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."
Wow! Did you see this press release from DTC? Haven’t seen much about it online at all, just this short blurb from the Financial Times:
Trillions of dollars of stock certificates are feared ruined after Hurricane Sandy flooded a vault at the Depository Trust & Clearing Corp, the Wall Street-owned organization that manages important parts of the U.S. trading infrastructure. The DTCC houses 1.3m paper certificates for shares, bonds and other financial instruments, including foreign securities, at the organization’s headquarters in Manhattan’s financial district.
As businesses in the affected areas continued efforts to pump out flooded basements, the DTCC admitted on Thursday that its vault remained underwater and officials had still not been able to assess the damage. “The building itself remains inaccessible and will be until power is restored and an on-site health and safety inspection can be completed,” it warned in an email alert to its clients. It has suspended processing of physical certificates for an indefinite period.
Adding to the confusion, the DTCC also said that it was still trying to track down certificates that were in the mail over the period of the storm. Couriers are experiencing disruptions of their own and could take several days to reroute deliveries to DTCC’s alternative sites. A spokeswoman added that it had electronic records of all the certificates, which could be reissued. “Hindsight is 20/20. We have taken a lot of precautions, in terms of protection both for the security of our systems and of our records, and we have a full inventory of the certificates, as well as a robust recovery plan.”
DTCC is used by the financial industry for clearing and settling trades, and it houses stock certificates so that they do not usually have to be posted around the country from investor to investor. The vast majority of trades are now recorded electronically without certificates moving at all. The organization said that it switched its systems to back-up servers and was dealing with electronic trades as normal out of offices in Dallas, Texas, Tampa, Florida and Brooklyn, New York. More than 1,000 of its New York employees are working from home.
In recent years, the DTCC has spearheaded an effort to encourage electronic-only share and bond issuance, so the proportion of securities that exist in paper form has declined. The organization has further encouraged the process by encouraging “dematerialization”, where certificates are converted to electronic format. In a white paper earlier this year, it said that it cost the financial industry almost $300m to replace $16 billion of certificates that disappeared in the collapse of the World Trade Center in 2001.
A friend claims that stock certificates are printed on special paper that can be laundered – meaning I guess the damage would be minimal. But that doesn’t seem to come out in DTC’s press release (here is the latest on DTC’s operations).
Disney’s Proxy Access Shareholder Proposal
Recently, Disney submitted a no-action request in response to a shareholder proposal on proxy access. It looks like the proposal came from a London-based firm called Legal and General Assurance (Pensions Management) Limited, but ultimately from Hermes Equity Ownership Services (the letter says Hermes is the “client”) which is a European-based fund again that’s active. Maybe this proposal preempted one that I thought Disney got jointly from CalPERS and three other funds…
Meanwhile, Jim McRitchie reports that the United States Proxy Exchange (USPX) has suspended its central activities. USPX was a leader in filing shareholder proposals related to proxy access last season.
Atlas’ Networking Potential
In this podcast, Dave Chun of Equilar explains what Atlas is and how it can help you leverage professional networks (you can try a free trial), particularly for boards, including:
– What is Atlas?
– What was your goal in creating it?
– Any surprises so far since it went live?
Yesterday, I blogged about how Hurricane Sandy could impact your disclosures. Here is more on that topic from Goodwin Procter’s John Newell, particularly for your next Form 10-Q:
Form 10-Q Disclosure and Sandy
Many of our public company clients are preparing to file their quarterly reports with the SEC. This message highlights the possibility that “Superstorm” Sandy is likely to affect these clients in a variety of ways. Although most companies have only just begun preliminary action to assess the impact of the storm, public companies will want to consider possible MD&A disclosure of the potential effects of Sandy, as well as related disclosure and other securities law issues. As a starting point for evaluating these matters, the SEC disclosure principles and related issues that should be considered include the following:
1. MD&A Speaks as of the Filing Date
The SEC has made clear that MD&A must discuss and analyze a company’s financial condition and results of operations, including any known facts, trends or uncertainties, as of the date of filing, rather than the end of the fiscal period covered by the report.
