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."
It’s starting to become an annual tradition – blogging about the world’s largest holiday disclaimer (here is the one from last year). Cary Klafter of Intel again shares what I imagine has to be the world’s largest holiday disclaimer, running for 15 pages, nearly double last year’s beast. And don’t forget Manatt’s funny holiday card with disclaimers…
PCAOB’s New Staff Audit Practice Alert: Professional Skepticism in Audits
A few weeks ago, the PCAOB published a Staff Audit Practice Alert #10 to remind auditors of their requirement to exercise professional skepticism throughout their audits. On its face, the fact that the PCAOB published an alert to tell auditors to do their job speaks volumes. It begs the question – why aren’t auditors already skeptical? I’m not convinced issuing an alert will do much by itself…
Meanwhile, the SEC issued this order on Monday approving the PCAOB’s Auditing Standard No. 16, Communications with Audit Committees (see this Gibson Dunn blog and Morrison & Foerster blog on impact on EGCs). And the SEC posted this report to Congress on assigned credit ratings yesterday.
Nasdaq has just filed an amendment to its proposed rules relating to compensation committee independence and consultants. The change addresses a troublesome timing problem with the original proposal.
Proposed Rule 5605(d)(3) states that a compensation committee must have the specific responsibilities and authority necessary to comply with Rule 10C-1(b)(2), (3) and (4)(i)-(vi) under the Exchange Act relating to the retention, compensation, oversight and funding of compensation consultants, legal counsel and other compensation advisers, and is required to consider the six independence factors enumerated in Rule 10C-1(b)(4) before selecting, or receiving advice from, these advisers. Originally, these provisions – that is, requiring that the committee be granted the specific authority and responsibility referenced in Rule 5605(d)(3) — were to have become immediately effective upon approval of the Nasdaq proposal by the SEC, creating some implementation and coordination problems. Under the amended proposal, Rule 5605(d)(3) will become effective on July 1, 2013; by that date, the committee’s authority and responsibility under Rule 5605(d)(3) must be reflected in the committee charter, resolutions or other board action, as permitted by state law. (Ultimately, the authority and responsibility under Rule 5605(d)(3) must be included in the charter in accordance with the regular transition schedule for these rules.) In addition, under the amendment, Nasdaq proposes that companies comply with the remaining provisions of the amended listing rules by the earlier of (1) their first annual meeting after January 15, 2014 or (2) October 31, 2014. This revision is consistent with the NYSE proposal.
Also notable in the amendment is the express deletion of the word “independent” prior to “legal counsel” to make clear that only in-house counsel are excluded from the requirement to consider independence. In addition, the original proposal discussed the committee’s need to consider the six independence factors in “making an independence determination” regarding compensation consultants, legal counsel and other advisers. In the amendment, the concept of an “independence determination” has been deleted, with the reference now only to the need to consider the six factors before selecting, or receiving advice from, these advisers. The deletion may have been intended to emphasize that the committee “is not required to retain an independent compensation adviser.” The addition of the phrase “receiving advice from” makes clear that the analysis cannot be avoided simply by not “selecting” an advisor.
The amendment also proposes changes to the phase-in schedule for companies ceasing to be Smaller Reporting Companies, allowing these companies six months, in lieu of the originally proposed 30 days, to certify that they have adopted a formal compensation committee charter. These companies will also be permitted, under the amendment, to phase in fully compliant compensation committees.
The proposed form of compensation committee certification is now attached to the amendment to the proposal. The certification will be due 30 days after the final implementation deadline applicable to the company.
Meanwhile, Ning Chiu of Davis Polk analyzes the 15 comment letters submitted on the Nasdaq’s and NYSE’s proposals in this blog…
Lona Nallengara Tapped as Acting Corp Fin Director
Yesterday, the SEC announced that Lona Nallengara has been named as Corp Fin’s Acting Director, replacing Meredith Cross until a permanent Director is found. In addition, John Ramsay was named Acting Director of the Division of Trading and Markets.
Happy Birthday to the SEC’s Shareholder Proposal Rule!
