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."
Yesterday, Shuffle Master filed this Form 8-K to reveal its become the third company this proxy season to fail to achieve a majority vote for say-on-pay as only 45% of shareholders voted in favor (here’s the other two). And Hemispherx Biopharma revealed it almost became the fourth with only 51% support as reflected in its Form 8-K.
In his “Proxy Disclosure Blog,” Mark Borges gives us the latest say-when-on-pay stats: with 739 companies filing their proxies, 44.3% triennial; 3.4% biennial; 48.8% annual; and 3.4% no recommendation. As Dave blogged a few days ago, the annuals have now passed the triennials…
PCAOB Ramps Up Project to Rethink the Auditor’s Report
Yesterday, the PCAOB held a public meeting regarding its project on how best to improve the auditor’s report. Here’s the press release – and statements from Chair Doty and three other PCAOB board members (and here’s related presentation slides from a meeting with the PCAOB Investor Advisory Group last week).
It was a packed house as this project could lead to the most significant changes in reporting by auditors since the 1930’s. A concept release is expected this Summer. This project is long coming, and comes on heels of recommendations made in October 2008 by the US Treasury Advisory Committee on the Auditing Profession (recommendations were also made in the 1970’s by the “Cohen Commission” but were not fully acted on).
SCOTUS Supports Plaintiff’s Bar in Matrixx
Yesterday, the US Supreme Court decided Matrixx Initiatives Inc. v. Siracusano, a case examining whether failure to disclose non-statistically adverse data can give rise to fraud claims. The Court upheld a decision by the Ninth Circuit Court of Appeals, determining that investors stated a claim and adequately pleaded materiality under the federal securities laws. Here’s analysis from Kevin LaCroix’s “D&O Diary Blog.” And we’ll be posting memos as they arrive in our “Materiality” Practice Area (such as this Cooley memo, Simpson Thacher memo and this Morrison & Foerster one).
Here’s news from Bob Dow of Arnall Golden Gregory:
During this February and March, a large number of companies have exited from the OTC Bulletin Board (OTCBB). Many of these have shifted to the OTCQB platform operated by the organization formerly known as “Pink Sheets,” which is now called “OTC Markets.”
The companies were frequently caught by surprise because the move was involuntary and not well publicized by OTCBB or the market makers. Unbeknownst to the company, the sponsoring market maker ceased quotation on OTCBB and began anew on OTCQB. Without a market maker on OTCBB the company’s stock would no longer be eligible to be quoted on OTCBB. In some cases, the reporting of trades on popular financial web sites was not transitioned smoothly due to the sudden unannounced change. Initially, OTCBB reported some of the stocks’ deletion as due to “Failure to comply with Rule 15c-2,” which could have been taken to imply some sort of intentional violation of the securities laws by the company. In mid-February, the OTCBB started reporting the deletions as “Ineligible for quotation due to quotation inactivity.” Here’s a listing of deletions.
Since the 1990s, OTCBB has been a popular medium for trading stocks that were not listed on a stock exchange. Companies are not really “listed” on OTCBB. Each company’s stock is quoted on the OTCBB if a market maker begins posting quotes for the stock there. OTCBB is operated by FINRA, but in September 2010, FINRA entered into an agreement to sell the OTCBB to the investment banking firm Rodman & Crenshaw. In 2010 FINRA also increased the fees it charges market makers to quote stocks on OTCBB, to $6.00 per security per month. OTCQB does not charge any such fee.
So early in 2011, a few market makers began quietly moving their quotations to OTCQB. At some point a critical mass was achieved and the herd started moving rapidly in February. By some accounts, more than 800 companies have left the OTCBB so far in 2011. One wonders if this is what FINRA and the Rodman firm had in mind when they agreed to the sale. It seems like the value of the franchise could be diminished if there is a sufficient run-off. Here are others that have commented on this development: Reverse Merger Report and RedChip Companies Blog.
Pre-Proposal Comment Submission: If the SEC Builds It, Will They Come?
