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 big news – although not surprising if you’ve been paying attention. On Friday, at the ABA Annual Meeting, Corp Fin Director Bill Hinman said that the SEC won’t be delaying the implementation of pay ratio (as always, speaking for himself & not the Commission). Bill also mentioned that Corp Fin would be issuing guidance on the pay ratio rules at some point in the near future. It’s still possible that Congress could delay – or repeal – the pay ratio rule. But I wouldn’t make that bet…
We decided to release these course materials early since so many are grappling now with the type of issues addressed in this “How to” manual. Just like the upcoming “Pay Ratio & Proxy Disclosure Conference” in October will comprehensively address these – and many more – issues. This comprehensive pay ratio event is one that you can’t afford to miss. Also remember that our third pre-conference webcast is September 27th.
Register Now: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days. Register today.
Comment Letters: Corp Fin’s New “SWAT”
Here’s the intro from this blog by Stinson Leonard Street’s Steve Quinlivan:
The Office of the Inspector General has issued an evaluation of the Division of Corporation Finance’s disclosure review and comment process. The report begins with a description of the Division’s comment process. Perhaps the most interesting part is the report notes that the Division is developing a new system to improve and streamline certain aspects of the disclosure review process. The new system is called the System for Workflow Activity Tracking, which is referred to as SWAT.
SWAT will automate certain aspects of the review process such as providing notifications of filing review status to other review team members. In addition, according to Division officials, SWAT will generate a draft comment letter based on comments input into and approved within the system. The reviewer or another designated member of the relevant Assistant Director’s staff will review and revise the draft letter to ensure that it meets the Division’s policies for format, tone, and content. Once the draft letter is approved, a final comment letter will be generated within SWAT.
Small & Emerging Companies: Final Report From SEC’s Advisory Committee
Last week, the SEC’s “Advisory Committee on Small & Emerging Companies” held its 22nd – and final – meeting. At least with that Committee name. Per Chair Clayton’s opening remarks, the 6-year-old Committee is going to morph into the “Small Business Capital Formation Advisory Committee” – and the SEC is also creating a new “Office of the Advocate for Small Business Capital Formation.”
According to this Cooley blog, the Committee recommended that the SEC continue to address three main topics:
1. Facilitating Exempt Offerings: This includes a recommendation for regulatory certainty & clarifying guidance for finders, private placement brokers and platforms. The Committee also wants the “accredited investor” definition to capture as many households as possible, while remaining simple to interpret & apply.
2. Reporting Companies: The Committee recommended that smaller reporting companies get the accommodations afforded to emerging growth companies and that the cap for smaller reporting company status be raised.
In addition, the Committee recognized the benefit of board diversity and recommended that the SEC require companies to disclose not just their diversity policy, but directors’ diverse characteristics – as self-reported by directors.
3. Market Structure: Insufficient liquidity is an ongoing concern for smaller companies. The Committee wants the SEC to move forward with creating a separate secondary market for accredited investors to trade small-cap equities – as well as federal preemption for Tier 2 Reg A issuers that are current in ongoing reports.
The Committee also recommended ongoing analysis of tick size – wider trading increments may encourage more support for small & mid-cap equities and improve liquidity.
Last week, there was a promising development for Regulation A+ – the House passed the “Improving Access to Capital Act,” which would allow reporting companies to use Reg A+. But wait, there’s more! Under this bill, Exchange Act periodic reports would also satisfy the reporting requirements for Tier 2 offerings. Remember, Tier 2 offerings can raise up to $50 million in a 12-month period.
Smaller public companies that are not listed on Nasdaq or the NYSE, and are therefore subject to state securities regulation in respect of their capital raising activities, may find Regulation A+ especially attractive, because an offering under Tier 2 of Regulation A+ is preempted from state securities regulation other than the potential requirement to make a notice filing, consent to service of process, and pay a filing fee.
Meanwhile, Jay Knight & William Lay of Bass Berry have put together this nice set of FAQs on Reg A+ offerings…
Do Audit Tensions Cause “Material Weaknesses”?
A few weeks ago, John blogged about the correlation between late-season auditor dismissals & “bad apples” – companies with restatements, material weaknesses & delistings. This “Audit Analytics” white paper goes further, to suggest that auditor tensions might contribute to the negative events (also see this Compliance Week article).