The precursor to today’s Rule 14a-8 was adopted 70 years ago today…
Board Oversight of Compliance
In this podcast, Jeff Kaplan of Kaplan & Walker explains the latest developments in how boards oversee compliance programs, including:
– What are the important legal drivers for board oversight of compliance programs?
– Can you provide an overview of board oversight of compliance programs – meaning what sort of information they should receive?
– Can you describe more about what you called the operational type of information?
– Is there the same type of variation in what you called the case-specific type of information that a board gets?
– How does a company make all this happen? Is the starting point with governance documentation?
Here’s how this article entitled “How the SEC Almost Shut Down Wall Street” begins:
Sensitive, confidential information belonging to major U.S. stock exchanges was at risk of being hacked, according to a new Reuters report. Securities and Exchange Commission Interim Inspector General Jon Rymer wrote in a 43-page report that some SEC staffers had used unprotected government computers at a Black Hat convention this year. This convention attracts hundreds of hacking experts who bring seemingly impenetrable devices with them to see if they can be cracked, says Adam Levin, chairman and cofounder of Credit.com. The SEC said the government-issued computers were not hacked and no unauthorized breach of data occured. According to Reuters, the SEC employees attending the conference had logged into the unencrypted computers through public wireless networks.
The Inspector General said the employees, who had worked in the SEC’s Trading and Markets division, were no longer at the federal agency. The SEC has been warning Wall Street firms and and market exchanges to beef up their cyber security efforts. But the government computers brought to the Black Hat convention did not have basic virus protection programs installed and the employees had neglected to encrypt the devices, Reuters reports.
And this Reuters article notes that the NYSE has hired former Homeland Security Secretary Michael Chertoff to make sure sensitive exchange data was not breached after securities regulators left their computers unencrypted.
In this podcast, Greg Dickinson of Hiperos discusses the latest developments in FCPA compliance, including:
– What does Hiperos do?
– How does your platform allow companies to facilitate forming their FCPA compliance programs?
– Any surprises in creating that platform?
– What do you see in 2013 as far as DOJ enforcement of the FCPA is concerned?
– What about the regulatory environment in general?
Heard Peter Coyote talk about the plight of wrongly imprisoned Leonard Peltier and it’s sad that this country still can’t get it right when it comes to freedom. Please sign this petition for clemency as he is in poor health and already served 37 years for something he didn’t do…
FCPA Regulators Speak on Newly Released FCPA Guidance
Here are notes from Morrison & Foerster from a recent conference where SEC and DOJ Staffers spoke about the new joint FCPA guidance (and here is Morgan Lewis’ memo on the same topic)…
Back in May, I blogged about the madness in the SEC’s Inspector General’s Office. The David Kotz and David Weber show. A soap opera at the SEC like this comes along only once every few generations!
The latest is that former Assistant Inspector General Weber has filed a $20 million lawsuit alleging he was fired for being a whistleblower. And the complaint is full of juicy details (which may – or may not – be true). Here are some articles on this development:
As a U. of Michigan grad, I’m very excited about their hoops team this year – particularly our Canadian freshman Nik Stauskas. Here is a video of what he did for Thanksgiving. Unbelievable talent and dedication…
PCAOB Issues Report on the State of Internal Controls
A few days ago, the PCAOB released a report summarizing observations from its inspections of audits performed by the 8 largest public accounting firms of their clients’ internal control over financial reporting in 2010. As noted in this blog by the FEI, there is a concern over the increasing rate of deficiencies – up to 22% in ’11 from 15% in ’10.
In this podcast, Abram Ellis of Simpson Thacher & Bartlett explains the latest developments relating to Iran sanctions and disclosure, including
– How do the recent changes to the U.S.’s economic sanctions related to Iran implicates disclosures?
– What does it mean when you say an issuer must report the activities of affiliates? What’s included in that?
– What types of activities need to be disclosed?
– How detailed do the disclosures need to be?
– Anything else we should know about the disclosure requirements?
In this podcast, Dave Lynn and Marty Dunn engage in a lively discussion of the latest developments in securities laws, corporate governance, and pop culture. Topics include:
– Changes at the SEC
– Reflections on a “business day”
– Which is better: 450 5th Street versus 100 F Street?
