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."
As part of my “Big Legal Minds” podcast series – check out this one-hour podcast, during which Lynn Turner describes his diverse – and fascinating – career, as well as offers his perspectives on the state of things, including:
1. How did you wind up becoming an accountant?
2. How did working as a CFO prepare you to serve as the SEC’s Chief Accountant?
3. What was it like serving as the SEC’s Chief Accountant?
4. What was your role in drafting Sarbanes-Oxley?
5. What was it like working for Glass Lewis?
6. What are the things about the auditing profession that drive you the most crazy?
7. Does the PCAOB enforce its regulations sufficiently?
8. What are the aspects of teaching that you like the most?
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…
Wes Bricker Named SEC’s Interim Chief Accountant
As noted in this press release, the SEC has tapped Wes Bricker to serve as the interim Chief Accountant. Jim Schnurr is recovering from a serious bike accident – so Wes was promoted from Deputy. Meanwhile, Deputy Chief Accountant Brian Croteau is leaving the SEC…
Conflict Minerals: Year Three Brings Better Reporting
This blog from Audit Analytics has some nifty charts – and these kinds of stats:
– By the May 31 deadline, 1,225 Forms SD were filed, representing a decline of about 4% from 2015 and 8% from 2014.
– In 2016, only 19 companies (about 1.8% of all Form SD filers) provided IPSAs. While this is a substantial increase relative to the four IPSAs filed in 2014, the number is still very low. Of the 19 companies to provide an IPSA, seven were “Conflict Free,” five were dual opinions, and seven were “Conflict Undeterminable.”
The effort by 13 prominent business leaders – including Warren Buffett & Jamie Dimon – and large institutional investors to draw up a set of “Commonsense Corporate Governance Principles” is complete. Not an easy thing to do; getting folks to agree on anything these days. Some participants in the process dropped out along the way, including Fidelity and Wellington Asset Management.
As could be expected, most of the principles are high level – and address topics that have been commonsense (and mainstream) for quite some time (although a few of them are emerging ideas, like rotating committee chairs and lead directors – and some are controversial, like limiting dual-class voting). So the real news probably is what is missing from them – as those are the items that shareholders & management seem to still disagree about.
These memos summarize the principles (also see this blog). Here’s a statement from CII that welcomes the principles – but then goes on to note they should have gone further on shareholder rights. See this DealBook piece…and then there’s this “Idiot’s Guide to Mocking ‘Common Sense’“…
SEC Amends ALJ Rules
As noted in these memos posted in our “SEC Enforcement” Practice Area, with the SCOTUS portion of the ALJs saga behind us regarding the SEC’s use of administrative law judges for its enforcement proceedings, the SEC has adopted changes to its rules of practice for administrative proceedings last week. Here’s the intro from this blog by Steve Quinlivan:
The SEC has approved a final rule amending its rules of practice for administrative proceedings. The changes make incremental improvements but fall short of what is necessary to make the proceedings more fair. Among other things, the final rules would adjust the timing of administrative proceedings and give parties additional opportunities to take depositions of witnesses.
Davis Polk’s New Podcast Series! Linda Thomsen on “Directors as SEC Enforcement Targets”
I’m very excited to report that Davis Polk has joined my “Big Legal Minds” with their own podcast series devoted to governance topics! Their series is called “Before the Board” and available on iTunes or by RSS feed. Or it can be accessed on the firm’s site – the 1st episode is a 20-minute interview conducted by Joe Hall with Linda Chatman Thomsen (now with Davis Polk & former SEC Enforcement Chief) about recent trends in SEC enforcement actions involving directors. Awesome!
Recently, I blogged about how it wasn’t clear what Congress would mean if it passed a budget bill that wouldn’t allow the SEC to conduct rulemaking or enforce certain rules. I indicated that the SEC hasn’t been faced with that type of law before. But I have since discovered that other federal agencies have – and that Congress has been playing this game with other agencies more often these days. For example, Congress recently limited the US Consumer Product Safety Commission’s ability to use appropriated funds to proceed with proposed rulemaking.
Without getting too far into the arcane details of federal appropriations law (for that, see this report), agencies are allowed to use appropriated funds only for “the objects for which the appropriations were made, except as otherwise provided by law.” There is a multi-part “purpose test” that is applied. If Congress makes a specific use of funds impermissible, then appropriated funds may not be spent for the prohibited purpose. The risk of spending appropriated funds in violation of Congressional limitations, among other things, is a possible “Antideficiency Act” violation, which must be reported to Congress and the President – and which could result in disciplinary action, civil and possible criminal penalties for the employees responsible for the violation.