According to the research, the events associated with higher likelihood of a material weakness in the same year include:
– Changing auditors – and reporting disputes with the former auditor – increases the probability of a material weakness by 12.74%
– Reporting a reissuance restatement or filing two or more financial restatements in the calendar year increases the probability by 19.61%
– Receiving a significant vote against auditor ratification increases the probability by 24.02%
It appears something is seriously amiss here. The study seems to conclude that if the auditors and management get along, the auditors are not near as likely as to report a problem to investors. But if the find themselves at odds, a scorned auditor is willing to tell all. What might be more likely is that companies are firing auditors when there’s a disagreement over a material weakness finding – and the dismissal is reported before filing the annual report.
Survey Results: Compliance Training Still Not a Priority…
As reflected by this 54-page report from Navex Global, despite the flurry of recent scandals, companies aren’t investing in more training – and in some cases, are investing less! Here’s some of the survey’s notables:
– 25% still don’t have a dedicated budget for compliance training (same as last year)
– 93% aren’t even attempting to show a return on investment from training (which helps explain why so little investment is being made)
– Directors are getting trained less than last year – down to 44% compared to 58% last year. Only 17% of new directors are getting training – and only 25% of directors get cybersecurity training.
– Retaliation concerns are lower than expected at 20%
The silver lining is that 31% are actually taking data from their policy/incident management systems – and combining it with training data to create more savvy & efficient programs.
Cyberattacks are a “dime a dozen” these days. But the one that Equifax disclosed last week has an insider trading twist that all corporate lawyers should be aware of. Reportedly, as noted in this LA Times article, three of the credit agency’s senior executives sold company shares – worth nearly $2 million – after the breach was discovered. But before public disclosure of the breach was made! According to the LA Times article, these sales weren’t likely made pursuant to a Rule 10b5-1 plan.
At this point – as the LA Times article notes – we don’t know if these officers were aware of the breach before they made the sales and/or whether the company’s pre-clearance procedures were adequately followed. Keep tuned (and please participate in our new “Blackout Periods Quick Survey.”
In addition, some are questioning why the company – including the board – didn’t correct vulnerabilities after prior breaches. Read more in this blog by Patterson Belknap’s Craig Newman, which notes that the cyberattack disclosure resulted in the immediate filing of this class action complaint (and subsequently, many more – including a securities lawsuit). Also see this NY Times article.
Given that Equifax’s breach of 143 million records might have personally impacted you – and everyone else reading this – this blog notes steps you might take to help avoid identify theft. People are understandably upset that Equifax is offering folks to use their security monitoring service for free in case they were breached. But it’s not quite “free” – in order to do that, you must first waive any rights against Equifax that you might have due to a breach…
NYC Comptroller & Pension Funds Begin New Activist Campaign
As noted in this Reuters article & this Weil Gotshal blog, the NYC Comptroller & the NYC Pension Funds have sent a letter to 151 companies seeking more board diversity – and a board that is more independent & climate-competent.
They want companies to use this standardized board matrix when making board composition disclosure – and they want boards to work with them (and other large shareholders) to identify suitable director nominees. This 2.0 project follows the “Boardroom Accountability Project” launched in 2014. We’re posting memos about this new campaign in our “Investor Policies” Practice Area.
Tomorrow’s Webcast: “Secrets of the Corporate Secretary Department”
Tune in tomorrow for the webcast – “Secrets of the Corporate Secretary Department” – to hear former Pitney Bowes’ Amy Corn, Primerica’s Stacey Geer and Mondelez International’s Carol Ward as they debunk myths on how to run the corporate secretary department, as well as provide oodles of practice pointers – the agenda includes:
– Scheduling Meetings – Approach & Tips (a/k/a The Calendar Challenge)
– Considerations in Planning Board/Committee Meeting Schedule & Agendas
– Allocation of Duties to – & Among – Committees (Using Charters)
– Committee Calendars (a/k/a Still More Calendar Challenges)
– Develop Annual and Monthly Agenda for Board & Committee Meetings
– Presentations vs Discussions vs Information Items
– Logistical Support – Tips & Pitfalls
– Minutes & Meeting Follow-ups
– Technologies – Portals Are Your Friend
We decided to release these course materials early since so many are grappling now with the type of issues addressed in this “How to” manual. Just like the upcoming “Pay Ratio & Proxy Disclosure Conference” in October will comprehensively address these – and many more – issues. This comprehensive pay ratio event is one that you can’t afford to miss. Also remember that our third pre-conference webcast is September 27th.
Register Now: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days. Register today.
