been quite unfriendly to the SEC over the past decade). Plus it makes it harder for agencies to withstand such challenges (ie. if an agency is found to have not complied with this law, the rule is overturned unless the agency provides “clear and convincing evidence that vacating the rule would result in irreparable harm”). I believe this overturns decades of legal precedent about how agency rules are judicially reviewed.
The bill requires the SEC to adopt similar cost-benefit tests for agencies under its oversight, such as the PCAOB (Section 11). The bill also requires agencies to examine rules five years after adoption to see if they are achieving desired results (Section 6). A Chief Economists Council is established under Section 9.
How do you read Section 7? I believe it requires the SEC to develop a plan one year from adoption of this law – and then every five years thereafter – “to modify, streamline, expand, or repeal existing regulations so as to make the regulatory program of the agency more effective or less burdensome in achieving the regulatory objectives.” Wow! All of its laws? Not just the Dodd-Frank ones? Let me know if you read that Section differently.
Personally, I like to be straight-forward and honest. If you want to stop Dodd-Frank in its tracks, do it – but don’t call it something else. But unfortunately, that is not the Congressional way. Not surprisingly, the mass media has overlooked this bill completely so far. I can only find this The Hill article, whose title infers that these bills just “tweak” Dodd-Frank.
SEC Chair Nominee Mary Jo White: Senate Confirmation Hearing Set for Tuesday
The Senate Banking Committee has set its confirmation hearing for SEC Chair Nominee Mary Jo White for next Tuesday, March 12th at 10 am. Not sure the hearing would have drawn that much attention on its own. But given that the nominee for the head of the Bureau of the Consumer Financial Protection Bureau – Richard Cordray – will also be considered at the same hearing, it could turn ugly since that new agency has been a lightning rod on the Hill. I’m sure that Senator Shelby’s bill will be mentioned…
33% Early Bird Discount Expires on Friday: Our Pair of Popular Executive Pay Conferences
Last chance to take advantage of the 33% early bird discount for our popular conferences – “Tackling Your 2014 Compensation Disclosures: The Proxy Disclosure Conference” & “Say-on-Pay Workshop: 10th Annual Executive Compensation Conference” – to be held September 23-24th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas for the Conferences.
Early Bird Rates – Act by This Friday, March 8th: Act now for the early bird discount rate (both of the Conferences are bundled together with a single price). So register by end of this Friday to take advantage of the 33% discount.
The Gabelli court found that five-year statute of limitations period for federal enforcement actions seeking civil penalties begins to run “when the fraud is complete,” not when it is discovered by the government (unlike the standard for private plaintiffs). And the Amgen court found that plaintiffs don’t need to establish that allegedly false statements were material to the market before they can gain class certification.
Growing Use of ATM Offerings & Block Trades
Recently, this Reuters article noted how the growing use of at-the-market offerings and block trades are impacting the earnings of investment banks.
I have to mention that my good friend Lou Rorimer recently had his father featured in this NY Times article. Lou’s father was part of an allied military unit that was responsible for protecting artworks during WWII and then later recovering the ones that the Nazis stole. They were dubbed the “Monuments Men” – the story is being made into a movie starring George Clooney, Matt Damon, Daniel Craig, Kate Blanchett, Bill Murray, Jean Dujardin, Lord Grantham (er, Huge Bonneville) and John Goodman, due out this Christmas!
“Occupy the SEC” Sues to Hasten Volcker Rules
As noted in this Reuters article, a subset of the “Occupy Wall Street” movement has sued to push for adoption of the Volcker rules. I haven’t heard if the Occupy movement will be going to any annual meetings this year. Let me know if you hear something…
Webcast: “Growing Controversies Over Company Valuations Under Delaware Law”
Tune in tomorrow for the DealLawyers.com webcast – “Growing Controversies Over Company Valuations Under Delaware Law” – to hear Kevin Miller of Alston & Bird, Jennifer Muller of Houlihan Lokey and Kevin Shannon of Potter Anderson discuss whether – despite case law to the contrary – fair value (in appraisal) and fair price (under entire fairness) shouldn’t be viewed as identical. Please print off these two sets of Course Materials in advance – fair value and control premiums.
Last year, we gave you comprehensive Handbooks. This year? We have practical checklists for you! For the nitty gritty of the annual meeting itself, we have 15! Great tools to go with tomorrow’s webcast…
Tune in tomorrow for the webcast – “Conduct of the Annual Meeting” – to hear Carl Hagberg of The Shareholder Service Optimizer, Grace Holmes of Cameron International; Susan Permut of EMC; John Saia of McKesson and Dannette Smith of UnitedHealth Group explain how they handle the many challenges of running an annual shareholders meeting.
Two Reappointed to PCAOB Board
On Friday, the SEC announced that PCAOB Board members Steven Harris and Jay Hanson have been reappointed for five-year terms.
