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."
Given that its the 20th anniversary of when the SEC delivered this report to Congress about the impact of technology on the securities law, I thought it would be a good time to explain how I became the main “Internet” guru in Corp Fin back in late ’90s. The story involves reviewing the first CD-ROM prospectus as told in this 6-minute podcast.
If you search the term “script” in this amended registration statement for Ameritrade’s 1997 IPO, you will see video was included in a CD-ROM that was attached to the paper prospectus. The CD-ROM was considered part of the prospectus – and the script was appended at the end of the printed prospectus.
I have pictures of the print prospectus & CD-ROM on my fairly lame Pinterest page – and Ameritrade recently posted the video itself! The video features numerous members of senior managers and explains how the company operates. Love the use of the Netscape browser! [Here’s my blog about my video regarding “how to file video on Edgar.”]
As noted in this blog, you might recall David Westenberg telling us that the 1st multimedia prospectus was the 1985 IPO of Kurzweil Music Systems – the printed prospectus was polybagged with an audiocassette. This was before the SEC had guidance on what to do with multimedia, so there were no lessons learned…
1997 Congressional Report: Impact of the Internet on the Securities Laws
Let me briefly explain that report to Congress about the impact of technology on the securities law. It was mandated as part of NSMIA. With Meredith Cross & Mauri Osheroff reviewing my work, I wrote the section relating to the Internet and public companies.
At the time, I printed off hundreds of pages of screen shots involving the first time that a pioneering company did something online. The firsts! I literally knew everything going on with public companies online – because there wasn’t all that much happening. In 1997, even large major companies were building their own websites for the very first time.
The Internet was so new that when I eventually landed at RR Donnelley as a marketing & sales guy (after a stint in-house at Lockheed Martin) – and sold them a website called “RealCorporateLawyer.com.” My title had the term “Internet” in it because that was so novel!
Broc & John: Impact of Technology on Securities Laws
In this 6-minute podcast that John & I taped a while back, we discuss the impact of technology on the securities laws & old dogs.
This podcast is also posted as part of my “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…
I’m sad to note that Bill Carter passed away last week. Bill served in Corp Fin for 30 years, most of them in the Office of Chief Counsel. Perhaps most notable is that Bill was primarily responsible for hiring several generations of Corp Fin Staffers over many years – including me.
Along with Bill Morley, Bill conducted the first – and often only – interviews with possible candidates. I remember my interview – right out of law school – vividly. Those two were cool customers. I had no idea how I fared in the interview. Little did I know that having gone to the University of Maryland Law School made me a “shoo in.”
I was with a bunch of former Staffers last week when we found out about Bill. We all had our Bill stories. For example, Bill apparently wanted to be a veterinarian. Bill was a real class act. When he announced his retirement in the late ’90s, I was working in OCC with Bill – and I tried to set him up with my mom. Bill was precisely the kind of guy that you wanted as your stepfather. Here’s how you can made donations to the American Cancer Society on Bill’s behalf.
SEC Chair Lists His Agenda Priorities
Recently, SEC Chair Jay Clayton testified on the SEC’s fiscal 2018 budget before the Senate Appropriations Subcommittee and listed his priorities. Here’s an excerpt from this Weil Gotshal blog on the topic (also see this Bass Berry blog):
Chair Clayton’s testimony revealed three main concentration areas for fiscal 2018: facilitating capital formation with an emphasis on small business growth; protecting investors through enforcement; and leveraging technology to achieve the SEC’s goals. The Chair indicated the SEC would be improving efficiency through automation, streamlining internal processes and utilizing data throughout the agency. Improvements in efficiency will be necessary to do more with less because the budget calls for small reductions in full time equivalent headcount in most areas (e.g., Enforcement down from budgeted FTE in 2017 of 1362 to 1329; Corporation Finance from 465 to 453, and Office of Compliance Inspections and Examinations (OCIE) from 1083 to 1055).
Transcript: “Public Company Carve-Outs – The Nuggets”
We have posted the transcript of our recent DealLawyers.com webcast: “Public Company Carve-Outs – The Nuggets.”
On Friday, John blogged about Corp Fin’s big announcement that it would extend eligibility for confidential review of draft registration statements to all IPOs – not just emerging growth companies as permitted under the JOBS Act. Since then, Corp Fin has issued these 18 FAQs to flesh out its new position, which commences July 10th…
We have posted the July issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Dazzling Sights of a Conference
Taking my own advice about “how to maximize your conference experience,” here’s the 10 new people I met during this year’s ‘Society for Corporate Governance’ conference:
Back in March, the SEC adopted new rule & form amendments requiring that the exhibit index in registration statements & ’34 Act reports contain links to the exhibits that are listed – & that these filings be made in HTML. We’ve posted in memos in our “Exhibits” Practice Area.