Public companies should therefore consider including MD&A disclosure about the potential effects of Sandy in their Form 10-Q reports for the quarter ended September 30, 2012 if the report is filed after the date(s) on which Sandy affected the company’s business, properties and/or financial status. Note that “risk factor” or other cautionary disclosure alone may not be adequately responsive to SEC requirements for an event that has already happened, even though the impact is currently unknown or uncertain. To the extent that the company’s disclosure includes estimates or other quantitative information, cautionary disclosure about the possibility of that information changing as more facts develop should be considered.
2. Two-Step MD&A Disclosure Test
The SEC has also made clear that the required test for MD&A disclosure of known facts, developments, trends, demands, commitments, events or uncertainties is the test first announced in the 1989 MD&A Interpretive Release. Where a trend, demand, commitment, event or uncertainty is known, management must make two assessments:
First: Is the known trend, demand, commitment, event or uncertainty reasonably likely to come to fruition?
Second: If management cannot determine that the trend, demand, commitment, event or uncertainty is not reasonably likely to occur, management must evaluate materiality objectively on the assumption that it will come to fruition.
Disclosure is required unless management can determine that it is not reasonably likely to have a material effect on the company’s financial condition or results of operations. This test, rather than the Basic v. Levinson materiality test (balancing of probability and magnitude), should be used for this MD&A disclosure.
Since Sandy is for nearly all companies a historical fact at this time, most companies will need to consider the potential effects of Sandy using the second test and include appropriate disclosure in their MD&A disclosure.
Because of the very short interval between the date of the storm and the due date for Form 10-Q reports, it is likely that many companies will be unable to make definitive or specific statements about the effects of Sandy. Among other things, the internal and external resources (such as engineers and insurance adjusters) required to begin a definitive assessment are likely to be subject to extremely limited availability for some time. As a result, it may be difficult for companies to establish reasonably accurate estimates of damages and/or uninsured losses; even approximate estimates or ranges may be difficult at this point and may take significant time to establish. These factors should be considered in drafting any disclosure relating to the effects of the storm.
Although the discussion above focuses on potential disclosure of adverse impacts, some public companies may experience increased demand for their products or services, which could lead to disclosure about possible favorable material effects (for example, building supply, construction and engineering/remediation companies; manufacturers of switches/signals/controls for transit systems; manufacturers of transformers and other components for the power grid). Other companies may benefit from increased consumer spending to replace damaged items, resulting in unexpected positive business developments, while companies whose business relies on discretionary consumer spending (for example, clothing) may see unanticipated negative business developments as discretionary consumer spending is redirected to spending related to storm damage. Each company will need to evaluate the need (and content) of potential disclosure based on its specific facts.
3. Form 8-K Item 2.02 Filing Requirement
Companies should be aware that the reporting requirements of Form 8-K Item 2.02 are triggered by the disclosure of material non-public information regarding a completed fiscal period. If a company releases additional or updated material non-public information regarding a completed fiscal period (for example, if the company issues a press release updating previously-released information relating to a completed fiscal period), that release will trigger an additional Item 2.02 filing requirement.
4. Other Possible Issues
A. Insider Trading. Companies should remember that to the extent that material information develops after the date on which the Form 10-Q is filed they may need to evaluate whether the company’s insider trading policy and applicable SEC insider trading requirements would affect the ability of insiders to buy or sell the company’s securities.
B. Guidance and Projections. Companies should also be aware that the effects of Sandy may cause guidance they give now or have given before to become incorrect. In appropriate cases, companies should consider highlighting the fact that their guidance does not include any estimates for the effects of Sandy. If companies choose to include an estimate for these effects, they should be alert to the possibility that it may be appropriate (or in some cases necessary) to update that guidance as more facts become known.
How to Request a Filing Date Adjustment for a Late Filing
Hurricane Sandy: Should the NYSE Have Been Shut Down?
There has been some debate in the mass media about whether the NYSE should have shut down for two days due to Hurricane Sandy. Here are some of those articles:
Second Circuit Addresses Insider Trading Duty under Misappropriation Theory
In law school, my favorite part of the securities law class dealt with the emerging misappropriation theory. Here is a blog from David Smyth about the latest case, dealing with tipping by those that conducted due diligence for a possible deal…
As with all disasters, the potential impact on your disclosures must be evaluated (Howard Dicker in NYC shares this eye-popping video of flooding). Here is some commentary from Yelena Barychev Blank Rome’s blog on this:
A few SEC filings made this week reflect the effect of Hurricane Sandy ranging from postponing or cancelling quarterly earnings calls to extending the deadline of a tender offer. In addition, in response to Hurricane Sandy, some companies qualify their guidance in earnings press releases by excluding losses due to the impact of the hurricane if a significant portion of the company’s revenues is derived from the areas affected by Hurricane Sandy.