“Token Sales” & ICOs: A Primer
We’ve been blogging a bit about the emergence of initial coin offerings, also known as “token sales,” “app coins” and all sort of other terms (here’s our latest blog). Some members have asked how can a currency be a security. Rather than host a webcast on that topic, I think this 32-minute podcast from “a16z” does a great job of making something fairly challenging to understand seem simple. The brief discussion at the 18:29 mark about how governance works when a “protocol” is monetized sets the table for a fascinating debate…
Steven Clifford on “The CEO Pay Machine”
In this 26-minute podcast, former CEO Steven Clifford discusses the problems with CEO pay – and describes his plan about how to fix it (as noted in his new book “The CEO Pay Machine“), including:
1. Why did you write this book?
2. Can you explain the role of boards in setting pay – and how they might be “collectively” delusional?
3. Why might CEOs not be as important as many think they are?
4. Can you get into the topic of “peer groups” and how CEOs may not be portable?
5. How can excessive pay actually be a de-motivator?
6. I’ve always argued that any pay is “pay-for-performance” by definition. How are most P4P arrangements detrimental to a company’s long-term health?
7. How is “shareholder alignment” not the gold standard that many think it is?
8. What is your plan to fix the “CEO Pay Machine”?
This podcast is also posted as part of our “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play. Use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…
Here’s an excerpt from this new study from the “Economic Policy Institute” about relative pay levels:
By this measure, in 2016 CEOs in America’s largest firms made an average of $15.6 million in compensation, or 271 times the annual average pay of the typical worker. While the 2016 CEO-to-worker compensation ratio of 271-to-1 is down from 299-to-1 in 2014 and 286-to-1 in 2015, it is still light years beyond the 20-to-1 ratio in 1965 and the 59-to-1 ratio in 1989. The average CEO in a large firm now earns 5.33 times the annual earnings of the average very-high-wage earner (earner in the top 0.1 percent).
Transcript Now Available: “Pay Ratio Workshop – What You (Really) Need to Do Now”
For those registered for our comprehensive “Pay Ratio & Proxy Disclosure Conference“, we have posted the transcript for our popular webcast: “Pay Ratio Workshop – What You (Really) Need to Do Now.”
The first webcast was on July 20th – and the second webcast was on August 15th; transcripts & audio archives are available for both. The third webcast is on September 27th.
It doesn’t matter whether you can make it to DC – because the October 17-18th Conference is available to watch online by video webcast, live on those specific days or by video archive at your convenience. And in addition to the October Conference, you gain access to three pre-conference webcasts – and this set of “Model Pay Ratio Disclosures” in both PDF & Word format.
Register Now: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days.
In response to my recent blog about “initial coin offerings” (also known as “token sales”), Margaret Rosenfeld of Smith Anderson sent me this interesting note:
1. It’s Real – The crypto-economy is a reality and this is not fringe anymore – but frontier. I can remember when I practiced outside the U.S. before Regulation S was adopted. As practitioners, we had to grapple with how to fit into the SEC regulation regime. There were many cowboys, there were many conservatives and there were many of us right down the middle, which is where Regulation S ended up being.
2. Bankers Are “In” – There are many people taking advantage of the crypto-economy. Bankers that will do an accredited investor ICO for you in exchange for 50% of the raise are using the SEC’s Section 21(a) Report to tell people that the SEC is coming down hard on ICO’s and everything done will be considered a “security.” Why are they promoting this so strongly? Very obvious.
3. Millennials Love It – The driver of the crypto-economy is the millennial generation, which now has purchasing power. They want disruptive, socially conscious ways that differ from their elders.
4. SEC’s Position Is Howey Test Applies – Most of the law firm memos written about the SEC’s Section 21(a) Report note that it didn’t state that every ICO is a securities offering. The Howey test applies. Many digital assets are being sold primarily for non-economic purposes. Note that many of us active in the crypto-economy are working to use consistent nomenclature and call these “Tokens” and “Token Sales” rather than “Coins” and “Initial Coin Offerings.”
By the way, here’s an example of a Token Sale that is trying to do it the right way after the SEC’s Section 21(a) Report.
5. Game Theory Involved – There is a lot of “game theory” involved in this economy. Millennials grew up on gaming.
6. The Securities Law Question – This is the most important question facing the cryptoeconomy right now on the regulator front: If the primary purpose for someone’s purchase of a Token is for a non-investment reason – but the Token’s value can increase or decrease, does that make it a security?
Think of Chuckie Cheese, a millennial breeding ground. Kids put money into machines to play the games. They got tickets. They compete with their friends to get tickets and to see who is the best at the game and has the most tickets at the end. The tickets end up having a value because they can be traded in for cheap trinkets. Are the kids putting the money into the machines to play the games, to compete and be the big winner or for the trinkets (which shows value)? My kids often went home with tickets in their pockets. My son actually stockpiled his tickets.