An agency subject to this sort of limitation (if enacted and signed into law) must restrict its Staff from spending time on the prohibited activities. Just how far that agency has to go will depend on the exact language of the limitation. If drafted appropriately, the limitation could preclude a government employee from spending any type of time on the prohibited actions. In other words, Congress could prevent an agency’s staff from spending any time on implementation, enforcement or interpretation of a rule – even if that rule has been promulgated in final form (whether or not the effective date has arrived).
The bigger point is that this technique – which is quite controversial & has resulted in Presidential veto threats – is not unique to the SEC. And it’s increasingly being advocated by any number of special interest groups, depending on the agency and the substance. Hat tip to Stephanie Tsacoumis for her help sorting this out!
SEC’s Revolving Door: Will It End If Clinton Wins?
The reform-minded wing of the Democratic Party, led by Senator Elizabeth Warren, takes credit for pushing an affirmation of the classic political adage, “personnel is policy”, into the platform. The platform says it will nominate regulators who aren’t beholden to the industries they regulate, crack down on the revolving door between the private sector and Wall Street, and ban golden parachutes for those taking government jobs.
So does that spell a Wall Street-free administration if Hillary Clinton is elected? Maybe not. Former Commodity Futures Trading Commission chairman Gary Gensler, now the chief financial officer of the Hillary Clinton campaign, is frequently mentioned as a possible Treasury Secretary candidate in a Clinton administration despite being a former executive of Goldman Sachs GS.
Binding Say-on-Pay: Finally Coming to the UK?
You might recall that the concept of non-binding say-on-pay came from across the pond. The British had implemented say-on-pay a decade before the US. More recently, the UK has been close to adopting binding say-on-pay (see this blog that I wrote on CompensationStandards.com) – and even the European Commission proposed it a few years back.
In the wake of Brexit, it looks like the new UK Prime Minister Theresa May is seeking a number of governance reforms – as noted in this excerpt from the Glass Lewis blog:
On July 11 Theresa May launched her subsequently successful campaign to become leader of the Conservative Party and, by extension, Prime Minister of the UK, under the slogan “A country that works for everyone, not just the privileged few”. Having outlined her broader vision for the economy, Ms. May’s speech quickly turned to matters of corporate governance under the themes of “Putting people back in control” and “Getting tough on corporate irresponsibility”.
In detailing her priorities, Ms. May vowed to push for employee representatives on boards and to make shareholder votes on executive remuneration legally binding, moves which are likely intended to address growing inequality and perceived public distrust in the establishment, business and politicians.
Our Executive Pay Conferences: 10% Reduced Rate: We have posted the registration information for our popular conferences – “Tackling Your 2017 Compensation Disclosures: Proxy Disclosure Conference” & “Say-on-Pay Workshop: 13th Annual Executive Compensation Conference” – to be held October 24-25th in Houston and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days.
Discounted Rates – Act by September 9th: 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 special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by September 9th to take advantage of the 10% discount.
Following up on my blog about things to hate about the proxy season, a bunch of anonymous members sent in these things that they hate:
– Colleagues, executives & directors, who had no idea what it took to put the proxy statement together – and thought, gather a little information, make it look presentable and presto, the proxy statement is prepared in a couple of days, what’s the big deal.
– All those folks who complain about having to attend so many internal meetings to discuss the proxy statement and its content when I feel like a person with multiple personalities as I hold endless internal dialogues with myself about content, revisions, positioning, etc. with little to no meaningful internal input (unless you count directors sprucing up their bios). And then, I get to draft it all.
– Having no budget and no personnel & then having other companies create interactive proxy statements (where I am sure they did have a budget for external advisors or lots of internal folks) that are brought up as shining examples of what a proxy statement should look like.
– A gripe about director independence disclosures. Every company does them differently and every company thinks it complies with the rule. And explaining with a straight face why ISS thinks there’s an independence issue and will oppose the re-election of one of your directors because a member of the director’s extended family took an entry level job at a large, multinational professional services firm that the company paid $20K.