Some forward-looking statements in earnings press releases reference the impact of Hurricane Sandy as one of the risks and uncertainties which could cause actual results to differ materially from those projected.
While we are in the midst of the 10-Q season, companies affected by Hurricane Sandy should also evaluate whether they need to include in Form 10-Q a risk factor related to the potential impact of the hurricane on their results of operations and financial position.
ISS Extends Policy Comment Deadline to November 9th
ISS has extended its deadline to submit comments on its draft ’13 policies to November 9th.
Our November Eminders is Posted!
We have posted the November issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Conflict Minerals Poll: Are You Using a Process Design Consultant?
Meanwhile, we had an interesting query in our “Q&A Forum” yesterday (#7397) about whether companies were hiring consultants to help them sort out the design & processes necessary to capture the conflict minerals data. I posted an answer but thought I would poll our readership since this wasn’t in our “Quick Survey of Conflict Minerals” that will wind up soon…
Good scary Halloween stuff, loosely based on the attention placed on the impact of Hurricane Sandy on EDGAR (see my blog about that from Monday). I have heard a few stories about errors in SEC filings recently such as these (please send your own stories – I will keep them confidential unless you tell me otherwise):
– The error in this exhibit to a SEC filing was likely caused by a disgruntled employee (or maybe someone at the financial printer was having fun) as the second resolution in this amendment to City National Bancshares’ certificate of incorporation has swear language buried in the midst of it to the effect of: “you f__ing new when i asked you liartors…”
– Reminds me of a time around 20 years ago when someone I was working with did the same thing and filed an S-4 with the “Securitzed Exchange Ommission.” Never occurred to anyone to read the very first line of a 200 page document.
– A fake Silicon Valley Form S-1 from a company called “Ponzify, Inc.” with lots of comedy such as: “For instance, “Our company is built upon a viable revenue model” is a forward-looking statement.”
And here is an excerpt from the fake Business Section: “Our primary measurement of revenue is a non-GAAP accounting principle known as Adjusted Consolidated Assumed Income (ACAI). ACAI is an ancient accounting remedy that can slow the aging process of most balance sheets and rejuvenate the face of any company, no matter what the medical community or the FTC might tell you.”
– I scared myself when I plugged the “F” word into Edgar’s search engine and got some hits. But that’s because the prospectus for Audience Productions includes the screenplay for a movie entitled “Lydia Slotnick Unplugged.” I’m not sure why the screenplay was filed but there you have it…
CII’s Halloween Request to Top Bar Associations: No More “Zombie” Directors
Last week, CII issued this press release indicating that it wrote letters to the American Bar Association and the Delaware Bar Association urging them to revise their voting standard to a majority vote. In the letters, CII provided draft language and supporting commentary.
We continue to post new items daily on our blog – “The Mentor 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:
– Earnings Call Disruptions: Why Don’t They Happen More Often?
– NLRB’s New Restrictions on Social Media Policies
– Food for Thought: The Audit Committee’s Dilemma
– Sarbanes-Oxley and Audit Reform
– Insider Trading: Open Window Trading Periods Not Mandatory
Recently, Microsoft filed its 2012 proxy statement. The upshot is that the company continues to evolve its approach, although most changes year-over-year are mostly cosmetic. But put 2011 and 2012 side-by-side and they look quite a bit different. Here are some of the changes:
1. Adopted the graphical look and feel of new corporate-wide branding guidelines (e.g., font, color, captioning). Moved to 2-column text for improved readability.
2. Continued to work on organization of content so that it flows more naturally and related parts are grouped together.
3. Highlighted on the cover that for the first time they are moving to proof of ownership for admission. They emphasize the point several other places.
4. Included an easy-to-understand table showing the vote needed for ballot items and effect of abstentions and uninstructed votes (pg. 3)
5. Described a political contributions disclosure policy (pg. 6)
6. Revised the graphical presentation of charts and graphs that they had used previously:
– Microsoft operating income vs. total direct compensation (pg. 25). The table illustrates that changes in total direct compensation for NEOs generally have tracked changes in our operating income over the last 5 years.