It’s been a while since the SEC made it as simple as an email to submit a comment letter on a rule proposal, which in turn have raised the number of “casual” comments submitted from the men & women “on the street.” Lately, I have been wondering if the Dodd-Frank proposals got more of these types of comments than usual because of their high profile nature? Particularly since the SEC took the unusual step soon after Dodd-Frank was enacted to allow for comment on its upcoming rulemakings, even before actual proposals were out.
The answer is “not really.” Although a high percentage of comments posted in the SEC’s pre-proposal portal are from individuals, there are only a handful for most of topics as many of the “regulars” who submit comments didn’t bother at such an early stage (with some exceptions such as conflict minerals).
I do note that one person – Robin McLeish – submitted a comment letter on a majority of the topics in the portal. Her comment letters vary but here are two of them as examples:
1. On the “Office of Minority and Women Inclusion“: “Hi and thanks for the chance to comment. I saw this article on CNN Money website. I feel that the Treasury should be in charge of the money and it should be backed by mineral assets. The fed can set interest rates.”
2. On “Exemptions for Certain Advisors“: “Hi and thanks for the chance to comment. I saw this article on CNN Money website. I feel that no one should be exempt from following the laws of the constitution. Those that do not in this one nation under God will have to answer to him on judgment day and I will be there pointing my finger at them.”
Conduct of the Annual Meeting
We have posted the transcript from our recent webcast: “Conduct of the Annual Meeting.”
If you are not among the many who have inputted their email address to receive notification of Mark Borges’ analysis of compensation disclosures as they are filed with the SEC, you are missing out. Here is the latest from Mark from his “Proxy Disclosure Blog” on CompensationStandards.com (you can input your email address on the left side of the blog to receive notifications):
Who says that there’s nothing new in proxy statement design and content? Just when you think you’ve seen it all, companies come along with an innovative idea that has the potential to catch on big (sort of like the iPad).
I’m referring to General Electric’s proxy statement, which was filed on Monday. GE starts its proxy statement with a four-page “proxy summary.” It’s a CD&A Executive Summary on steroids; that is, it summarizes all of the key information from the proxy statement, not just executive compensation information related to its “Say on Pay” proposal.
As such, it covers the following topics:
– the date, time, and location of the Annual Meeting of Shareowners;
– the meeting agenda;
– the matters to be voted on at the meeting. along with Board of Directors’ voting recommendation and a cross-reference to where the item is addressed in the proxy statement;
– the nominees for the Board of Directors, including summary information on their occupation, qualifications and experience, independence status, committee membership, and other directorships;
– the identity of the company’s auditors, as well as a breakdown of their audit and non-audit-related fees for 2009 and 2010;
– the shareholder advisory votes on executive compensation and the frequency of future shareholder advisory votes on executive compensation (by the way, GE’s Board of Directors is recommending that future “Say on Pay” votes be held annually;
– a compensation elements table, with a brief description of the form and terms on each principal compensation component;
– a brief description of the key executive compensation actions and decisions for 2010; and
– a 2010 compensation table for the company’s Named Executive Officers, which is similar to the required Summary Compensation Table, but also provides a “Total Realized Compensation” column to show to difference between reported and realized pay in 2010.
It’s probably a natural progression in the evolution of proxy statements, as this year (perhaps for the first time) we’ve been forced to step back and look at the document as a communication tool first and foremost. I’m currently working with a couple of companies that are planning to do something similar in their proxy statements, so it’s obviously an idea that many companies have seized upon as they respond to the new shareholder advisory vote requirements of the Dodd-Frank Act.
It’s also a concrete example of the often-discussed concept of “layered disclosure.” While not a substitute for the substantive content of the proxy statement itself, it offers readers an additional way to obtain information about the annual meeting and related matters. I expect that some investors will be perfectly satisfied to rely on this summary as their primary (if not only) source of information.
At the same time, they have access to the full proxy statement for further detail. And, in addition to the full Compensation Discussion and Analysis, they have an Executive Summary for reference (as in past years, GE focuses on the details of its CEO’s compensation to illustrate its approach to “ay for performance”).
GE is the first company out of the gate with this disclosure and has, as usual, done an excellent job in presenting this new item. I expect that it may become a template that other companies (particularly GE’s peers) use, tailored to their own specific circumstances.