Made you look. Blame it on an early April Fools joke? The truth is that Corp Fin is not laying off anyone.
But the sequester is real. Living in DC, I know quite a few folks that have already received furlough letters from federal agencies. No word yet if the SEC will be doing so too – but my guess is it’s just a matter of time. The budget cuts are real & deep. And that’s on top of the massive government cuts that have taken place since ’07, the most since WWII.
Anyways, Congress is off on its normal 3-day weekend, just a week after its 10-day winter break. And they sure don’t seem to care much about that looming government-wide shutdown coming up on March 27th…
Diversity: The Boardroom Mystique
A must-read piece by Lucy Marcus about how little we’ve progressed with board diversity – with some great commentary on why we need to get there for business reasons. Piggybacks on the 50th anniversary of the publication of Betty Friedan’s “The Feminine Mystique”…
SEC Staff Updates XBRL FAQs
Yesterday, Risk Fin posted updated XBRL FAQs. It looks like the new and updated FAQs have a note next to them.
By the way, the Lowell Milken Institute for Business Law & Policy at UCLA Law School is looking for a new Executive Director…
Our March Eminders is Posted!
We have posted the March issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Thanks to a “heads up” from a Society of Corporate Secretaries alert, here is some information about an ISS policy aimed at preventing the sharing of ISS reports. Here is the notice received from ISS by larger companies:
As many of you are aware, ISS allows companies to access the ISS proxy analysis on their specific company free of charge through an online platform, called Governance Analytics. If you do not already have a log in, you can request one.
You may also be aware that in the case of large cap companies (SP500), ISS will provide a draft of its proxy analysis for the purpose of fact-checking prior to publishing its final analysis and recommendations for institutional investor clients. ISS encourages companies to review the draft analysis thoroughly and to consult with their advisors where necessary to ensure accuracy of company-specific data in the report. Draft analyses can be shared with advisors as appropriate.
This year, in response to increasing unauthorized sharing of login credentials and copies of final proxy analyses (which are protected by copyright), ISS began explicitly prohibiting companies from sharing database login credentials and copies of their final proxy analyses with corporate advisory firms. ISS proxy analyses are the work product of ISS and are protected by copyright. Advisory firms wishing to access ISS analyses or various governance databases can do so by subscribing through ISS Corporate Services (ICS).
And as noted by Davis Polk’s Ning Chiu in this blog, companies can now obtain their ISS QuickScores via ISS’ data verification site. QuickScores will also be provided on ISS proxy research reports – and beginning the second week of March, on Yahoo! Finance pages.
2nd & 3rd Say-on-Pay Failure of the Year
As noted in this Form 8-K, Digital Generation failed to gain majority support for its say-on-pay with only 39% voting in favor (hat tip to Karla Bos of ING Funds) – and and as noted in this Form 8-K, Nuance Communications also failed to gain majority support for its say-on-pay (hat tip to Jim Kroll of Towers Watson).
Poll Results: How Many Companies Will Receive a “Failed” Say-on-Pay Vote in ’13?
Here are poll results in which readers predicted the number of say-on-pay votes that fail to garner majority support this year (here are results of last year’s predictions):
I just posted a “Quick Survey on Separating 401(k) Summary Plan Descriptions & Prospectuses” and what folks are doing in the wake of potential securities law liability for ERISA plan fiduciaries where a 401(k) Plan that offers a “Company Stock Fund” investment choice incorporates SEC filings by reference (and the filings later turn out to be inaccurate). Please participate – all responses are anonymous.
Last week, SEC Commissioner Troy Paredes – whose term expires in June – delivered this interesting speech about the need to reform the SEC’s disclosure framework. A lot of good stuff in there. Much of it has been said before (Troy himself gave a speech on the same topic a few years back – and remember the dead-soon-after-conceived “21st Century Disclosure” project) – but it’s important to keep the eye on the ball and recognize the world has changed, but that the way disclosures are made has not all that much (despite the forceful period of change we have been through the past decade). Here is my ten cents off literally off the top of my head:
– Hard to live in DC right now and not think about “sequester, sequester, sequester.” Which leads to my point of how will the SEC have the horses to do something of this magnitude given its resource level, lack of support from Congress, way-behind rulemakings and larger priorities (see this farewell speech by OIA Director Ethiopis Tafara about conflicts between market participants).
– Although I agree that more disclosure is not always better than less, the beauty of the Web is that fulsome disclosure can always be posted online and then investors can decide which disclosures are the most meaningful for them.
– It will be hard to convince companies to pare down sections such as “Risk Factors,” since SEC filings principally remain compliance documents. The linchpin of reducing volume is how does one devise a framework that continues to protect companies that make less disclosure?