– Microsoft’s position relative to peers on three measures — revenue, market capitalization and headcount – (pg. 27). The chart represents the company’s current position relative to combined peer companies on three dimensions, to demonstrate the complexity and scope of their responsibilities.
– Pay mix versus peers (pg. 28). The chart provides information about the company’s fiscal year 2012 target pay mix for our NEOs (excluding Steve Ballmer) compared to the non-CEO NEOs of their Dow 30 and Technology peers companies.
– CEO pay comparison (pg. 29). The table illustrates Steve Ballmer’s compensation opportunity for fiscal year 2012 compared to his peers.
The SEC’s (& EDGAR’s) Status During Hurricane Sandy
On days like this – where the SEC’s HQ is closed but it’s other office locations are open (at least those out of Sandy’s path) – I wonder whether there should be someone responsible for managing the SEC’s website and other communication functions outside of DC for these one-off situations. The SEC now has Hurricane Sandy info posted on its home page – and here is info for Edgar filers. Corp Fin is operating like during a snowstorm (see this blog) – which Dave has confirmed in response to a query in our “Q&A Forum” (#7393).
Alan Dye has addressed Section 16 filing deadlines in his Section16.net Blog today. In addition, some members report they have been able to file on Edgar so far today – but note this statement on the SEC’s site:
During this weather emergency, we understand that filers may be unable to submit their filings. You should file when you are able. The Divisions will handle requests for filing date adjustments on a case by case basis.
As this article notes, it’s the first time in 27 years that the NYSE has been closed due to weather!
Troutman Sanders’ Brink Dickerson gives us this news: Recently, a court in the Western District of Missouri held that the PCAOB privilege applies – not only to material exchanged with the PCAOB and records of exchanges – but also to internal documents of the corporate client that reflect development of material and information for the PCAOB audit or investigation, because those materials were created because of the PCAOB action. The privilege may be asserted by the subject firm, as well as the PCAOB. This Bennett v. Sprint Nextel & KPMG decision is important because it is contrary to Silverman vs. Motorola, a 2010 Northern District of Illinois case that held that the privilege covered only documents and information prepared specifically for PCAOB.
Note that under §7215(b)(5)(B), without loss of the privilege, the material may be shared with other federal and state regulatory and enforcement entities.
Federal Court Applies SOX/Dodd-Frank Whistleblower Protections to Non-Securities Law Circumstances
In his CompensationStandards.com blog, Mike Melbinger notes how a federal court recently allowed a whistleblower case under Sarbanes-Oxley and Dodd-Frank to proceed even though it related to an employee’s complaints about a qualified pension plan – not a securities law area.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor 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:
– Even Domestic Bribery Falls within the SEC’s Jurisdiction
– Delaware Allows $600 Million Caremark Claim To Proceed Against Allergan Directors
– Large Auditors Lobby Like Never Before
– Insider Trading: Three Thoughts about Rajat Gupta
– SEC Approves FINRA Rule Requiring Filing of Private Placements
Spanking brand new. Posted in our “Shareholder Proposal” Practice Area, this comprehensive “Shareholder Proposal Handbook” provides a heap of practical guidance about Rule 14a-8. This one is a real gem – 206 pages of practical guidance. This is an update of a treatise that I co-authored with Beth Young and Bill Morley over a decade ago…
Where Should Lawsuits to Challenge a SEC Rulemaking Be Filed?
In the wake of the news of a lawsuit being filed against the SEC over its conflict minerals rulemaking in the US Court of Appeals for the DC Circuit, I received a few emails from members asking why this case wasn’t filed in the lower court like the resource extraction lawsuit a few weeks earlier.
That’s because the earlier resource extraction lawsuit also involved this emergency motion with the higher court to determine which court has jurisdiction. This emergency motion is slated to be determined on November 7th. This dual track approach over the resource extraction rules likely was taken due to the DC Circuit previously declining to exercise jurisdiction over a challenge to the CFTC’s position limits rule a few months ago. Recall that the proxy access lawsuit was filed with the higher Court of Appeals…
In the conflict minerals case, an amended petition for review was filed on Tuesday to add the Business Roundtable as a petitioner.