In the case of tokens, the Buyer is primarily buying for something other than a potential investment. For example, the Buyer may get a right to participate in a future event to vet and approve projects of the company (I purposefully use those words rather than voting). As a company builds a community of tokenholders and grows more successful, those tokens can increase in value. If there is a limited supply of tokens and a demand builds to have those tokens to join the community, a market develops to trade those tokens. So, will the SEC take the view that those tokens, which a buyer bought for a non-investment purpose, is a security because their value can increase?
Think of it this way. I buy a house in a nice community. It has a HOA and I have a vote to decide where HOA money is being spent and other HOA matters. If it is a good HOA, arguably the right I have to vote (my Token) and participate in community activities may be increasing the value of that community and my token. If my house goes up in value, is that a security?
7. Moving Outside the US Probably Doesn’t Solve – Does incorporating your company in the Caymans and stating that “US citizens cannot participate” work? Law firms out there are advising this and allowing securities to be offered. Really? These websites are not blocking ISP addresses in the US. Putting your company offshore and allowing offering materials flow into the US does not mean you are not subject to the US securities laws (uh, Regulation S anyone?).
Individuals may think they are protecting themselves – but if you are physically on the ground in Florida and doing this, I expect the SEC Staff will be calling you.
Six Possible Approaches
AND, the people participating in this economy from the beginning are trying to be disruptive. They want to make changes to the world and create a global currency that helps all. They don’t want to limit things to “accredited investors.” So here are six approaches that I see:
– Structure it as a true utility sale – a Token Sale. It must be a product that has real rights and not a primary purpose for investment. And you must say that clearly and often in your disclosure.
– When you launch your pre-sale, you must already know clearly what those rights are and state them. You can add to those rights, but you must analyze before the pre-sale (which is a right to be converted into the eventual token sold at a discount) whether it is a utility or a security. Pretty obvious but many out there are diving in without doing this and being advised that it is okay.
– Don’t fuss around with the offshore and limits. Pillar did this and found that the limits killed its raise. It restructured. Folks are smart and wonder why are you putting this in the Caymans.
– If it is not a utility, structure is as a security. Do it right. And let’s as a community try to find bankers who will not gouge the companies with crazy fees.
– Right now, 506(c) approach is what is being done for the private placements. This is good. BUT I would like to work with the SEC to see if we can use Form 1-A to come up with a standard ICO approach. I think it could work but the SEC has to be willing to be nimble about review on this.
I have been around a bit – practicing securities law since 1997 – and seen many trends. This is a paradigm shift in the economy. I was in Jakarta a month ago and watched a waiter pull out his phone so that he could buy into an ICO. I got to talking with him and learned that the stability of cyber-currency was a huge attraction for Indonesians.
I am usually a debunker of trends – but I predict in 10 years there will be a global crypto-currency that dominates. Remember how we grew up and there were just three channels on TV! Could you imagine sitting in front of a TV with 300 when you were 10? The future is now. Believe it or not, there are already 10 token/coin offerings that are targeted to be announced at Burning Man at the end of the month…
We’ve blogged several times since the SEC adopted a rule requiring companies to link to exhibits in their filings. My latest blog predicted that we would see guidance from Corp Fin ahead of the September 1st effective date of that rule. At this point, that is starting to look unlikely.
That last blog noted that there are a number of open questions that folks are wondering about. For example, how does one link to an exhibit in a 30-year old registration statement that was filed as one gigantic ASCII file? In this blog, Bass Berry’s Jay Knight notes that he has received an informal answer to this question from the Corp Fin Staff.
Here’s the relevant excerpt from that blog:
Based on recent informal Staff discussions relating to this question, we were instructed that the filer should hyperlink to the ASCII filing containing the exhibit and clearly identify the hyperlinked exhibit that is being incorporated by reference from the ASCII filing.
By way of example, the hyperlink description could look something like this: “Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Form S-1 Registration Statement filed with the SEC on XX XX, XXX) (File No. XXX-XXXXXX).”
Alternatively, the registrant could voluntarily choose to re-file the old exhibit with the present filing.
Recently, John blogged about how Microsoft is one of the early adopters of the FASB’s new revenue recognition standard. Microsoft is also early adopting FASB’s new lease accounting standard.
Just a few weeks ago, Microsoft held a call for with investors to explain the impact of the transition to the new standards – see the presentation slides, transcript and audio archive.