Lately, I’ve blogged several times about the controversy over loss contingency disclosures (eg. this recent blog on audit response letters). Here is an excerpt from this Cooley alert by Cydney Posner:
You might be interested in this article from The New York Times, which discusses the more extensive 10-K disclosure provided by big banks regarding their potential litigation and other legal exposure. Not only are the numbers enormous (e.g., $4.5B for JPMorgan), but what’s most interesting is that there are so many numbers disclosed at all. The quantitative specificity was apparently prompted by 2010 “Dear CFO” letters from the SEC reminding the banks that they are required to make disclosures when there is a “reasonable possibility” of a loss. The article reports that the SEC actually “followed up to make sure they would provide deeper information. One executive remarked the agency’s reminders were, put politely, forceful.” Only Morgan Stanley decided not to provide a catch-all number, opting instead to provide only its estimate for two separate lawsuits with potential aggregate exposure of $518M.
While attention may for the moment be focused on the big banks, there’s no reason to assume that the interest in more quantitative disclosure will stop there. In several fairly recent presentations (in addition to one aimed specifically at financial institutions), the accounting staff indicated that the absence of historical disclosure regarding “reasonably possible” losses could well be subject to comment, particularly when settlements are disclosed in future periods.
The SEC Staff on International Issues
We just posted the transcript from our recent webcast: “The SEC Staff on International Issues.”
Poll: How Many Chiefs of Corp Fin’s Office of International Corporate Finance?
The webcast noted above featured the current and a former Chief of Corp Fin’s Office of International Corporate Finance. Since the Office’s formation in the early ’70s, please guess how many Chiefs have served (including the current one, Paul Dudek):
We have announced the line-up for our annual package of executive pay conferences to be held on November 1st-2nd in San Francisco and by video webcast: “Tackling Your 2012 Compensation Disclosures: The 6th Annual Proxy Disclosure Conference” and “The Say-on-Pay Workshop Conference.” Save 25% by registering now at our early-bird discount rates.
As you can see from our agendas, this year’s pair of Conferences (for one low price) will be workshop-oriented more than ever before in an effort to provide the practical guidance that you need in the new say-on-pay world that we live in:
1. November 1st’s “Tackling Your 2012 Compensation Disclosures: The 6th Annual Proxy Disclosure Conference” includes:
– “Say-on-Pay Disclosures: The Investors Speak”
– “Say-on-Pay: The Executive Summary”
– “Drafting CD&A in a Say-on-Pay World”
– “The In-House Perspective: Changing Your Processes for ‘Say-on-Pay'”
– “Getting the Vote In: The Proxy Solicitors Speak”
– “Handling the New Golden Parachute Requirement”
– “The Latest SEC Actions: Compensation Advisors, Clawbacks, Pay Disparity & Pay-for-Performance”
– “Dealing with the Complexities of Perks”
– “Conducting – and Disclosing – Pay Risk Assessments”
– “Say-on-Frequency & Other Form 8-K Challenges”
– “How to Handle the ‘Non-Compensation’ Proxy Disclosure Items”
2. November 2nd’s “The Say-on-Pay Workshop: 8th Annual Executive Compensation Conference” includes:
– “The Say-on-Pay Process Playbook: Breaking It Down”
– “Say-on-Pay: How to Interpret Your Voting Results”
– “Say-on-Pay: How to Best Tell Your Story”
– “Say-on-Pay Shareholder Engagement: What’s Working – and What Isn’t”
– “How to Work with (or Against) the Proxy Advisors: Navigating the Say-on-Pay Minefield”
– “Pay-for-Performance Workshop: How to Properly Implement”
– “Plan Design Workshop: Hot Button Say-on-Pay Issues and More”
– “The Say-on-Pay Lightning Round: 50 Ideas to Implement Now”
In his “Proxy Disclosure Blog,” Mark Borges gives us the latest say-when-on-pay stats: with 514 companies filing their proxies, 46.3% triennial; 4.1% biennial; 44.9% annual; and 4.6% no recommendation.