– Of course, the biggest challenge is how to address the need to draw out more meaningful disclosures – forward-looking ones – in this era of increasing proxy disclosure litigation. Good luck with that.
– Disclosure lawyers are supposed to be experts in disclosure; yet few even know what “usability” means. That has to change and fast.
– The SEC has to look in the mirror first. Too many rules – and guidance – are not written in plain English. And the easiest fix is to tweak Edgar – change the labels for filings so they match what they are rather than the ancient symbols still used (eg. DEF 14A – what does that mean to the average investor?).
Coming Soon: SEC Staff Paper on Accounting Disclosures & Disclosure Roundtable
Among detailed notes from the accounting panels during PLI’s recent “SEC Speaks” conference, here’s an excerpt from Edith Orenstein in FEI’s “Financial Reporting Blog”:
During a lively panel on Day 2 of PLI’s “SEC Speaks” conference, SEC Chief Accountant Paul Beswick announced that a Staff Paper on Disclosures is expected in the “next couple of months” and a related Disclosure Roundtable is expected to be held in the “late spring or early summer.”
Forward-Looking Disclosures and the ‘Dividing Line’ Between MD&A and Footnotes
Beswick noted that in the past few years, the FASB has been working on three projects relating to disclosures:
Beswick explained that the SEC staff is working on a paper about “what is the dividing line;” e.g., he said, “One of the things we are looking at is: [feedback saying that] “you are pulling too much forward- looking information from MD&A into disclosures.” He added, “We think the paper is important because we think you need a level set [of information].”
“I am hopeful the staff paper will be out in the next couple months,” said Beswick, “with the goal of having the disclosure roundtable in the late spring or early summer.”
As previously referenced by Beswick at the Dec. 2012 AICPA National Conference on Current SEC and PCAOB Developments, the topic of disclosures involves not only geography within the entire “financial reporting package” but also legal liability, auditor/auditing considerations, and the “disclosure framework” generally (a project the FASB is currently working on); therefore, the SEC will engage with the FASB and PCAOB on this project as well.
Transcript: “Activist Profiles and Playbooks”
We have posted the DealLawyers.com transcript of our recent webcast: “Activist Profiles and Playbooks.”
Here’s news from Davis Polk’s Ning Chiu from this blog:
New York State Comptroller Thomas DiNapoli on Friday issued a press release announcing that the New York State Common Retirement Fund has withdrawn the lawsuit it filed in early January against Qualcomm over political spending disclosure, after Qualcomm implemented and publicly posted what the release calls an “industry-leading” Political Contributions and Expenditure Policy. The lawsuit, which we previously discussed, sought Qualcomm’s books and records under Section 220 of the Delaware corporation law.
The press release includes statements from both Qualcomm’s CEO and Chairman and Mr. DiNapoli extolling the importance of increased transparency about corporate political spending. According to the release, the company’s policy will include information on contributions to political candidates and parties, and expenditures to trade associations and Section 501(c)(4) organizations, as well as contributions to influence ballot measures. 501(c)(4) groups, whose primary purpose must be focused on “social welfare” in order to stay tax-exempt, have come under increasing attention for their involvement in the political process while being able to maintain donor anonymity.
The Center for Political Accountability weighed in and in the same release announced that the Qualcomm disclosure “puts it near the top” of its CPA-Zicklin Index, which we described here. According to the CPA, 107 large public companies have agreed to disclose corporate political spending so far.
The 4-page Qualcomm policy indicates that political expenditures require the approval of certain members of management and oversight by the board’s governance committee. The company plans to update the policy twice a year for information on specific political contributions, dues to U.S.-based trade associations that received payments of at least $25,000 (and the portion of those dues and special assessments that were used for activities that are not deductible if such information is available after making reasonable efforts), payments of $10,000 or more to social welfare organizations, and contributions to influence the outcome of ballot measures. The policy states that the company does not plan to make independent expenditures on behalf of federal candidates.
While some had expected a decrease post-election, ISS reported that, like last year, it is tracking more than 110 shareholder proposals on the topic this season.
Is a Guy on a Couch Commenting on Your Defective Auditor Consents?
Just received this important lesson learned from a member:
There is a guy who is reviewing 10-K auditor’s consents and sending emails to the CEO and CFO pointing out deficiencies (wrong date, unsigned) within 30 minutes of the 10-Ks hitting EDGAR. I have had a couple clients receive these emails in the past week and based on the slew of 10-K/As filed in the last week to correct the same sort of deficiencies, I have to imagine he is sending them to other companies too.
I think it’s a good lesson that someone actually reads these things and outside counsel often does not review the final auditor’s consent – but a mistake can be problematic. Although an 8-K can work to get a corrected Exhibit 23 on file I understand the SEC prefers a 10-K/A (which can be exhibits only but still requires SOX certifications). Not sure what his motivation is for these emails but the fact that someone is reading these consents so closely and quickly is an eye-opener.
