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."
For the many of you that have registered for our Conferences coming up next Monday, October 24th, we have posted the “Course Materials” (attendees received a special ID/PW yesterday via email that will enable you to access them; note that copies will be available in Houston). The Course Materials are better than ever before – with numerous sets of talking points comprising 180 pages of practical guidance. We don’t serve typical conference fare (ie. regurgitated memos and rule releases); our conference materials consist of originally crafted practical bullets and examples. Our expert speakers certainly have gone the extra mile this year!
Here is some other info:
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take a few hours to post the video archives after the panels are shown live). A prominent link called “Enter the Conference Here” – which will be visible on the home pages of those sites – will take you directly to the Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: Windows Media or Flash Player).
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here are the conference agendas; times are Central.
– How to Earn CLE Online: Please read these “FAQs about Earning CLE” carefully to see if it’s possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see our “CLE Credit By State” list.
– Register Now to Watch Online: There is still time to register for our upcoming pair of executive pay conferences – which starts on Monday, October 24th – to hear Keith Higgins, etc. If you can’t make it to Houston to catch the program in person, you can still watch it by video webcast, either live or by archive. Register now to watch it online.
– Register in Houston to Watch In-Person: Starting on Friday, you will no longer be able to register to attend in Houston through this site – but you can still register to attend when you arrive in Houston! You just need to bring payment with you to the conference and register in-person. Through Thursday, you can still register online to attend in Houston…
For five consecutive years, the number of auditor malpractice claims against one of the Big Four auditors has stood in the single digits. A high of 46 claims was reached in 2002 – reflecting the chaos in the wake of the dot-com bubble – whereas only two claims were filed during each of the years 2014 and 2015. 2015 was also a relatively quiet year for auditor malpractice settlements. The totals of such cases were not enough to break into the Top 50 All Time Accounting Malpractice Settlements since 1991- the threshold of which is now $68 Million, as shown in the chart below.
Here’s an excerpt about restatements:
After six years of relatively steady levels, the total number of Financial Restatement disclosures filed in 2015 dropped by 12.7%. The total number of Re-issuance Restatements and the number of companies restating reached a low of 161 disclosures issued by 141 companies. Similarly, the number of Revision Restatements in 2015 also showed a decline. They dropped to 516 from 605 the year before, and accounted for 76.2% of the restatements disclosed.
The largest negative restatement in 2015 came from Alphabet, Inc. (Google’s parent). The $711 million adjustment reduced Alphabet’s previously reported 2014 net income by roughly 2%. Although the $711 million adjustment was the largest in the past three years, it was still dramatically less than amounts disclosed from 2002 to 2006.
In this post, our second annual “best-of-the-year” review, we’ll look at 2015 filings for some of the highlights of the year: the largest restatement, for example, and the biggest overseas stash. We’ll also look at lengthy comment letter correspondence, give a quick recap of auditor ratification, present some notable non-timely filings, and update disclosure controls.
As John blogged recently, Corp Fin recently announced that it would no longer require companies to include “Tandy letter” representations in their responses to Staff comments. The question that I got from some members was: “I presume Tandy reps are still required for acceleration requests?” The answer is “no, the Staff no longer seeks Tandy language in acceleration requests.” This is consistent with the rationale for no longer requiring the language in comment response letters…
Here’s a blog by Keith Bishop highlighting that he had questioned whether Tandy reps were enforceable several months ago. By the way, these were called “Tandy” representations because of a position that the SEC Staff took in the mid-’70s against the Tandy Corporation…
Tune in tomorrow for the webcast – “Virtual-Only Annual Meetings: Nuts & Bolts” – to hear HP’s Katie Colendich, Broadridge’s Cathy Conlon, Ciber’s Sean Radcliffe, GoPro’s Eve Saltman and the Veaco Group’s Kris Veaco as they describe the recent trend towards virtual-only annual meetings, including numerous first-hand accounts of the processes necessary to pull them off.
Political Contributions: Senator Warren Still Red Hot
As noted in this WSJ article, Senator Elizabeth Warren recently wrote this scathing letter to President Obama about SEC Chair White’s failure to conduct political contribution disclosure rulemaking. I have blogged about this saga before…
Here’s a blog by Kevin LaCroix about Warren’s letter, noting it came on the heels of the SEC announcing record Enforcement activity…
On Wednesday, the SEC proposed shortening the standard settlement cycle for most market transactions from 3 business days after the trade date to just two – known as “T+2” (here’s the 148-page proposing release). A significant number of European countries already use T+2 – & the SEC’s Investor Advisory Committee is already clamoring for T+1!