– I am in my tenth proxy rodeo here at “Large Corporation Named In My Contact Information.” This is the “Bad Colleague Moan and Groan.” At times like this, I would dearly love to bill by the hour. Along with the many status meetings and reviewing drafts – which I don’t really mind – I have to participate in too-numerous CD&A “drafting sessions” run by a non-lawyer who doesn’t grasp the meaning of the phrase. First of all, he is a pill. He is not a good colleague. His direct reports flee as soon as possible. He is not a good writer. But he “owns” the CD&A, so what can a nice lawyer do? I go. I give it the old college try. These sessions are not collaborative but rather, he tells us to tell him what to do write, so he can turn around take credit for the work put in by the rest of us. He argues over every suggestion. Won’t use commas. I am exhausted before we even begin. I might dress up as him for Halloween.
– Here are things I continue to dislike:
1 – Seasonality of it; so many proxies, in so little time
2 – Outsized and often arbitrary stress it generates for all concerned, and the effect that has on people
3 – Missing family time, being unable to respect commitments outside work and explaining to bemused friends “BECAUSE COMP COMMITTEE PRESENTATION TOMORROW”
4 – Being grossly out of shape for Spring sports
5 – 27# paper, red as a tint (pink!), fonts that don’t align in tables…
More on “5 Reasons Why I Love the Proxy Season”
Following up on my blog about things to love about the proxy season, an anonymous member wrote in some things he loves:
1. Responsibility & opportunity to work with smart people who get it on very high profile projects
2. Camaraderie; it takes “teamwork to make the dream work” and I enjoy being so engaged with clients and internal teams
3. Getting creative within tight boundaries
4. Contributing something tangible to a positive outcome
5. Copy & design that work together (because one without the other is like a meal with stale ingredients)
Before she wrote this interesting blog, Cydney Posner asked me what defunding a rule would actually mean? This relates to the games that the House GOP has played with its version of the budget bill that is necessary for federal agencies to regulate the markets – see my blog on that. Cydney’s blog identifies the provisions that would prevent the SEC from enforcing a host of rules – including a catch-all that would prevent the SEC from conducting any rulemaking at all until after the Inauguration (which arguably could include even providing interps on rules).
Anyway, Cydney asked a great question about what defunding actually means in practice. I inquired with a bunch of old-timers & confirmed that this likely is the first time that the SEC might be faced with such a ridiculous mandate (if it ever gets passed, which is unlikely at this time). Cydney’s blog poses all the right questions that the SEC – and those of us that have to comply with the SEC rules – would need to tackle. For example, do companies still need to comply with a rule that the SEC is prohibited from enforcing – even though the rule is still on the books? And I wonder how CEO/CFO certifications would hold up if a company did decide to flaunt a rule that can’t be enforced. The answer is “nobody knows”…
Meanwhile, the House Financial Service Committee held a hearing on the “Financial Choice Act” bill last week – here’s my blog about that bill…
The Rise of Third-Party Board Evaluations
As part of my “Big Legal Minds” podcast series – check out this 37-minute podcast, during which Kris Veaco & Cherie Sorokin of the Veaco Group explain the nuts & bolts of third-party board evaluations, including:
1. Why should boards be thinking about hiring a third-board evaluator?
2. What are the advantages of using third-parties over using internal personnel?
3. Who delivers the hard news if there is a poorly performing directors?
4. How are the results used?
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…
Tomorrow’s Webcast: “How to Apply Legal Project Management to Deals”
Tune in tomorrow for the DealLawyers.com webcast – “How to Apply Legal Project Management to Deals” – to hear the experts who are on the ABA M&A Task Force for Legal Project Management – Haynes and Boone’s Bill Kleinman, QLex Consulting’s Aileen Leventon and Verrill Dana’s Dennis White – that created a new “Legal Project Management Guidebook” which contains a variety of new tools for deal lawyers – including the “Deal Issues Negotiating Tool” that you can use to identify key deal points. Please print out the “Course Materials” in advance (they’re also available in PowerPoint via a link near the top of this page).
Yesterday, Corp Fin issued a CDI – CDI 103.11 of the Regulation 13D-G CDIs – to clarify that just because someone is disqualified (due to efforts to influence management) from relying on HSR’s “passive investment” exemption doesn’t necessarily preclude that shareholder from being eligible to file a short-form Schedule 13G rather than the longer Schedule 13D. In other words, the HSR test is applied differently than the similar one for 13G/13D. The CDI notes that control intent – as analyzed through the relevant fact & circumstances – is key.
Before providing three examples of this analysis in operation, the CDI notes that the determination might hinge on the subject matter of the shareholder’s discussions with management – with the context in which the discussions occur being “highly relevant.”
