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."
Each year about this time, I get questions from members about whether they need to update their D&O questionnaire (remember our “D&O Questionnaire Handbook“). That’s a tough question to answer so far this year as there hasn’t been a consensus yet about how to handle the PCAOB’s new Audit Standard #18 regarding related-party transactions (see our memos on AS #18).
From what I hear, the Big 4 auditors have not been forthcoming – or consistent if they are – about what they need from their clients in response to AS #18. In some cases, it appears that an independent auditor might ask a client to have D&O questionnaires elicit a list of all the members of an insider’s immediate family on the questionnaire so that the auditor can then search for transactions with those individuals. For info on how “related party” is defined for purposes of AS #18, see #8536 in our “Q&A Forum.” Give me your feedback – and stay tuned for more…
Nasdaq has released a bunch of “Top 10″ lists, such as the “Top 10 Frequently Asked Questions” and “10 Most Popular Staff Interpretations & Listing Council Decisions”…
SCOTUS & Insider Trading: Newman Stands!
As noted in this Paul Weiss memo, on the first day of the US Supreme Court’s 2015-16 term, SCOTUS declined take up the government’s petition for writ of certiorari in United States v. Newman, a landmark decision that dismissed indictments against two insider trading defendants. By declining to hear the petition, the Supreme Court ensures that the Second Circuit’s decision in Newman will remain binding in the Second Circuit and influential across the country as it has already had a significant impact on the law of insider trading.
Two of Newman’s holdings are particularly important: first, that the government must prove that a remote tippee knew or should have known of the personal benefit received by a tipper in exchange for disclosing nonpublic information; and second, that the benefits alleged by the government in Newman were not sufficient to support a conviction, as they were not sufficiently “consequential.”
Webcast: “Transaction Insurance as a M&A Strategic Tool”
Tune in tomorrow for the DealLawyers.com webcast – “Transaction Insurance as a M&A Strategic Tool” – to hear Dechert’s Markus Bolsinger, Aon Transaction Solutions’s Matt Heinz, Pepper Hamilton’s Jim Epstein, Norton Rose Fulbright’s Scarlet McNellie and Haynes and Boone’s George Wang discuss all the “in’s & out’s” as insurance in M&A transactions has gained in popularity.
As noted in this Schulte Roth memo, the SEC & Amnesty International filed petitions (here’s the SEC’s petition – and here’s Amnesty International’s) on Friday seeking an en banc rehearing of the panel decision from August in which a divided three-judge panel of the US Court of Appeals for the DC Circuit reaffirmed its April 2014 majority decision that the requirement under the SEC’s rule to describe products as having “not been found to be DRC conflict free” is compelled speech that violates the First Amendment (see more in this Cooley blog). Here’s a key excerpt from the memo:
We think it is likely that the Conflict Minerals Rule litigation will continue for some time still, which is likely to preserve the status quo for at least the current compliance period (i.e., calendar year 2015 and the related filing due on May 31, 2016). Accordingly, registrants — and their direct and indirect suppliers — must continue with their conflict minerals compliance and traceability initiatives.
Resource Extraction: SEC Proposes to Adopt Rules Within 270 Days
As we blogged about a few weeks ago, the US District Court for the District of Massachusetts – in Oxfam America v. SEC – held that the delay in implementing the resource extraction rules violated the Administrative Procedures Act and ordered the SEC to file an expedited schedule for rule adoption within 30 days. On Friday, the SEC filed this notice with the court that it “proposes” to adopt a new rule within 270 days, June 27th 2016 (although the notice lays out how this will be difficult to accomplish for a variety of reasons).
Tune in tomorrow for the webcast – “Regulation A/A+: Developing Market Practices” – to hear Morrison & Foerster’s Marty Dunn & Dave Lynn, as well as Greenberg Traurig’s Jean Harris and Locke Lord’s Stan Keller, as they look at Regulation A/A+’s developing market practices and discuss how these new offering alternatives stack up against traditional offering techniques.
A new study, reported in the WSJ, showed that corporate insiders consistently beat the market in their companies’ shares in the four days preceding 8-K filings, the period that the researchers called the “8-K trading gap.” The study also showed that, when insiders engage in open market purchases –relatively unusual transactions for insiders—during that trading gap, insiders “are correct about the directional impact of the 8-K filing more often than not — and that the probability that this finding is the product of random chance is virtually zero.”
EDGAR Filer Support’s New Publication: “The Filer Report”
I was excited to see how the SEC’s EDGAR Filer Support Teams have begun to put out a new periodic publication – entitled “The Filer Report.” You will receive it by email if you sign up for “Email Updates” in the bottom right side of the SEC’s home page – and then you can customize your preferences to receive only those types of updates that you want from the SEC. If you’re only interested in “The Filer Report,” select only that box – the last one – under the “Industry Guidance and Information” section.
The inaugural issue of “The Filer Support” is not online. But it included all sorts of nuggets for those that deal with EDGAR regularly. For example, there was a link to this list of peak volumes for Edgar filings. There were reminders about including your CIK on filing fee payments – and how to send a single FedWire for multiple CIKs.