Recently, Liz blogged about an article that indicates that some investors that are considered “passive” may be more on auto-pilot than some would think. Now we have a paper that wants passive funds to be restricted from voting in an effort to preserve the role of informed investors as a force for managerial discipline.
Recently, John blogged about a Rivel Research study that asked institutional investors what they thought of regulatory reform efforts. Now Rivel is conducting a similar study – but this time with companies providing their views. If you participate in this Rivel survey, you get a free copy of the final report…
NYSE Revises Dividend & Stock Distribution Notice Requirements
On Monday, the SEC approved a rule change that amended the NYSE Manual to require listed companies to provide notice to the NYSE at least ten minutes before making any public announcement with respect to a dividend or stock distribution, irrespective of the time of day, even when the notice is outside of NYSE trading hours (rather than limited to the hours of 7:00 A.M. and 4:00 P.M. as in the prior rule). Bring your sleeping bags, NYSE staff: the NYSE indicated that “it intends to have its staff available at all times to review dividend or stock distribution notices immediately upon receipt, regardless of the time or date the notices are received….The Exchange staff will contact a listed company immediately if there is a problem with its notification.”
Transcript: “FCPA Considerations in M&A”
We have posted the transcript for our recent DealLawyers.com webcast: “FCPA Considerations in M&A.”
As we’ve blogged (also see this article), Vanguard recently received a shareholder proposal requesting additional disclosure about its climate change voting record – but Vanguard announced yesterday that it had negotiated the proposal’s withdrawal (also see this interview with Vanguard’s Glenn Booraem).
Here’s the key excerpt from Vanguard’s announcement:
Walden’s request also coincided with our plans for more comprehensive reporting on our Investment Stewardship activities; the first iteration of our expanded reporting will be published later this month, coincident with the annual filing of our proxy voting records. This report will feature deeper discussion of our thinking on climate risk and gender diversity on boards (as two issues on which we expect continuing focus), as well as expanded anecdotal discussion of specific engagements, voting rationale, and vote decisions.
Audit Reports: Comparison of PCAOB & International Standards
Check out this nifty comparison of the PCAOB’s and IAASB’s standards for the audit report. Note that the PCAOB’s standard is still awaiting the SEC’s approval, as noted in this blog…
Tomorrow’s Webcast: “Structuring, Negotiating & Litigating Public Deals – Has the Pendulum Moved?”
Tune in tomorrow for the DealLawyers.com webcast – “Structuring, Negotiating & Litigating Public Deals: Has the Pendulum Moved?” – to hear Greenberg Traurig’s Cliff Neimeth, Richards Layton’s John Zeberkiewicz and Richards Layton’s Mark Gentile analyze how recent Delaware case law and statutory changes are influencing the way that M&A deals are structured, negotiated and litigated.
– Mark Borges, Principal, Compensia
– Keith Higgins, Partner, Ropes & Gray
– Scott Spector, Partner, Fenwick & West
Register Now: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days. Register today.
Conflict Minerals: Many Companies Still Filing Reports
Here’s an excerpt from this blog by Cooley’s Cydney Posner:
Development International has posted its most recent “Conflict Minerals Benchmarking Study,” analyzing the results of filings for the 2016 filing period. The study looked at filings submitted by the 1,153 issuers that had filed conflict minerals disclosures as of July 10, 2017. The number of issuers filing disclosures for 2016 reflected a decline of 5.6% compared to 2015. Most interesting, however, is that, notwithstanding statements from Corp Fin, echoed by the Acting SEC Chair at the time, advising companies that they would not face enforcement if they filed only a Form SD and did not include a conflict minerals report, the vast majority of companies continued to file conflict minerals reports.
PCAOB: The Board’s Half-Full or Half-Empty?
The PCAOB occasionally struggles to have a full complement of its five-member Board – similar to any federal agency – but this time, it’s perhaps taken to an extreme. On Friday, SEC Chair Clayton issued this statement that includes this blurb:
SOX provides that the PCAOB is governed by a Board of five members — two of whom must be certified public accountants, and three of whom must not be — serving for staggered five-year terms. Today, of the five PCAOB Board seats, one is vacant, two are held by members whose terms have expired, and one is held by a member whose term will expire in two months.
PCAOB Chair Jim Doty – whose term has expired – is helping to look for his successor. Jeanette Franzel’s term is also expired, and Steven Harris’s term will end in two months. Lewis Ferguson’s term ends in October 2019. So lots of changes are coming to the PCAOB’s cast of Board members…