It is also worth noting that, while all the reports on the recent lawsuit against Apple’s proxy statement in the Southern District of New York focused on the unbundling claim made by Greenlight for the charter amendment proposal, as we previously discussed, little known is that the judge in that case also dismissed efforts by another plaintiff to enjoin the say-on-pay proposal. That plaintiff had claimed that Apple’s use of terms like “experiences,” “input” and “peer group data,” when describing the compensation committee’s judgment in granting long-term equity, failed to provide sufficient information. The judge found, however, that since the plaintiff did not identify any material omission in the proxy and since the compensation discussion and analysis section included in the proxy statement was compliant with the SEC rules, the plaintiff was unlikely to succeed on the merits.
Nonetheless, the Symantec and, in the say-on-pay preliminary injunction context, Apple successes do not mean that U.S. public companies should relax and assume that the plaintiffs’ bar will be deterred. At least one law firm that has been particularly active in filing these types of lawsuits has recently identified several more companies which it is investigating for potential breaches of directors’ fiduciary duties in connection with say-on-pay proposals. Given that the proxy season is upon us, we continue to recommend that companies pay extra attention to their executive compensation disclosure.
In a very important development in the current proxy disclosure litigation wars relating to annual meeting votes, last Thursday the Santa Clara County Superior Court sustained Symantec Corporation’s demurrer in Natalie Gordon vs. Symantec Corporation dismissing a shareholder lawsuit which had sought declaratory relief and damages against Symantec and its directors based on allegations that the directors had breached their fiduciary duties by failing to provide adequate disclosure to shareholders regarding Symantec’s say-on-pay vote in the company’s August 2012 proxy. (For background on the annual vote proxy disclosure litigation cases, see my recent post and Latham’s commentary.)
While the court’s earlier denial of the plaintiff’s motion to preliminarily enjoin Symantec’s annual say-on-pay vote (in October 2012) was welcome and important news to public companies and their advisors (especially since the same court had previously granted a shareholder’s motion to preliminarily enjoin an equity plan approval vote in Stephen Knee v. Brocade Communications Systems), as a decision on the merits, the court’s Thursday decision will be even more valuable than the injunction denial decision to companies in defending proxy disclosure lawsuits.
In its Symantec complaint, the plaintiff alleged on behalf of shareholders as a class that Symantec’s directors had breached their fiduciary duties to shareholders by failing to provide adequate disclosure in support of the company’s say-on-pay vote proposal, pointing to eight alleged deficiencies. Among the eight alleged deficiencies (proving that no good deed goes unpunished, no matter how well trumpeted) were that Symantec had failed to disclose how the board had determined to shift its executive officer pay targeting from 65th to 50th percentile of its peer group and how it had determined to increase officer ownership guidelines and implement a requirement that officers hold at least 50 percent of their after-tax equity grants.
After dispensing with some procedural issues, the court recited the applicable legal standards governing the adequacy of proxy disclosures, namely that directors have a duty to fully and fairly disclose all material information within their control when seeking shareholder action, and that information is material if there is a substantial likelihood that that a reasonable shareholder would view it as significantly altering the “total mix” of information if it were to be made available. The court then applied these standards to each of the alleged deficiencies and concluded that the additional disclosures sought by the plaintiff were not material in view of all of the other information in the proxy, and that the plaintiff had failed to state a cause of action. The court gave the plaintiff ten days leave to amend the complaint to attempt to state a cause of action.
Jim’s analysis of the possible implications of this development are at the bottom of this blog. Here’s the court correspondence since inception (relates to annual meeting from last year).
Off & Running: 1st Say-on-Pay Failure of the Year
As I blogged on CompensationStandards.com’s “The Advisors’ Blog” last week, as noted in its Form 8-K, Navistar International is the first company holding its annual meeting in 2013 to fail to gain majority support for its say-on-pay with only 17% voting in favor since abstentions count as “against.” Lower than anything we saw last year, although perhaps not surprising since nearly 50% of Navistar is held by just 3 investors, including Carl Icahn, who has blasted them for poor governance. Hat tip to Karla Bos of ING Funds for pointing this out!
Transcript: “Rule 10b5-1 Plans Under Attack: The Latest Practices”
We have posted the transcript for our recent webcast: “Rule 10b5-1 Plans Under Attack: The Latest Practices.” This topic clearly has touched the nerves of many members. Here is a note from one such member: “Trades under 10b5-1 plans are by definition structured – and not ad hoc, random trades – and thus the correct comparison is not to market performance generally, but to similar types of structured trades. For example, limit orders are likely to perform better than the market generally because the trade occurs only if the target is achieved. And the absence of trades is due to the fact that the target was not achieved. Those are never reflected because by definition they do not occur.”