There also was a note that the “Information for EDGAR Filers” page is in the process of being redesigned – I’m crossing my fingers that it will include a blog that would notify us when EDGAR is down – or hiccups are occurring for certain types of filings – as well as notify us when those problems have been resolved…
EDGAR Modernization: Some Near-Term Suggestions
Following up on the news about the SEC’s EDGAR modernization project that I previously blogged about, a 9-page letter was jointly submitted to the SEC by the Business Roundtable, CAQ, FEI and CCMC in response to the SEC’s disclosure effectiveness project. The letter focuses specifically on EDGAR modernization – and includes suggestions to improve EDGAR in the near-term. A detailed two-phase approach is suggested that could be achieved before other EDGAR enhancements and SEC rulemaking. Here’s an excerpt from the letter:
We developed a two-phase approach to our recommendations for near-term improvement to the filings area of the SEC website. The first phase focuses on consolidating and updating current search features by improving their visibility and organization. The second phase focuses on additional enhancements to EDGAR, which include improvements to the company search page, filings detail screen, output functionality, and interactive data functionality.
While the letter suggests a number of changes to EDGAR’s search function, my favorite suggestion relates to finding previously-filed exhibits. Here’s the suggestion:
Registrants usually include a list of previously filed exhibits in periodic reports. However, it is challenging to find the exhibit that is referenced. The enhanced functionality should allow users to access all exhibits from one screen rather than have to go into individual filings. Also, a greater ability to use a search engine across the exhibits would be helpful.
What do I think of the new database? I’m not sure anyone needed it. But it doesn’t hurt as now proposing releases are listed together with adopting releases – although it doesn’t include Commissioner statements like the PCAOB does (and of course, this combo is available on our site along with firm memos, etc. in our “Practice Areas“).
As a psuedo-web designer myself, I can’t help but notice some minor stuff that I would change (some of the text is in light colors – hard to read; font sizes are a wee bit small too). And the layout highlights how some of the SEC’s releases have really LONG names (eg. “Final Rule Purchase of Certain Debt Securities by Business and Industrial Development Companies Relying on an Investment Company Act Exemption”). I almost always shorten the names of the SEC’s releases when I post them on our site.
Broadridge Updates ProxyVote.com!
A key to better usability of the proxy framework is the voting machines. That’s why I was excited to see that Broadridge has updated its ProxyVote.com to make it easier for folks to vote. Here’s an excerpt from the press release:
Examples include a capability to vote additional ballots, with fewer steps, for other shares held in current meetings, and to easily view additional communications from issuers, including video and virtual shareholder meetings. As part of this initiative, Broadridge also redesigned the content and format of the email messages that initiate proxy communications with shareholders. Broker-dealers can also easily add their branding and custom messages.
Our October Eminders is Posted!
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Last week, the SEC proposed amendments to how it’s administrative tribunals work in an attempt to quell the firestorm over its use of ALJs (although, as this blog notes, the proposal does little to address constitutional challenges to the SEC’s use of ALJs). We’re posting memos about the proposal in our “SEC Enforcement” Practice Area. The proposals include three primary changes to the SEC’s Rules of Practice:
– Adjust the timing of administrative proceedings, including by extending the time before a hearing occurs in appropriate cases
– Permit parties to take depositions of witnesses as part of discovery
– Require parties in administrative proceedings to submit filings and serve each other electronically, and to redact certain sensitive personal information from those filings
Keith Bishop wrote this interesting blog about the proposal entitled “When Is Medical Information Considered Sensitive?” And this proposal comes a few days after, as noted in this blog, the Second Circuit handed the SEC another defeat – forcing the SEC to stay the administrative proceeding against well-known fund manager Lynn Tilton. It’s hard to tell why though, as the Second Circuit’s order is one sentence long.
Meanwhile, this Bloomberg article summarizes a study that claims that the SEC’s Enforcement Division is padding its “success” numbers…
SEC Enforcement & the Electronic Communications Privacy Act
In this blog, David Smyth lays out how the pending “Electronic Communications Privacy Act” could impede Enforcement’s ability to obtain emails not used through normal corporate channels…
The UK’s Modern Slavery Act Applies to Many Companies Doing Biz in the UK!
As noted in this Cooley memo, the UK has adopted the Modern Slavery Act 2015, which imposes specific transparency requirements on many companies doing business in the UK, regardless of where the company is incorporated! There is a threshold for doing business in the UK that triggers its applicability. I don’t know if the number is settled yet, but I’ve heard £36 million – so it will certainly apply to many larger companies. That is quite a broad sweep!
As noted in this press release, ISS has released the results of its annual policy survey (here’s the full summary of the results). Here’s a few highlights (and more from Ning’s blog):
1. Proxy access – Survey responses fell close to the ISS policy adopted last year as “large majorities” of investors believe ISS should issue negative recommendations if management adopts a higher-than-3% requirement – with 90% investors seeking negative recommendation if the threshold exceeds 5% or if the ownership requirement exceeds 3 years. Large majorities (ranging from 68-80%) believe negative recommendations are warranted if the aggregation limit is fewer than 20 shareholders – or if a cap on nominees is less than 20% of the existing board size.