– Which is better: Original Elvis or Comeback Elvis?
Congressional Committee Changes & the Impact on the SEC
This Reuters article discusses changes in the leadership of the Senate Banking Committee and House Financial Services Committee, the top oversight committees for the SEC. Senator Michael Crapo will now be the ranking Republican on the Senate Banking Committee, with Senator Tim Johnson (D-SD) remaining at the Chair. Newly elected Elizabeth Warren (D-Mass) will join that committee (here is a recent interview with her).
Representative Jeb Hensarling (R-Texas) will take over as Chair of the House Financial Services Committee (taking over for Spencer Bachus) with Maxine Waters (D-Cal) who will be the ranking Democrat on that committee…
The Legacy of SEC Chair Mary Schapiro
Tomorrow is SEC Chair Mary Schapiro’s last day and much has been – and will be – written about her legacy. There are a collection of articles about this linked from this Cooley new brief. And here is a brief interview conducted with Mary.
Personally, I will always be amazed at how long a career she has had in public service at the very top. Don’t forget she first became a SEC Commissioner at age 33! And she was the first woman to serve as the SEC Chair. In between, she served a variety of high-ranking roles at other agencies (including the head of FINRA) – all under the administrations of different political parties. I would be surprised if someone else ever matched Mary’s leadership record of public service in the securities law field…
Pretty interesting video featuring Naval Ravikant, co-maintainer of AngelList, describing his efforts to come to DC and change how the JOBS Act was put together. According to Naval, all it takes is calling in a hundred favors – and approach the task like a start-up. There was an online petition with 5000 signatories from the VC world that was used to influence Congress – “using technology as a weapon in this cause.” Fascinating background. He does laugh about the misnomer “Jobs” Act, which was not his doing…
With Led Zeppelin being in DC recently to be honored at the Kennedy Center, I have to throw in some reference. Anyways, here are recent JOBS Act items:
1. As noted in this Cooley news brief, two SEC commissioners, Luis Aguilar and Elisse Walter, have advocated that “more safeguards for investors should be considered before a rule lifting the ban on general advertising for private offerings is adopted. Here is Commissioner Walter’s speech on the topic. Here is a Gibson Dunn blog about what Elisse’s promotion might mean for the future of this rulemaking – and here’s a summary of the comment letters from McGuireWoods.
2. This article claims that Chair Schapiro dragged her feet on the general solicitation rule so it wasn’t adopted on her watch. But the reality is that the interim proposed rule did not meet the test the courts have prescribed for an interim final rule and would likely not have stood up in court. As is often the case in the bizarro world we live in, the people pushing for its quick adoption are the same people who have criticized the SEC for not doing enough cost-benefit analysis on rules viewed as being investor friendly.
3. Some IPOs appear to be avoiding the JOBS Act stigma as noted in this WSJ article entitled “Some Firms Shun Looser IPO Rules.”
4. Check out this blog entitled “Crunching the numbers on EGC shells.”
5. The Treasury Department has been participating in JOBS Act roundtables around the country – but there has been zero press about them as they are closed to journalists. Why the need for secrecy?
In this recent speech, SEC Commissioner Aguilar bemoans the recent finding that only 17% of Americans trust the market. This is a much bigger problem for Corporate American than they realize and ties into the numerous accounting scandals, pay-for-no-performance stories and other governance bombshells that occur on a daily basis. No buyers mean that sooner or later, stock prices start going down…
Our New “Voting Requirements & Results Disclosure Handbook”
Spanking brand new. Posted in our “Form 8-K” Practice Area, this comprehensive “Voting Requirements & Results Disclosure Handbook” provides a heap of practical guidance about how to navigate Items 6 & 21 of Schedule 14A and Item 5.07 of Form 8-K. This one is a real gem – 33 pages of practical guidance…
One of my favorite topics is “usability” when drafting disclosure, whether it be for a paper document or for something posted online. I first wrote about the topic of usability for online documents in this article a dozen years ago. For many of us, drafting disclosure is our profession. We are the experts. And understanding how our disclosure is best consumed is something we should know a lot about.