Technology keeps enabling further reductions in the settlement cycle. I remember back in the day when moving off of “T+5” was a big deal…
More on “Auditor Independence: SEC Settles 1st Violation Caused By Personal Relationships”
Last week, I blogged about the SEC’s first enforcement action against an auditor – EY – for auditor independence violations due to personal relationships. This blog by Davis Polk’s Ning Chiu raises the question about how this impacts the clients of the auditor (also see this blog). Here’s an excerpt:
EY’s policies require that activities with clients to include a “valid business purpose” with expectations that “meaningful business discussions” will take place and forbade gifts or hospitality that are beyond what is customary. The SEC, however, still faulted the audit firm for ignoring various red flags, such as the fact that two senior EY partners noted back in 2012 that the coordinating partner’s expense spending was double that of the next highest individual but did not investigate, and there was no follow-up responses to the issuer’s questions about the expenses it was billed in 2014.
EY already had policies and procedures assessing their employees’ independence from audit clients, which included training and certification and addressed possible familial, employment and financial relationships that are expressly prohibited under SEC rules. As part of the remedial efforts from both cases, additional procedures have been instituted that will require the audit firm’s engagement team members to ask management of an issuer whether they are aware of any “close relationships” between members of the audit engagement team and any individuals employed by “or associated with” the issuer.
Also note the SEC’s Enforcement Director – Andrew Ceresney – recently gave this speech on auditors & auditing.
Speaking of auditor independence, Francine McKenna has been writing about the $5 billion lawsuit against PwC that was settled recently. Here’s an excerpt from this blog:
Right now I’d like to take an opportunity to document some interesting information about how the financial side of the firms, in this case PwC, works. Because the TBW v. PwC case went to trial, and a verdict could have included an assessment of punitive damages, we witnessed a highly illuminating series of motions and partial disclosures about PwC’s finances and how they manage them. This kind of information has not been made public by any Big 4 firm in a potential “tipping point” case for at least thirty years.
As noted in this NY Times article, MarketWatch article and Reuters article, CEO John Stumpf and the (now former) head of community banking for Wells Fargo have agreed to forfeit unvested equity awards to the tune of $41 million and $19 million, respectively (the CEO also agreed to forego bonuses for this year, nor draw any salary while an internal investigation is ongoing). These actions by the board more than effectuate what the company’s clawback policy would have otherwise required. The look of clawbacks going forward, perhaps? Here’s the related Form 8-K that Wells Fargo filed yesterday.
Here’s five notable items:
– The board was able to impose an “unvested equity” clawback that was much easier than clawing back dollars/stock that had already been delivered into the executive’s hands.
– Avoids possible need for the executive to amend past tax returns & file for a credit under Code Section 1341 (which Mike Melbinger has discussed in a few blogs).
– Necessary PR move, as the board was under a lot of pressure to show responsiveness. This came at little immediate cost to the company or the CEO (merely cancelling unvested equity awards for Stumpf). In theory, these forfeited awards could be made up in the future.
– We’ll see whether this situation leads to a restatement for the company. So far, news reports suggest it’s immaterial to the company’s financials. “Restatement” is such a subjective term as the numbers of “formal” restatements – those deemed material enough for an Item 4.02 8-K – are way, way down. In comparison, revision restatements (stealth?) are over 70% of all restatements now.
– Maybe a good lesson for drafting future clawback policies: don’t provide for a clawback triggered only upon a restatement…
Register Now: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a reasonable rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register now.
SEC’s ALJs: SCOTUS Denies Cert
Speaking of Enforcement, the US Supreme Court denied cert a few days ago in the Tilton case that challenged the SEC’s ALJ system…
Here’s a blog that Mike Melbinger recently wrote on CompensationStandards.com: It’s September, welcome back to “school”. As we all begin to prepare for setting 2017 compensation and the 2017 proxy season, among the issues that executives and compensation professionals should consider – and consider raising with compensation committees – is the subtle change ISS made to its policies for executive compensation early this year. This change appeared in the January 2016 FAQs, but that was too late for most companies to do anything about it. However, the change will be fully effective for the upcoming proxy season.