House Republicans Seek to Repeal/Modify Four Dodd-Frank Provisions
As noted in this Market Watch article, House Republicans have been working on four separate discussion draft bills to repeal or change parts of Dodd-Frank and one draft bill to ease smaller company capital raising that is not Dodd-Frank related (here’s a piece from “The Hill” and a Reuters article). The article lists these 5 topics that would be addressed through the bills:
– No longer make credit-ratings firms liable if their initial ratings turn out to be faulty
– Exempt companies that use derivatives to hedge commercial risk from new requirements that they route their transactions through clearinghouses
– Exempt private-equity fund managers from registering with the SEC
– Overturn requirement requiring companies to disclose the median annual total compensation of all employees and calculate a ratio of how employee compensation compares with that of the CEO
– Increase the offering threshold for companies that don’t need to register with the SEC to $50 million from $5 million
My Final Four Predictions…
Butler over VCU in final, North Carolina and Arizona. And for the record, I have an #11 seed for the Elite 8 too (Gonzaga) and #12 Richmond and #13 Oakland in the Sweet 16 (that’s four double-digit teams for the Sweet 16). And I have Kentucky beating Ohio State to make the Elite 8 also…
I recently got this from an anonymous member (here are related thoughts from Cydney Posner and Marty Lipton):
You may have seen the stories regarding ISS’ recommendation that shareholders withhold against the entire Hewlett-Packard nominating committee for the way new directors were selected. I haven’t seen the ISS report, but the news stories (eg. WSJ article) probably describe it pretty well.
At issue seems to be the fact that five new directors of H-P were identified by an ad hoc committee, which according to H-P’s proxy statement “consisted of the CEO and three non-employee directors, which was formed in November 2010 to assist in identification of new director candidates and to facilitate the process of evaluating those candidates as potential directors.”
ISS and Glass Lewis criticize the addition of the CEO to this committee, since only the independent directors of the Nominating and Governance Committee are supposed to responsible for director nominations. While CEOs play a role in nominations, it does seem unusual to formally include the CEO on the search committee. It likely also didn’t help that, as according to this Bloomberg article, many of the new directors had connections to the CEO. None of those relationships are disclosed in the proxy, as much of it relates to the CEO’s former company.
More on “Should the SEC Be Reorganized? If So, How?”
On Thursday, the SEC released the 263-page Congressional study from the Boston Consulting Group that I blogged about a few weeks ago regarding the SEC’s organization and operations, as required by Section 967 of Dodd-Frank. Here’s Chair Schapiro’s statement on the study. Here’s analysis of the consultant’s report from Vanessa Schoenthaler’s “100 F St. Blog.”
So how did the study address my original question of reorganizing the SEC? The section of the study regarding “reshape of the organization” begins on page 84. As Vanessa notes, there is a lot of “consultant speak” in the study (eg. “layer-by-layer redesign and role chartering exercise”) and I get the sense that this study was halfway done when BCG got hired as they probably make the same types of recommendations to a lot of their clients (who probably all need to make similar changes, so the recommendations fit).
And I don’t really blame BCG for making what seem like general recommendations as I imagine it’s awfully difficult to come in and really learn an organization and make sweeping suggestions within a relatively short period of time. So I read the study with that bias in my mind. And then I admit I’m further biased having been forced to participate in a similar study in a prior life (which was not at the SEC). In that situation, the consultant came in, took up six months of valuable senior management time – and then got paid $20 million to make suggestions that those “in the know” could have made in 15 minutes. I don’t know if that is the case here – but I do have that bias too.
So with so much bias weighing on me, it’s all I could do to scan the 263 pages to see if something leaped out at me that felt “specific” – but nothing jumped out before I decided to go on with my day and leave the real analysis to those out there with real organization management experience. I’m sure the study is fine and could lead to meaningful change, I’m just not the person to tell you what that is…if you are, drop me a line!
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:
– What Needs to be Disclosed About Data Privacy and Security in SEC Filings?