The effective date is delayed for most companies until September 1st – and for smaller reporting companies and non-accelerated filers that use the ASCII format, until September 1, 2018. But companies can comply earlier of course – and some indeed have. Here’s some examples from the most recent group of Form 10-Qs – note the different approaches:
Links to Exhibits: SEC Staff Still Needs to Update Edgar Manual
Interestingly, these companies have experimented by including links to their exhibits voluntarily – without the benefit of an updated Edgar Manual. Some members told me that the updated Manual was expected in mid-May – but we haven’t seen that happen yet (nor do I think we’ll see anything soon). Without the updated Manual, companies are lacking clear instructions on how to do accomplish what the SEC will be expecting…
Per Weil Gotshal’s Howard Dicker, here are other issues that might be addressed by the Staff:
1. Amended Reg S-K Item 601(a)(2) requires an “Exhibit Index” appearing before the signatures. Current rule is immediately preceding the exhibits.
2. For exhibits that have been previously filed, what should companies do about (a) exhibits that were filed in ASCII and (b) exhibits that are not separate files (e.g., pre-2000 when the exhibits and the report were all included in one single ASCII file.
How To Fix “In Progress” Edgar Filings
In the latest issue of Edgar Filer Support’s newsletter, there’s a discussion of how to handle “in progress” Edgar filings. Here are 3 pointers:
1. If your filing shows this status for 4 hours or more, there might be a technical issue with your CIK, tax ID or filing fee.
2. If you see the “in progress” status for over 12 hours, call Edgar Filer Support at 202.551.8900.
3. Your filing will usually show up with the original filing date once the issue is resolved.
I recommend that you watch my quasi-parody below before you watch the SEC’s video. When I fed my buddies their lines before we taped, I didn’t inform them that this was a spoof. They thought I had written the lines as a joke. After we taped – in just one take! – I showed them that the lines were actually drawn from the SEC’s real video. I call my video a “quasi-parody” because I think we showed more teamwork in creating our version. Let us know your feelings about them in the poll below…
This Nixon Peabody memo cracked me up. It describes a criminal insider trading conviction based on one buddy sliding a napkin to his pal at a bar with the name of a company that was going to be acquired (ie. nonpublic material information – “MNPI”)). What cracks me up is the manner in which some folks share MNPI – as if sliding over a napkin solves the problem of his pal placing a huge order that is totally out of character for him!
Which reminds me of this “Cap’n Cashbags video” that parodies another real-life SEC enforcement action involving napkins & insider trading tips. What’s with the napkins!
I’m thinking of compiling a list of “Top 50 Funny Stories of Insider Trading.” Please send me your ideas. I won’t attribute to you unless you give me permission (as always)…
NYSE Turns 225!
Congrats to the NYSE! As noted in this article, the NYSE celebrated 225 years of trading stocks last week — back in 1792, 24 stockbrokers created the exchange when they signed an agreement to trade with each other…
Tom Conaghan on Doing Beer Deals
In this 27-minute podcast, McDermott Will’s Tom Conaghan discusses his career – including:
– How did you wind up becoming a lawyer?
– How did you wind up selecting securities laws?
– What was the most interesting/challenging thing you have worked on?
– How do you think the practice of securities law has changed over the years?
– How did you get into alcohol beverage deals?
This podcast is also posted as part of my “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…
If you’re a regular reader of this blog, you know that nothing excites me more than when someone fools the SEC’s Edgar & makes a fake filing! A little drool perhaps. Plug the term “fake” into the search box of this blog & you’ll see plenty of fake filings coverage.
The latest involves the filing of a fake Schedule TO-C, making it look like Fitbit was in play (here’s an article from back when that happened). The SEC brought a civil case; the DOJ brought a criminal one. And this dude went through all this trouble – and got into so much trouble – for a measly $3k in profit! Dummy.
According to the SEC’s complaint, Robert W. Murray purchased Fitbit call options just minutes before a fake tender offer that he orchestrated was filed on the SEC’s EDGAR system purporting that a company named ABM Capital LTD sought to acquire Fitbit’s outstanding shares at a substantial premium. Fitbit’s stock price temporarily spiked when the tender offer became publicly available on Nov. 10, 2016, and Murray sold all of his options for a profit of approximately $3,100.