Interestingly, this CDI came out on the same day that the DOJ – as noted in these memos posted on DealLawyers.com – announced a record fine of $11 million that ValueAct paid to settle allegations that it had violated the HSR’s “passive investment exemption”…
Model Business Corporation Act: Exposure Draft
Six years in the making, the ABA Corporate Laws Committee has published for comment an “Exposure Draft” of the 2016 Revision of the Model Business Corporation Act. This Revision represents the first top to bottom revision of the Act since publication of the Revised Model Business Corporation Act in over 30 years! Since 1984!
The Revised Act has served as the basis for the organic corporation law in more than 30 jurisdictions, with portions embedded in the corporation law in several others. The 2016 Revision represents a compilation of all of the amendments to the Act since 1984, including several adopted within the last three years following publication for comment in The Business Lawyer, as well as a thorough review and revision of the Act and its Official Comment. The 2016 Revision also incorporates the basic terminology and concepts contained in the Uniform Business Organizations Code, adopted by the Uniform Law Commission in 2011.
Comments are encouraged & must be delivered to Corporate Laws Committee Chair Karl Ege before August 15th…
More Indictments In Proxy Solicitor/ISS Bribery Scandal
This Reuters article provides news about the latest in the bribery scandal between a former ISS staffer and current & former members of Georgeson, a proxy solicitor. The former ISS staffer – the seller of the information – was sentenced a while back. Also see this WSJ article…
Over the past six months, the SEC has issued two different concept releases relating to its disclosure effectiveness project – the first one dealing with Regulation S-X and the second one regarding Regulation S-K. As the Staff continues to analyze the comments submitted on those, the SEC decided yesterday to issue this 318-page proposing release in an effort to update & simplify certain disclosure requirements with the goal of eliminating redundant, overlapping, outdated & superseded requirements. The proposing release also seeks the same type of input for US GAAP. There is a 60-day comment period. Here’s the press release – and this is a “demonstration” version of the proposed redlined rule changes, which is another 193 pages by itself…
This is the piece of the SEC’s disclosure effectiveness project that has stirred up Senator Elizabeth Warren. Here’s an angry letter that Sen. Warren wrote to Chair White last week. I don’t believe that criticism is warranted as the SEC has said all along that the project is likely to elicit more disclosure than reduce it on balance – this just happens to be the part of the project that would reduce the volume of repetitive or useless disclosure. And based on the reactions of members that quickly perused this new proposing release last night, there probably ain’t gonna be as much reduction as one might hope for…
S-K Concept Release: The Comments So Far
Comments are due on the S-K concept release by next Thursday, July 21st – here’s the list of comment letters. Other than 7000 form letters and a few dozen other brief comment letters, there aren’t too many comprehensive comment letters submitted – at least so far. Most comment letters tend to come in at the deadline – or shortly thereafter. Here are a few of the more substantive ones:
The Future of Disclosure: Looking Beyond Disclosure Effectiveness
I found this recent speech by SEC Commissioner Kara Stein to be pretty interesting. Kara looks beyond the ongoing projects to upgrade Edgar & improve disclosure effectiveness in an attempt to further modernize how disclosure is delivered & consumed. Here are some of Kara’s main points – followed by my ten cents in brackets:
– Creation of a “Digital Disclosure Task Force” comprised of investors, analysts, academics, companies and technologists (I’m dubious about this. Sometimes a committee doesn’t create a better soup; it just creates red tape. I think it’s better to just find the right people that truly understand how information is consumed today)
– Conducting “investor testing” rather than the SEC simply relying on comments on its proposals (Hopefully, this is the concept of usability testing – something I have been hammering for two decades.)
– Presenting disclosure in different formats (There is mention of “company profiles” & structured data, as well as different formats to match the different platforms by which disclosure is consumed today – which is already permissible under Example 7 of this 1996 interpretive release. There is no mention of virtual reality.)
It’s great that Kara is pushing this important topic – something that has been bandied about as far back as when browsers first came into our life twenty years ago – because it’s a tough one and is easy for the SEC to push aside as they handle the immediate crises of the day…
Speaking of disclosure effectiveness, here’s a fuller description of the contentious Senate Banking Committee that I blogged about earlier…
In a near record for turnaround time, we have cleaned up & posted the transcript for last week’s popular webcast: “Non-GAAP Disclosures: The SEC Speaks!” The audio archive is available via a link at the top of the transcript…
Don’t forget that the Corp Fin Staff may listen to your earnings call & issue non-GAAP comments – this was happening even before the arrival of the new CDIs. For example, see #4 in this comment letter for a 10-K review last year. This may be worth considering as you prepare your earnings call scripts…
This month marks the 50th anniversary of when President Lyndon Johnson signed the “Freedom of Information Act” into law. Go FOIA! Here’s a piece on FOIA’s history…
Tesla’s Travails: Road Test for FASB’s Materiality Proposals
Here’s a blog by Jack Ciesielski of “The Analyst’s Accounting Observer”:
About a week ago, Fortune’s Carol Loomis wrote the first story about the Tesla autopilot incident that claimed the life of its driver. Tesla CEO Elon Musk famously responded that the incident was “not material to Tesla” and that the story was “BS.” Since then, the Wall Street Journal has reported that the SEC is in the early stages of investigating whether or not the incident was a material fact that should have been disclosed to investors before a $2 billion stock sale.