65. Would a legacy employment agreement that is automatically extended (e.g., has an evergreen feature) but is not otherwise amended warrant an adverse vote recommendation if it contains a problematic pay practice?
Automatically renewing/extending agreements (including agreements that do not specify any term) are not considered a best practice, and existence of a problematic practice in such a contract is a concern. However, if an “evergreen” employment agreement is not materially amended in manner contrary to shareholder interests, it will be evaluated on a holistic basis, considering a company’s other compensation practices along with features in the existing agreement.
Companies and committees should be conscious of the fact that ISS is taking a firmer approach to problematic pay practices in “grandfathered” agreements, including “evergreen” agreements with problematic pay practices. In fact, the 2016 U.S. Executive Compensation Policies, Frequently Asked Questions, does not include the phrase “grandfathered.”
Whistleblowers: You May Need to Review Severance & Other Agreements
As part of the settlement, the company agreed to amend its severance agreements to make clear that employees may report possible securities law violations to the SEC and other federal agencies without prior approval and without having to forfeit any resulting whistleblower award, and make reasonable efforts to contact former employees who had executed severance agreements, following the adoption of the whistleblower rules, to notify them that former employees are not prohibited from providing information to the SEC staff or from accepting SEC whistleblower awards. The defendant did not admit or deny the SEC findings in the enforcement action.
The terms of recent settlements should serve as reminder to any company that falls within the SEC’s enforcement jurisdiction (a significantly broader group that just public companies) to consider including provisions in severance and confidentiality agreements to explicitly provide that an employee may communicate with the SEC (and other federal agencies) about potential securities law violations without company approval (notwithstanding other confidentiality and disclosure obligations in the agreement). Likewise, for pre-existing severance and confidentiality agreements with employees, companies should consider broad communications highlighting that any agreements with former employees will not be interpreted as restricting such former employee’s ability to provide information to the SEC or accept SEC whistleblower awards.
Whistleblowers: Sean McKessy Lands at Whistleblower Speciality Firm
Recently, the SEC’s first Chief of its Whistleblower Office – Sean McKessy – announced he was leaving. He has now landed at Phillips & Cohen, a law firm that specializes in helping whistleblowers. Jane Norberg was promoted today to Chief of the SEC’s Whistleblower office – she served as the Deputy under Sean…
As noted in Ning’s blog, the SEC’s Enforcement Director – Andrew Ceresney recently gave this speech about the agency’s whistleblower program – including some interesting data. Ceresney also gave this recent speech on auditors & auditing…
Here’s an excerpt from this “D&O Diary Blog” about how few companies are disclosing cybersecurity & data breach incidents in their SEC filings (which could be a concern for investors – and for D&O underwriters):
According to a September 19, 2016 Wall Street Journal article entitled “Corporate Judgment Call: When to Disclose You’ve Been Hacked,” nothwithstanding the long-standing SEC disclosure guidelines, companies are being hacked more frequently but are not disclosing these incidents in their periodic reports to the SEC. The article cites a recent Audit Analytics report, in which the firm reviewed the filings of nearly 9,000 reporting companies during the period January 2010 to the present. The report found that only 95 of these companies had informed the SEC of a data breach. However, according to the Privacy Rights Clearinghouse, the number of data breaches during that period experienced by all U.S. businesses – including both public and private companies – totaled 2,642.
The most important consideration accounting for this apparent discrepancy is the question of “materiality.” If the company believes that the incident or incidents it experienced are not “material” within relevant reporting obligation standards, then, many companies apparently are concluding that they have no obligation to report the incident.
Significantly, while only a small number of companies have reported cyber incidents in their periodic reports, a greater number are reporting data breaches and other incidents to other regulators. The Journal article cites the Audit Analytics report as stating that about 300 publicly traded U.S. companies have reported cybersecurity incidents to a state regulator or directly to affected consumers over the past six years.
Obviously, whether or not any potentially reportable item is “material” and therefore subject to disclosure is a judgment call of a type that corporate officials have long been called upon to make. The concern is that these types of judgment calls can be subject to hindsight scrutiny. In that regard, it is probably worth noting that to date the SEC has not yet brought a regulatory enforcement action against a company that failed to disclose a cyberincident – but, the Journal article notes, SEC officials “have not ruled out doing so.”