The SEC alleges that Murray created an email account under the name of someone he found on the internet, and the email account was used to gain access to the EDGAR system. Murray then allegedly listed that person as the CFO of ABM Capital and used a business address associated with that person in the fake filing. The SEC also alleges that Murray attempted to conceal his identity and actual location at the time of the filing after conducting research into prior SEC cases that highlighted the IP addresses the false filers used to submit forms on EDGAR. According to the SEC’s complaint, it appeared as though the system was being accessed from a different state by using an IP address registered to a company located in Napa, California.
Shareholder Proposals: The Battle Over BRT’s Reform Proposal Begins
Raising the bar for proponents to get their shareholder proposals on the ballot is a theme in the “Financial Choice Act,” as well as the reform package offered by the Business Roundtable last year. The Choice Act’s reform would go beyond what the BRT seeks, as noted in this Bloomberg article. This article also notes how shareholders are asking questions about the BRT proposal this proxy season. Here’s an excerpt:
Anne Sheehan, director of corporate governance at the California State Teachers’ Retirement System (CalSTRS), and Tim Smith, who leads Walden Asset Management’s shareholder engagement, have also sent letters to the CEOs of nearly 50 companies that are members of the roundtable asking where they stand on shareholder proposals. “We do not believe that the Business Roundtable is reflecting the views of companies with a history of meaningful and constructive engagement with investors,” the letters say.
Another letter from Sheehan and other institutional investors with more than $4 trillion in combined assets was sent May 17 to all members of the House of Representatives as they gear up to vote on the bill soon.
I blogged this on our “Proxy Season Blog” on Friday, but it bears repeating: As noted in this Reuters article, a shareholder proposal at Occidental Petroleum – often referred to as “Oxy” – earned 67% support last week even though the company’s board recommended against. This was a “climate risk two-degree scenario analysis” proposal. As discussed in the Reuters article, BlackRock supported the Oxy proposal — its first support for a climate resolution, which bodes well for future climate proposals (but not all of them).
Now, all eyes are on the ExxonMobil vote on this same issue, May 31st in Dallas (where interestingly, ISS also came out against Exxon CEO’s pay package)…
I worry that some companies might be relying on Congress to step in and delay the implementation of the pay ratio rule. That’s looking less likely by the day. So the time that you have to prepare is narrowing.
It’s also far from clear whether the SEC would take action to delay implementation of a rule required by Dodd-Frank. Then-Acting SEC Chair Piwowar’s re-opening of comments earlier this year did not result in an outpouring of complaints from companies. Beyond 13,000 form letters in favor of pay ratio disclosures, the SEC received about 180 comment letters – of which only about 15% were against the rule. In this blog a few months ago, I linked to some of the comment letters from specific companies. And Ning Chiu blogged yesterday about a specific comment letter.
Our upcoming “Proxy Disclosure/Say-on-Pay Conferences” will comprehensively cover what you need to be doing now to implement pay ratio – with 20 panels spread over two days. Many of the panels will be drilling down into pay ratio issues. Act by June 9th for a 20% early bird rate. You can attend in-person in Washington DC – or watch by video online.
I strongly believe that executive pay should be reformed. My own research demonstrates the substantial benefits to firms of treating their workers fairly. However, disclosure of pay ratios may have unintended consequences that actually end up hurting workers. A CEO wishing to improve the ratio may outsource low-paid jobs, hire more part-time than full-time workers, or invest in automation rather than labor. She may also raise workers’ salaries but slash other benefits; importantly, pay is only one dimension of what a firm provides. Research shows that, after salary reaches a (relatively low) level, workers value nonpecuniary factors more highly, such as on-the-job training, flexible working conditions, and opportunities for advancement. Indeed, a high pay ratio can indicate promotion opportunities, which motivates rather than demotivates workers. A snapshot measure of a worker’s current pay is a poor substitute for their career pay within the firm.
The pay ratio is also a misleading statistic because CEOs and workers operate in very different markets, so there is no reason for their pay to be linked — just as a solo singer’s pay bears no relation to a bassist’s pay. This consideration explains why CEO pay has risen much more than worker pay. As an analogy, baseball player Alex Rodriguez was not clearly more talented than Babe Ruth, but he was paid far more because baseball had become a much bigger, more global industry by the time he was playing. Even if the best player is only slightly better than the next-best player at that position, the slight difference can have a huge effect on the team’s fortunes and revenues.
I agree with some of what Alex says – but he also doesn’t understand that boards can take internal pay into consideration as just one factor in their decisionmaking. And instead of comparing pay ratios of different companies – a company should just be looking at its own pay ratio over an extended period (ie. decades).