It’s hard to see how it wasn’t a material factor for investors: if they’re buying Tesla stock, it’s not because Tesla cars have rich Corinthian leather in their seats. They’re buying Tesla stock for its promise of futuristic technology, be it the electrical power or the possibility of being a fully driverless car someday. If there’s an event that surfaces questions about the viability of those technologies, it would only be fair for investors to know that BEFORE they fork over cash for some of that future.
That’s where it is now – and it will be interesting to see where the SEC comes out on this. I can’t help but wonder how this would be disclosed in the footnotes of the financial statements under a pair of exposure drafts issued by the FASB that would grant more discretion to issuers in what they considered to be material matters to report. (My response is here; I wasn’t a fan.)
Given that Tesla already considered it a non-event, it probably wouldn’t be reported even if greater discretion was allowed. That’s why it will be interesting to see where the SEC stands on this – it might point up a difference in views on materiality between the two regulators. The SEC would want the FASB’s materiality concepts to hold up so they could apply them for their own purposes. Again, it’s tough to see how this series of events wouldn’t affect the judgment of a reasonable investor. Maybe the outcome will affect the FASB’s views on what they might create with their materiality proposal.
Yesterday, Corp Fin issued these two new CDIs relating to Form S-4 & A/B exchanges (Exxon Capital deals) – the two new CDIs are duplicative of each other:
1. How does serving in the Air Force serve you well in serving as a professor?
2. What are your favorite aspects of being a professor?
3. Least favorite?
4. How do you decide what to study?
5. What is the process to get a study out the door?
6. How do you feel about the recent changes in the insider trading laws?
7. What presently drives you mad about executive pay?
8. How do you feel about the latest accounting reforms?
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…
– How to Deal With Stock Options Between Signing & Closing
– The Examples
– Preliminary Considerations
– Economics of Option Treatment in Various Transaction Settings
– Section 409A Considerations
– Plan & Award Agreement Considerations
– Compensation Committees: Strategic Role in a Successful M&A Process
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online for the first time. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
Here’s the intro from this blog from Manifest about the “Financial Services and General Government Appropriations Bill” for fiscal year 2017:
The US House of Representatives last week voted on a series of proposals designed to dismantle key aspects of Dodd Frank reforms. After June’s vote to propose regulation of proxy advisors and rescind the conflict minerals rule, the latest intervention on watering down shareholder rights and ESG removes:
– the SEC’s authority to enforce the CEO median pay ratio disclosure rules;
– the ability for the SEC to mandate companies disclose material climate-change risks; and
– the ability for SEC to give shareholders voting by proxy the ability to vote for a mix of of management and opposition board candidates on the same “univeral ballot card”. At present, only shareholders physically present at a meeting are allowed to vote for a mix of candidates from different slates. Shareholders voting by proxy must choose one full slate or another.
The proposals were put forward as “poison pill riders” to a financial-services agencies appropriations bill for the federal budget year beginning October 1. Although the bill was passed and sent to the Senate, the future of the most controversial aspects is uncertain. It is understood that due to the timing of the presidential elections, Republican leaders do not want to pass a budget bill that could lead to a presidential veto that they could not override. A previous vote to reduce SEC funding by $50 million was opposed by Senator John Boozman.
I did a quick Google search & couldn’t find these poison pill riders – but I did find this version of the bill, which would also bar the SEC from rulemaking on political contribution disclosures (Section 625 on page 134)…
Sean McKessy: SEC’s Chief of Whistleblower Office to Leave
On Friday, the SEC announced that its first Chief of its Whisleblower Office – Sean McKessy – will be leaving the SEC. Sean doesn’t yet know his next adventure…
Inline XBRL: Mock Sample
On Friday, the SEC posted a mock filing to illustrate the functionality of its Inline XBRL viewer. Here are FAQs about Inline XBRL…