Disclosing “Risks”: Breaking Down Apple’s Tax Uncertainties
This blog by the “SEC Institute” does a great job of analyzing the various ways that Apple discloses the “uncertainties” related to its international tax situation, including risk factors, MD&A and financial statement disclosures…
Tomorrow’s Webcast: “Middle Market Deals – If I Had Only Known”
Tune in tomorrow for the DealLawyers.com webcast – “Middle Market Deals: If I Had Only Known” – to hear Joe Feldman of Joseph Feldman Associates talk about how to best avoid post-closing deal surprises for a mid-market deal. Please print these “Course Materials” in advance.
I had a lot of fun taping this 36-minute podcast with Brink Dickerson of Troutman Sanders. I’m still chuckling over Brink’s response to my query about “least favorite tasks” (starting at the 23:45 mark). I highly encourage you to listen to these podcasts when you take a walk, commute to work, etc. Brink tackles:
1. Where did you grow up?
2. I understand that you may be the only securities lawyer without a customary qualification?
3. How did you end up going to law school?
4. Although you are in Atlanta now, you started practicing in Chicago. How did that come about?
5. What early experiences shaped how you practice law?
6. Were there any particular experiences that impacted how your practice evolved?
7. I understand that you considered joining the SEC at one point. Tell me about that.
8. How do you prepare for a speaking gig?
9. What types of work tasks are your favorite to work on?
10. Least favorite?
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…
Rebuttal: “How the SEC Enabled the Gross Under-Reporting of CEO Pay”
Here’s a rebuttal from a member to the blog that I excerpted from on Friday: About this new study about how to calculate “total compensation” for purposes of the Summary Compensation Table, not only are the authors misstating what goes into the SCT – but that even is of little consequence to their analysis. The grant date value of awards issued during the year (not vested) are reported in the Summary Compensation Table. What these these authors are saying is realized compensation (W-2 pay) is far more valuable than SCT pay:
– For example, they reference data from 2014, which indicated S&P 500 company CEOs’ SCT pay averaged $19.3 million, while average realized compensation was $34.3 million.
– The authors conclude that pay is seriously underreported – and the SEC is aiding and abetting this understatement.
The problem with the paper’s analysis is that realized equity gains are based on awards granted several years ago – and comparing gains realized in the current year to awards granted during the year is largely irrelevant & very misleading (to quote Mark Twain: “there are lies, damn lies and then there are statistics”):
– A careful statistician would have examined the grant date value of the specific awards from prior years and compared it to the actual value of the award; in that way, they would be truly matching grant date and realized values of the same award.
– A likely distortion in their analysis is gains realized in the current year might include several years of prior awards (for example 2-3 years of stock options exercised in a single year), thus one year’s pay reported in the SCT is being compared to multiple years’ awards reported in the gain realized table.
– Stock price performance could have soared since the awards were granted, thus realized values are far more valuable than anticipated ( as are shareholders’ gains); why do the authors believe this is a bad outcome?
– Executives who hold onto stock options until expiration (rather than exercise at vest) are likely to report the largest realized gains; arguably, the gains realized after vesting are investment rather than compensation decisions, and should not be included in the authors’ analysis of grant date versus realized pay.
The SEC’s proposing release on pay-for-performance includes a table that attempts to address the lack of disclosure of realized pay, as equity awards will be reported as they vest – but this wouldn’t completely address the authors’ concerns as they are using the value of options when exercised, not when vested.
As I blogged a few months ago, in the wake of Brexit, the new UK Prime Minister Theresa May is seeking a number of governance reforms – she recently promised that a corporate governance consultation would take place within the next few months. The Prime Minister has promised bold action including “cracking down on excessive corporate pay” and giving employees and customers representation on boards.
Meanwhile, the UK Parliament Business, Innovation & Skills Committee launched its own governance consultation last week. This is what Marty Lipton wrote about that:
In announcing the inquiry, the chairman of the committee stated that principle purposes were to determine whether under existing law, corporate governance encourages companies to achieve long-term prosperity and assures fair treatment of employees. That the inquiry is focused on a stakeholder approach to corporate governance is made clear by the first three questions it poses:
– Is company law sufficiently clear on the roles of directors and non-executive directors, and are those duties the right ones? If not, how should it be amended?