Now I have written a checklist to help you get a better grasp on the process of writing more usable documents, with some great input from Jared Brandman of Coca-Cola (Coke has done some great things lately, from its online proxy statement to a revamped IR web page).
Proxy Drafting & Usability
In this podcast, Iain Poole of Labrador discusses how to best draft a proxy statement, including:
– How do you determine the ideal type of disclosure layout for a proxy statement?
– What trends are you seeing in proxy presentation?
– What about the ideal format for usability online?
FINRA recently released FAQs and a user guide related to Rule 5123 filings. As discussed in more detail in the June/July issue of Up To Date, Rule 5123 requires, subject to certain exceptions, FINRA member firms that sell securities in certain private placements to submit a notice filing with FINRA. Such notice filing shall include a copy of any private placement memorandum, term sheet or other offering document, including any materially amended versions thereof, used in connection with such sale. Members that do not employ offering documents must indicate to FINRA that no such documents were used in connection with the applicable offering. Submissions must be made within 15 calendar days of the first sale.
The FAQs answer practical questions regarding filing requirements, such as: how members file a notice with FINRA, whether third parties can file offering documents on behalf of a member, and when does the 15-day period commence for filing with FINRA. In addition, the FAQs address matters relating to exemptions form Rule 5123. The FAQs also provide contact information at FINRA for members who have general inquiries and questions regarding Rule 5123. The user guide gives members step by step instructions regarding how to access the private placement filing system and how to make a Rule 5123 filing.
Oh boy. This is a hard one for me to swallow. I’ve been eagerly waiting for the SEC to modernize its guidance about how social media can be leveraged to enhance disclosures to investors. The latest guidance is from ’08, well before the golden age of social media. I know the SEC purposely didn’t mention the terms “Twitter” or “Facebook” in the ’08 guidance in an effort to accommodate new technologies – but it sorely needs to be updated (the guidance also didn’t mention “search engine optimization” but that’s another story). Since the guidance was issued, the SEC has had its hands full with a financial crisis and two major Acts of Congress. So I can understand why there has been no progress in this area.
Anyways, we now have this – news that the SEC’s Enforcement Staff has issued a Wells notice to Netflix and its CEO Reed Hastings over a Facebook post about the aggregate number of hours people were viewing content from the company. This has the potential to set back the use of social media to give investors more information about investment opportunities by a factor of five. And since more disclosure is better for the marketplace, it’s truly a sad thing. Getting more information available via social media already was an uphill battle, as legions of lawyers have been telling clients “no” without bothering to figure out what “Twitter” and other social media channels really are. Many of the lawyers I have talked to about this also blame a lack of clarity in the SEC’s guidance.
I’m not a fan of the SEC using enforcement for policy-making purposes by going after high profile companies or executives to make a point in the disclosure area. And here is the kicker: Netflix is one of the only high profile companies that is friendly to retail investors. They accept retail investor questions on their conference calls via email and make the analysts wait on the call until all the emailed questions are dealt with.
Should the SEC Chase Netflix for an Alleged Regulation FD Violation Over a Facebook Post?
Of course not. And not just for the reasons set forth above about the big picture of what this means for the world of disclosure. When I asked for folks to email me their thoughts on this Bloomberg article entitled “Netflix CEO Hastings Faces SEC Action Over Facebook Post,” the overwhelming response was that the SEC was out of bounds. Many reactions were along the lines of this blog by Darrick Mix of Duane Morris regarding questions of materiality and sufficient public disclosure.
On the materiality issue, one member noted: “It is debatable that hours viewed is remotely material because you can’t draw a line between how many hours people watch Netflix to how much money Netflix brings in. The Netflix subscription fee is fixed regardless of how much subscribers use the service. Hours viewed is a measure of customer engagement in the service. If anything, more hours viewed increases Netflix’s costs slightly. Netflix explained this in their Q4 ’11 conference call in January 2012.”
Another member mused whether the old ubiquitous McDonald’s signs – “over 99 billion served” – would have been actionable for the SEC if Reg FD had existed then, noting that catch-phrase arguably contained more material information. More hamburgers means more revenue and more profit, unlike Netflix’s flat fee structure.