– FINRA Proposes New Private Placement Requirements
– Delaware Supreme Court Reverses Precluding Books & Records Inspections After Commencement of Derivative Litigation
– Delaware Supreme Court Dismisses Claims against PricewaterhouseCoopers
– More on “Facebook’s Raw Deal”
Here are some thoughts from former SEC Chief Accountant Lynn Turner:
Recently, the Council for Institutional Investors submitted this letter to the IASB Trustees. It points out a couple of important issues. First, there is a growing group who are pressing for the accounting standard setters to have to consider financial stability when writing their standards. For example, the IASB and FASB would need to consider if it were more important to have the financial statements actually reflect the economics of the transactions they had entered into (commonly referred to as “representational faithfulness”) or would have to let companies (eg. banks) smooth their earnings in down times and avoid reporting losses so as to try to create an image of financial stability.
In the past, standard setters have attempted to be neutral and not reflect the desires of macro economic policy. That is because when financial statements do not reflect faithfully what a company has done, it results in investors allocating capital to companies that probably should not receive it – and away from those that should – reducing the returns investors can achieve and market efficiency.
The CII letter points out that convergence to a single set of accounting standards cannot occur without consistent, uniform enforcement of the standards, something that does not exist today – and the CII letter also points out that independent funding for the IASB is necessary, again something that does not exist today.
For some historical perspective, consider this article from the 1980s by a retired Deloitte Senior Partner and retired member of the FASB and its predecessor discussing this topic and the implications of what some propose today. It notes how some, such as banks, have been arguing for eliminating neutral accounting standard for as long as accounting has been around in the United States.
Are Auditors Becoming Irrelevant?
Here’s an interesting article from GuruFocus.com entitled “Are Auditors Becoming Irrelevant?” Jim Peterson has been consistently pounding away at the theme that “the audit model is broken” in his “Re:Balance Blog.”
Spencer Stuart’s 25th Annual Board Study
Recently, Spencer Stuart issued its 25th annual study of S&P 500 boards – that certainly is a long time for corporate governance given it’s only become a well-known term for the past decade. Obviously, much has changed over this period – in 1986, the focus was on the “outsider/insider composition” of the board rather than the larger concept of “independence.” The average board size was 15 with a 3:1 ratio of outsiders to insiders. Today the average board size is 11 with a 5:1 ratio of independents to non-independents.
In 1986, only three boards of the 100 reviewed had the chairman/CEO as the sole insider. Today, the chairman/CEO is the only insider on more than half of S&P 500 boards and 40 percent of boards split the chair and CEO roles with 19 percent of chairs truly independent. There are plenty of other interesting stats in the study…
If you haven’t heard of crowdfunding, you probably don’t do venture capital work. As noted in Wikipedia, “crowd funding (sometimes called crowd financing or crowd sourced capital) describes the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the Internet, to support efforts initiated by other people or organizations. Crowdfunding occurs for any variety of purposes, from disaster relief to citizen journalism to artists seeking support from fans, to political campaigns, to funding a startup company or small business.”
Recently, the SBE Council sent this letter to Corp Fin to encourage the SEC to adopt a new “small offering safe harbor/regulation modification” to facilitate crowdfunding. [Pet peeve for me – when someone refers to the SEC as the “Security and Exchange Commission”.]
Finally, this article lists these nine crowding sites:
– What is the Sustainable Investments Institute (Si2)?
– Why did Si2 and As You Sow jointly prepare this new shareholder proposal report?
– What were the report’s major findings?
More on our “Proxy Season Blog”
With the proxy season in full swing, we are posting 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:
– Second Circuit Rules on MD&A Trend Disclosure Requirements
– 2011 Proxy Season Field Guide
– An Early Look at Social Issues Proposals
– More on “A Proxy Is Not A Vote and Why It Matters”
– Governance Proposals Face Various Challenges
In his “IR Web Report,” Dominic Jones reports about how “some in the industry expect the SEC will be forced to modify some of the more onerous detailed tagging requirements and extend the limited liability treatment of filings. However, some relief may also come as new technologies and service providers emerge. The Committee on Corporate Reporting of Financial Executives International (FEI) has written to SEC chair Mary Shapiro expressing concern that the XBRL filing requirements have led to delays in companies releasing reports to investors and compromised the accuracy of company filings.” Time is running short for the 8000 companies that will begin filing XBRL documents with the SEC in July.