– Is the duty to promote the long-term success of the company clear and enforceable?
– How are the interests of shareholders, current and former employees best balanced?
In addition to combatting short-termism, promoting long-term investment and protecting employees, the inquiry is focusing on executive compensation and its relation to companies long-term performance. Lastly, the inquiry poses the following questions about the composition of boards:
– How should greater diversity of board membership be achieved? What should diversity include, e.g. gender, ethnicity, age sexuality, disability, experience, socio-economic background?
– Should there be worker representation on boards and/or remuneration committees? If so, what form should this take?
While the outcome of the inquiry is not certain, it is clear that corporate governance in the U.K., in the U.S., and in the EU has again become a serious political issue. If companies and investors do not find a mutual path to governance that promotes long-term investment and accommodates employee, customer, supplier and community interests, legislation will result. That legislation may not be to the liking of either companies or investors.
“Consultations” are the UK’s rulemaking process – and they typically involve multiple bodies to accomplish the feat. It’s confusing. For an example, look at this blog leading up to the UK adopting binding say-on-pay where I note dual consultation processes in the House of Commons/House of Lords and the Financial Reporting Council (which looks after the “UK Corporate Governance Code”)…
Yesterday, Corp Fin issued this new “CDI 139.33/126.41” under the Securities Act Section 5/Form S-8 areas – while withdrawing “CDI 239.16/226.15.”
The new CDI deals with whether a company-sponsored 401(k) plan that doesn’t have an employer securities fund alternative might still be deemed to be offering securities that require ’33 Act registration (when the plan permits contributions through a self-directed “brokerage window”). The CDI concludes that “it depends” – whether the securities need to be registered “depends on the extent of the employer company’s involvement.” And the CDI goes on to provide more gloss…
Through a peculiar quirk of Sarbanes-Oxley, OSHA administers Section 806, which provides whistleblower protection for certain parties who report (1) federal mail, wire, bank, or securities fraud, (2) federal law relating to fraud against shareholders, and (3) any rule or regulation of the SEC. The interim OSHA guidance lays out various confidentiality and related provisions in employee settlement agreements that OSHA deems problematic.
Many of the points are derived from the three SEC enforcement cases brought over the past year on this issue. But the OSHA guidance goes a step further and deems problematic any provision that requires a complainant to waive a government whistleblower award. There has been some uncertainty as to the enforceability of such waiver provisions, and the SEC enforcement cases to date do not address the issue directly. While the OSHA guidance is not binding on the SEC, it is still instructive to parties seeking to comply with the SEC whistleblower rules in the absence of any formal guidance from the agency or its staff. Of course, if parties find themselves in a situation in which OSHA has the responsibility to review a settlement agreement, as detailed in the OSHA guidance, we fully expect each of its criteria to apply.
“How the SEC Enabled the Gross Under-Reporting of CEO Pay”
Here’s the intro from this blog entitled “How the SEC Enabled the Gross Under-Reporting of CEO Pay” by “truthout”:
Think it’s scandalous that the average 2014 pay of the CEOs of the 500 biggest companies was 373 times that of the typical worker, as the AFL-CIO reported? You aren’t scandalized enough. Their take home pay, which is reported in the bowels of SEC filings, as opposed to the Summary Compensation Table that the AFL-CIO, along with most analysts and reporters rely on, was a stunning 949 times that of the average worker in 2014.
How did this massive disparity come about, and why is the SEC on the side of such gross understatement?
An important new paper by William Lazonick and Matt Hopkins, which is recapped in detail in The Atlantic, explains this gaping disparity. The culprit is the differences in the approach used to measure stock-related compensation, which is the bulk of top executive pay.
John & I had a lot of fun taping our first “news-like” podcast. This 9-minute podcast is about director compensation & Smithsonian museums – the new African-American museum is opening this weekend (it’s already “sold out” for a few months)! I highly encourage you to listen to these podcasts when you take a walk, commute to work, etc. And as we tape more of these, it’s inevitable we’ll figure out how to be more entertaining…
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…
Transcript: “After Brexit! Current Developments in Capital Raising”
We’ve posted the transcript for our recent webcast: “After Brexit! Current Developments in Capital Raising.”
Corp Fin Updates Small Business Guide for Resource Extraction