Steps Netflix Could Have Taken to Possibly Fix This…
Let me start this analysis by asking if you were surprised to see that 8% of respondents to NIRI’s latest “use of corporate websites” survey planned to use their site as a recognized channel of distribution? NIRI’s press release characterized this result as “just 8%” – but I was shocked it was that high. I am only aware of Google and Microsoft having announced that they use their sites as recognized channels. Is anyone aware of other companies already doing so?
Netflix has never taken that crucial step of issuing a short press release telling investors to look to Hastings’ Facebook account for important investor information. If I correctly understand what Netflix is saying in the wake of the SEC’s action, they still say that they don’t use Facebook for that purpose – even though they also seem to say that they could if they wanted to because Hastings’ Facebook posts provide broad, non-exclusionary distribution (ie. his FB account is well followed by the media and they report what he posts quickly). I’d agree that Hastings generates more media coverage with his Facebook posts than the average company does with their news releases – but that it’s still unclear under the SEC’s ’08 guidance what that means for the company.
Anyways, here is more food for thought:
1. Hastings is using the “subscription” option that Facebook offers. That allows anyone on Facebook to subscribe to his public status updates and receive them in real time – in theory. In practice, his updates don’t come through in real time to public subscribers who are not also his friends, which is something Facebook can fix.
2. You don’t need a Facebook account to view Hastings’ public Facebook updates, but this is not handled as well as it could be by Facebook. If you go to his Facebook page without being logged into Facebook, you won’t see the previous post.
3. Netflix has done a poor job of making investors aware of its CEO’s Facebook account. There should be a link to it in his bio and on the IR homepage (this kind of thing is true for almost all companies). Ironically, the Wells Notice has now made the account very public through an SEC filing.
4. Hastings’ Facebook posts generate a lot of media publicity. There are many journalists and bloggers who are both friends and subscribers. He has 240k subscribers, more than I’m sure subscribe to the SEC’s NFLX feed on Edgar or that view the NFLX Yahoo Finance page on a daily basis. He has a pattern of posting things like hours viewed, commenting on competitors like HBO and even noting subscriber number milestones. Many investors subscribe to his public updates because they’re interesting and help them understand the company.
The Bottom Line: The SEC Needs to Regulate IR Web Pages (And More)
The state of affairs for IR web pages for many companies is atrocious. And I argue that this is where the SEC should spend its resources rather than chase a CEO who likes to inform investors. For starters, there needs to be bare minimums about how companies display information – and what they post.
When I interviewed a number of in-house folks to put together this checklist about making the social media business case for investor & analyst engagement, it was shocking how little they knew about what was happening on their IR web pages. One Fortune 100 company had Facebook and Twitter links on the bottom of their IR web page – but when you clicked on them, they were dead. What does that tell investors?
Too many companies still blindly outsource their IR web pages to third-party providers – without realizing what those third-parties are doing. Did you know that one of these major providers use robots so that the Wayback Machine can’t archive what the IR web pages look like over time? This could be problematic if a company wanted to prove it made a disclosure on its IR web page on a certain date. Conversely, it could hurt the SEC if it wanted to prove that the disclosure wasn’t there. Given that the Wayback Machine is essentially the “Edgar” of online disclosures, should companies be permitted to “shred” their records like this?
This is just one of many examples illustrating how it’s still the Wild West on the Internet – and the fix isn’t to pretend that things on the Internet should be the same as it was before. It’s simply not and there are grand opportunities to better educate investors about a company’s prospects. The SEC needs to evolve and regulate more broadly. Get away from the hyperfocus on the disclosures it forces to be filed on Edgar. Focus more on what investors actually bother to read. Don’t punish the companies that want to reach investors in the manner that today’s investors consume information. Rather, lead the way so that companies can get on the social media bandwagon and stop hiding behind the excuse of Reg FD.