Although not entirely clear, it appears that the SEC Staff recently updated its “Staff Interpretations and FAQs Related to Interactive Data Disclosure.” It’s not clear because “last modified” dates have not been affixed to each FAQ (like the Staff’s other CDIs have) and there is a note at bottom of this FAQs page that says it was last modified in December. However, the FAQs were recently reorganized and I do believe B.13 is new – and E.19 and 20 probably are too since they do not have a “formally” tag like the others…
How Law Firms Can Provide XBRL Services
In this podcast, Raul Varela of Rivet Software provides some insight how law firms can be involved in providing XBRL services, including:
– Can law firms provide XBRL services to their clients, just like some provide EDGARization services?
– What kind of options do law firms have to incorporate XBRL into their current service offering?
– What factors should a law firm consider to determine which type of XBRL service is best for them to offer?
The Burden of XBRL Costs on Smaller Companies
As the deadline for mandatory XBRL draws nearer, I am hearing from some smaller companies about how the costs charged by XBRL providers are higher than they expected. David Feldman blogs that those costs can be as high as $4000-8000 per year (which can be 50% of the operating costs for a shell company). Send me your anecdotal stories as I’d like to hear more from folks (I’ll keep them confidential as always unless you give me permission to attribute).
Poll: XBRL Filing Cost Estimates
Please take a moment to participate in this anonymous poll regarding your experience with XBRL filing costs/cost estimates so far:
Yesterday, the SEC’s Office of Chief Accountant and Corp Fin jointly issued Staff Accounting Bulletin No. 114, which revises or rescinds portions of the interpretive guidance included in the codification of the SAB Series. The update is intended to make the relevant interpretive guidance consistent with authoritative accounting guidance issued as part of FASB’s Accounting Standards Codification. The principal changes involve revision or removal of accounting guidance references and other conforming changes to ensure consistency of referencing throughout the SAB Series.
A List of Annual Meeting Dates & Locations: European-Style
Yesterday, I received this list of annual meeting dates and locations for companies located in Europe from an association for investors over there known as “VIP” (Vereinigung Institutionelle Privatanleger). It’s pretty nifty and got me wondering whether such a list exists for US companies that is publicly available? Shoot me an email if you know of one…
SEC’s Proposal: Incentive-Based Compensation for Large Broker-Dealers and Investment Advisors
Last week, the SEC proposed rule regarding incentive compensation for large brokers and investment advisors. Here’s the SEC’s press release – and here’s the proposing release in draft form (since other regulators need to sign off on this, the SEC posted it in draft form, which I believe is a “first”). Here’s Mike Melbinger’s blog on the proposal and we are posting memos in CompensationStandards.com’s “Bonus” Practice Area.
On Friday, Corp Fin issued nine new Compliance and Disclosure Interpretations on a variety of topics – including one on CD&A, two related to Rule 144, two on free writing prospectuses, two on director disclosures and two others – as follows:
In his “Proxy Disclosure Blog,” Mark Borges gives us the latest say-when-on-pay stats: with 365 companies filing their proxies, 49.8% triennial; 4.6% biennial; 40.2% annual; and 5.4% no recommendation.
A 23-Page Proxy Statement? Amazon Proves It Can Be Done
With Form 10-Ks and proxy statements now flowing into the SEC at full throttle, it’s worth pointing out how Amazon has its 2010 proxy statement boiled down to a mere 23 pages – just two pages longer than its ’09 proxy (the company hasn’t filed its ’11 proxy yet). I haven’t read it so I can’t comment on quality (nor would I comment), but it’s an amazing feat in an age of bloated filings. Hat tip to Luke Frutkin of Frost Brown Todd for pointing it out!
Webcast: “3rd Annual Public Company M&A Nuggets”
Tune in tomorrow for the DealLawyers.com webcast – “3rd Annual Public Company M&A Nuggets” – to hear Jim Griffin of Fulbright & Jaworski, Keith Flaum of Dewey & LeBeouf, Hal Leibowitz of WilmerHale and Claudia Simon of Paul Hastings engage in a lightning round of practical advice, covering all the hot M&A issues you are grappling with today, including the latest on tricky deal provisions and the ultimate list of “do’s” and “don’ts” during deal negotiations.