Announcing the NASPP Career Center
If you are looking to fill a job opening or a stock plan professional seeking a new position, check out the new “NASPP Career Center.” Any employer (NASPP member or not) can post an industry-related position – and active NASPP members can post a resume profile for visibility to employers looking to fill job openings; resumes are searchable by those with access to the Career Center.
Who would have thunk that the process by which companies Edgarize and file their documents with the SEC would make headline news? But here’s what the mass media ran on Friday:
Some of these articles are better than others – and there were others written that were not worth linking to. Personally, I don’t think bringing the process in-house will necessarily reduce the risk of human error. In that case, you are taking the process away from someone who files documents with the SEC all day long on a daily basis – and giving it to someone who might be doing it just a few times per quarter. That is safer? I think the upshot of this incident is that it’s amazing this type of error doesn’t happen more often. Note it happens several times per year, just never this highly publicized.
Financial printers haven’t gotten this much press since the release of the “The Financial Printer Diaries” (a new installment coming soon).
Can a Financial Printer Be Liable for Filing Your Document Early?
It is not clear how much liability R. R. Donnelley might bear for any losses Google incurred because of the early release of the report. Some have suggested that it will not be much because the earnings reported were accurate. But James Plumb, a longtime filing agent in Massachusetts, said he knew of at least one case in which an agent had to pay for its error, though it was two decades ago. “Could you get sued? Sure,” he said. “The way I look at it, yes, if I make a mistake, I’m responsible.”
My personal take is that your filing agent isn’t liable if it accidentally jumps the gun and files your document before you wished. Particularly if the agent was smart enough to say so in it’s contract when it was hired…
Transcript: “Evolution of M&A Executive Pay Arrangements”
We have posted the transcript for the recent DealLawyers.com webcast: “Evolution of M&A Executive Pay Arrangements.”
Not surprising given the lawsuit filed by the Chamber of Commerce and others a few weeks ago against the SEC’s resource extraction rules, a lawsuit was filed on Friday by the Chamber and the National Association of Manufacturers over the conflict minerals rules in the US Court of Appeals for the DC Circuit. As noted in this WSJ blog (and Bloomberg article), the petition for review is bare-boned and poses no arguments as its basis for challenge. We have posted the petition for review in our “Conflict Minerals” Practice Area.
In this Compliance Week blog, the next steps are listed as “the first batch of documents, including procedural motions, if any, and a “statement of issues to be raised” are due by Nov. 21, 2012. Dispositive Motions, if any, are to be filed by Dec. 6.” Here is the court’s Scheduling Order.
Is SEC Chair Schapiro a “Short-Timer”?
This Bloomberg article entitled “Schapiro’s SEC Reign Nears End With Rescue Mission Unfinished” provides a critique of the Chair’s tenure and notes that she is likely to depart after next month’s election. In this Reuters article, the Chair denies she is planning to leave before her term ends in mid-2014.
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:
– Canadian Court Rules on Voting By Phone Case
– Open Investor Letter to ALEC and Heartland Member Companies
– Human Rights Activism: Big Win at a Mutual Fund
– Canada Considers Regulation of Proxy Advisors
– Recent Proxy Access Proposals by Chevedden and Steiner Survive SEC Challenge
Please be aware that fraudulent solicitation letters are being sent to California businesses stating that such businesses are required to provide completed documentation – which looks very similar to state-required statements of information/annual reports – and submit an annual fee to a third party processor rather than directly to the Secretary of State office. I have not yet heard whether it has been happening in other states, but I wouldn’t be surprised if that were the case.
Board Portal Limits
During last week’s “Secrets of the Corporate Secretary Department” webcast, there was some interesting discussion regarding board portals – including their limits. In this podcast, Steve Shapiro of Pircher, Nichols & Meeks also describes the advantages – and limits – of board portals, including:
– What are the potential limitations of board portals that you see?
– Is there any way to compensate for those limitations?
– What advice would you offer for in-house governance professionals whose company has – or plans to use – a board portal?
Nasdaq Proposes Changes to Disclosure of Non-Compliance with Listing Standards
Recently, Nasdaq proposed to modify certain disclosure requirements surrounding a company’s non-compliance with the listing rules. Here’s a Blank Rome blog about its implications called “Has Your Company Received a Delisting Notice? Announce It Properly or Nasdaq May Announce It For You.”