In this podcast, Dave Lynn and Marty Dunn engage in a lively discussion of the latest developments in securities laws, corporate governance, and pop culture. Topics include:
– Special/Accelerated Dividends in Light of the Fiscal Cliff
– Ozzy: With or Without Black Sabbath
– Rule 10b5-1 Plans Under Scrutiny
SEC Approves Nasdaq’s Revised Deficiency Disclosure Listing Standard
As I blogged before, Nasdaq-listed companies will now have to disclose details when they don’t comply with a listing standard – and Nasdaq will have the authority to make that disclosure for you if you don’t make the disclosure. Here is the SEC’s order approving the revised Nasdaq rule a few days ago.
NYSE Proposes That Companies Provide Notices Through Web-Based System
As noted in this Sullivan & Cromwell memo, the NYSE has proposed changes to the Listed Company Manual that would require most notices to the NYSE by listed companies to be made electronically through egovdirect.com, the NYSE’s web portal, or by email, rather than by telephone, fax, telegram or otherwise. Notice of material corporate events or statements regarding rumors during or shortly before market hours would still require telephone notice to the NYSE at least ten minutes prior to release.
Ning Chiu of Davis Polk provides this news from her blog:
ISS has released a detailed set of FAQs on how it will select a company’s peer group for purposes of conducting its pay-for-performance analysis. ISS uses this peer group to measure a company’s total shareholder return and CEO pay in deciding how to recommend for the say-on-pay vote.
The FAQs provide information on how ISS will select 14-24 peers from the company’s own GICS code, as well as the GICS code of the peers named in the subject company’s proxy statement. Subject to size constraints based on revenues or assets and market value, ISS describes the order in which peers will be selected from the potential universe of companies that will come up based on those GICS codes. Other questions address the use of size parameters, which are clearly key to the selection process, the GICS industry groups (financial services) where assets will be used instead of revenue, and what happens if a company discloses using more than one peer group.
In addition, by December 21st a company can inform ISS of any changes to its peer group since the 2012 disclosures, as a source of input into the ISS peer group selection.
While more information is always useful, this is unlikely to mean that companies will be able to proactively figure out the ISS peer group themselves given the complexity of GICS, the number of potential companies that ISS can choose from under this method and the use of what they term “manual judgment” in the selection process. It appears that again companies will not know who they are being measured against until they receive the ISS report.
For those companies that may have faced a say-on-pay issue last year because of perceived faulty peer groups used by ISS, note that in back-testing this new method against their analysis applied in 2012, ISS indicates that more than 95% of companies would have received the same pay-for-performance analysis.
Everybody Into the Pool! SEC’s General Counsel and Trading & Markets Director to Leave
How Common Are All These SEC Departures After an Election?
I got crushed in the wake of this news by queries from members about whether this mass exodus is typical (guess I should be tapped for the director of the SEC Historical Society someday). For starters, I can’t recall three senior Staffers announcing departures within a 48 hour span. That certainly is unique (although it’s not unusual for turnover among Division Directors under a new SEC Chair). This tweet of mine was quite popular yesterday:
If the SEC’s remaining Division Directors quit tomorrow (eg. Enforcement, IM), can we hold our class outside?
So why are people leaving before the new SEC Chair settles in? It’s just a guess – but the change in the nature of working at the SEC might well be a part of it. The SEC is constantly blasted in the press, harassed by Congress and treated like dirt by the courts. And compared to private practice, the pay is a fraction. What would you do?
The other question I fielded was whether it was unusual for a SEC Chair to step down after a Presidential election. The answer is certainly not.
Here is the math: Elisse will be the 30th SEC Chair. Backing out the first Chair – Joe Kennedy – because his appointment was tied to the statute creating the SEC, there are 29 Chairs that have been appointed and 16 of those have been confirmed within 12 months of a Presidential election. That’s 55% of the time (and I didn’t even account for new Chairs because someone stepped down due to death, illness or controversy). And it’s even more pronounced of a trend if you just analyze the last 50 years – 12 out of 17 Chairs during that period were confirmed within 12 months of an election – for a whopping 71%. Here’s a list of the SEC Chairs if you want to do the math yourself.
Learn more about the intricacies of the SEC during our webcast today: “How the SEC Really Works.”