In fact, one reason why a company should be doing this internal look is that comparing a CEO’s pay package to peers is a primary cause of how we got into this mess in the first place – peer group benchmarking where CEOs got paid in the top quartile for years & years…
Pay Ratio: From the ’77 Archives
Hat tip to Deloitte Consulting’s Mike Kesner for sharing this 1977 WSJ op-ed from Peter Drucker on the notion of pay ratios. Executive pay was considered excessive even back then!
The full House is expected to vote on – and pass – the “Financial Choice Act” as soon as next week. But as John blogged a few weeks ago, it’s not expected that the Senate will act on the Choice Act. As noted in this article from “The Hill” (and this Bloomberg article), Senator Mitch McConnell reiterated the view that Dodd-Frank reform faced long odds in an interview yesterday. And those remarks came before the Special Counsel Mueller bombshell. Events in DC may dramatically slow down legislation in all areas.
So for those expecting pay ratio to be repealed, you might want to still prepare since time is getting tight for reform…
Meanwhile, as noted in this press release, CII and 53 institutional investors with collectively more than $4 trillion in assets sent letters to all members of the House asking them to not vote for the Choice Act…
A Pet Peeve: Use of PR Firms
One of the “bennies” of this job is that I hear from PR firms all day long. Most of the pitches are completely unrelated to the topics covered on our sites. But some do fit – and sometimes I actually take up an offer to work with a client.
But what annoys me is when I get pitched to talk to someone that I already know. I just received an email to talk to three people that I used to work with! Why didn’t they just email me directly? All it takes is a one-sentence email: “Hey dude. How would you like to [blank].” In my opinion, you’re wasting money on PR – just sit down & bang out a dozen emails – should take about 10 minutes.
I pride myself on being one of the more approachable people in our community. That’s the philosophy upon which I built our sites. It just feels odd. Just south of “I’ll have my assistant call your assistant – and we’ll do lunch.” But maybe I’m overreacting. Let me know what you think…
“Deal Tales”: Our New 3-Volume Series
Education by entertainment. This series of three paperback books – “Deal Tales” – teaches the kind of things that you won’t learn at conferences, nor in treatises or firm memos. With the set containing over 600 pages, John Jenkins – a 30-year vet of the deal world – brings his humorous M&A stories to bear.
This series is perfect to help train those fairly new to deals. And it’s also perfect for more experienced practitioners interested in what another vet has to share. John’s wit will keep you coming back for more. Check it out!
Occasionally, we get asked about how someone who’s in-house can make the case to their bosses to obtain more staff for their department. In our “Hiring More Staff” Practice Area, I have posted a six-page PowerPoint that you can modify to make your own business case.
I’ve talked to some in-house members about this – and here are some responses:
– Aggregate the outside legal bills for the subject matter at hand and then estimate the savings (and remember to argue the benefits of internal expertise).
– If trying to add a lawyer, one hard part is how to quantify the intangible benefits of having counsel pro-actively involved in matters, and how to quantify the opportunity cost of having someone else in the company (typically a controller, accountant or even the CFO) tackle the things a lawyer should do – minutes, coordinating meeting materials, Section 16 filings, etc. One general counsel I spoke with also placed value in having less volatile cost fluctuations, which she viewed as flattening out slightly with in-house counsel.
– In my experience, companies bring a lawyer in-house when outside counsel bills get so high that it just makes sense. Outside counsel can often recommend someone to the company – or even one of their lawyers decides to go in-house.
– The typical justification is based on the difference between (a) the avoided cost of outside counsel, usually based on hourly rates, versus (b) the fully-loaded cost (i.e. including benefits and other overhead) of in-house counsel performing the same functions. This does not assume that in-house counsel fully displaces the need for outside counsel – which is not practical for a lot of reasons. For some, there is about a 3-to-1 cost advantage. That doesn’t take into account enterprise risk management, efficiencies and other benefits that might be gained from using in-house counsel who may be more proactively focused broadly on the business than outside counsel who are typically engaged for more narrowly-defined purposes (e.g. a particular transaction or litigation matter).
– ACC has an info-pak titled “Establishing the In-House Law Department: A Guide for an Organization’s First General Counsel.” One relevant discussion in that publication says: “The simplest metric that a first GC can use to demonstrate the law department’s value involves calculating the hourly cost of performing work in-house in order to compare this cost to outside counsel hourly billing rates. ACC’s Value Challenge Tool Kit Resource, “Demonstrating the Law Department’s Value: Calculating In-house Counsel Costs,” provides a template to use and a description of the required calculations necessary for determining this metric. In general, this metric calculates total law department employee expenses (including adjustments for the costs of salaries, benefits, and facilities expenses) and divides by the total number of law department hours worked. The resulting metric will provide a number for the hourly cost of performing work inhouse, which can be compared to the hourly rates charged by outside counsel. This comparison can demonstrate to company management the amount of money that is saved by performing work in-house.”
Nasdaq’s “Regulation Reform” Proposal
Recently, Nasdaq published its own version of a blueprint to modernize the equity markets & streamline regulations. Like other reform proposals, its comprehensive – covering the “Big 3” of: restructuring the regulatory framework; modernizing market structure; and promoting long-termism.
Also see this op-ed published in the WSJ by Nasdaq’s CEO Adena Freidman…
Two Competing Visions of GOP Regulation
As we continue to post memos in our “Regulatory Reform” Practice Area about the Choice Act & other reform efforts, this WSJ article by Ryan Tracy & Andrew Ackerman is interesting. Here’s the intro:
The 2008 financial crisis was a global economic catastrophe that triggered years of new regulations designed to prevent another meltdown. Now that tide of rules is cresting, with officials across the globe talking about pulling back regulations instead of adding new ones. The defenders of the current regime are fighting to save it.
At the heart of the debate are opposing philosophies about free markets, regulation and the role of government. After 2008, the Obama administration in the U.S. pursued an aggressive rule-making path, injecting the government further into bank boardrooms, loan-underwriting decisions and conversations about retirement advice—all in the name of protecting citizens from a financial crisis and risky financial products.
With Republicans in control of the White House and Congress, the U.S. is seeing a resurgence of a different philosophy, one that favors freer markets and is skeptical of Washington’s recent approach to overseeing Wall Street. The government, these critics say, has repeatedly overreached in trying to prevent another crisis. It should take stock of all the work that has been done since the crisis—and consider rolling back many rules that critics say aren’t working as intended or weren’t needed in the first place.
As the debate rages on, here’s a closer look at the two competing visions for financial regulation.
Rein In the Banks: The Need for Discipline
Advocates who support active financial oversight favor an approach that can be summed up this way: Let the markets work, but within significant regulatory constraints to protect society from excesses. Left to their own devices, financiers can cause a lot of trouble, advocates say. Big banks have incentives to seek short-term profits without regard for the long-term consequences of their actions—and the 2008 crisis provided an example of just how much damage they can do if they succumb to those incentives.
Financial firms and consumers lent or borrowed too much, and regulators failed to act on warning signs before this excessive risk-taking spiraled out of control. Worst of all, the government bailed out some firms because it determined they were “too big to fail” without the financial system imploding. The result was a panic so sweeping, it dried up credit for Main Street and threatened the entire economy.
Regulatory hawks concede that government housing policies may have played some role in inflating the housing bubble but say it wasn’t central to the meltdown. Lack of oversight was. So, they argue, the government has an obligation to protect the economy from risky behavior—by banning those behaviors entirely or adopting policies that act like a tax on it, making it less attractive in the short term. Financial firms and their customers may have less freedom under these rules, but these advocates say that the effects of those restrictions pale in comparison to the cost of a huge financial crisis.
The 2010 Dodd-Frank law, approved by a Democratic Congress and signed by Democratic President Barack Obama, expanded the government’s power to react to what it viewed as emerging risks in financial markets. Firms considered “systemically important” to the economy now face tougher rules and more intrusive oversight than smaller competitors. A new regulatory committee can designate any firm for these tougher rules.
The idea is that if these firms pose an outsize risk, they should pay for it though higher regulation, even if those rules are complex. Federal Reserve Chairwoman Janet Yellen has said huge banks must “bear the costs that their failure would impose on others.” If the firms don’t like the regulation, so be it, these policy makers say: They can shrink or split themselves apart.
Tougher rules have meant that regulators take a far more active role in the continuing management of large firms, and to some extent smaller ones as well. The pro-regulation advocates acknowledge that such involvement might be uncomfortable, but say it’s a lot better than burdening taxpayers in the event of future bailouts.
Take the case of dividends. Large banks can no longer decide on their own to raise the dividend they pay to shareholders. They must get permission from the Federal Reserve first as part of their annual stress tests. The Fed justified the restrictions by pointing out that in the lead-up to the 2008 crisis, big banks paid out capital via dividends, then months later needed capital from taxpayers to stay alive. These restrictions are just one example of the myriad extra rules firms must now keep in mind as they make day-to-day business decisions.
In another case, when financial firms started ramping up a practice bank examiners considered dangerous—“leveraged loans” to companies already deep in debt—regulators at the Fed and the Office of the Comptroller of the Currency responded with prescriptive lending standards that they relentlessly enforced. Critics say the regulators should have let firms make their own lending decisions, but the Fed and Office of the Comptroller say that when a type of lending poses a risk to the broader economy, they have an obligation to try to nip it in the bud.