2. Overboarding – For directors who are not CEOs at the company, 34% of investors believe that a 4-directorship limit is appropriate; 18% believe that 5 is acceptable, and 20% believe that 6 is fine (which is the status quo for ISS policy). 16% said “it depends/other” suggesting a 3-directorship limit – and 12% didn’t support any limit. For CEOs at the company, 48% of investors believe that 2 seats (including the CEO’s own company) is an appropriate limit, while 32% believe that 3 seats is fine (the status quo for ISS policy) – and 12% didn’t support any limit.
As we continue to post oodles of memos on the DOJ’s “Yates memo,” we get word from this Mintz Levin blog about some commentary from Assistant AG Leslie Caldwell that fleshes it out. Here’s an excerpt:
As recently reported in our Health Law & Policy Matters blog, a central tenet of the Yates memo is that in order to qualify for cooperation credit, a corporation must identify all individuals involved in the wrongdoing and provide all relevant evidence implicating those individuals to the government. AAG Caldwell explained “This means that companies seeking cooperation credit must affirmatively work to identify and discover relevant information about culpable individuals through independent, thorough investigations. Companies cannot just disclose facts relating to general corporate misconduct and withhold facts about the responsible individuals. And internal investigations cannot end with a conclusion of corporate liability, while stopping short of identifying those who committed the criminal conduct.“
Expanding upon DAG Yates’ remarks last week at NYU Law School, AAG Caldwell stated “We recognize, however, that a company cannot provide what it does not have. And we understand that some investigations – despite their thoroughness – will not bear fruit. Where a company truly is unable to identify the culpable individuals following an appropriately tailored and thorough investigation, but provides the government with the relevant facts and otherwise assists us in obtaining evidence, the company will be eligible for cooperation credit. We will make efforts to credit, not penalize, diligent investigations. On the flip side, we will carefully scrutinize and test a company’s claims that it could not identify or uncover evidence regarding the culpable individuals, particularly if we are able to do so ourselves.” AAG Caldwell also explicitly recognized that DOJ can sometimes obtain evidence that a corporation cannot.
To the extent that practitioners read the Yates memo as erecting an impossible hurdle to cooperation credit, AGG Caldwell’s remarks indicate that each case will be evaluated on its facts. AAG Caldwell made at least one other point worth noting: the Yates memo does not change existing DOJ policy regarding the attorney client privilege and work product protection. Prosecutors will not be seeking corporate waiver of these protections.
Poll: Will Change in NYSE’s “Material News” Policy Impact Timing of Quarterly Earnings?
Dave blogged a few weeks back about the NYSE’s new “material information” policy (see the memos in our “NYSE Guidance” Practice Area). In response to this query in our “Q&A Forum” – “Is it expected that companies will begin to announce quarterly earnings before 7 am to avoid the NYSE requesting that the announcement be delayed until after market or recommending a halt in trading if earnings differ significantly from market expectations?” – I am running this anonymous poll:
On Friday, the SEC posted this 35-page “request for comment” about Regulation S-X for entities other than a registrant, including acquired companies, unconsolidated subsidiaries, guarantors & more (as this blog notes, there are four Reg S-X requirements being focused upon). This is the first step in the SEC’s disclosure effectiveness project. The comment period runs 60 days. And no, I don’t know why they didn’t call this a “concept release”…
As noted in this blog, the SEC’s Advisory Committee on Small & Emerging Companies has come up with three written recommendations, one seeks to enlarge the smaller company universe by revising the threshold to become one to a $250 million float…
Consultant Independence: What to Make of the Korn Ferry/Hay Group Merger?
In the wake of last week’s merger announcement, a reporter sent me this question: “What do you make of Korn Ferry’s acquisition? Does this raise independence issues under Dodd-Frank for companies that might pay a substantial amount to Korn Ferry for CEO, board search etc. who also consult with Hay Group on executive compensation? Most companies use the same consultant for executive and director compensation consulting. Is there extra due diligence required by the comp committee if they use the same firm for both services? Additional disclosure? Will boards have to start reporting how much they pay for executive and board searches?”
Here’s an answer that I received from Mark Borges:
I wouldn’t think board recruiting would trip a comp consultant’s independence. As you know, advisor “independence” must be considered, but there’s no requirement that a Compensation Committee use an independent advisor. So the assessment is really all about whether, in the opinion of the Compensation Committee, the highlighted relationship with the company impairs independence.
As you note, there is, on its face, a possible independence issue where a company retains Korn Ferry for specific services (such as a CEO, director search) while the Compensation Committee also uses the Hay Group for its executive compensation consulting. It’s really no different than the issue that the major HR firms faced a few years ago when they had to choose between their retirement and health care consulting services and their executive compensation consulting services. They chose the former because it presented a larger revenue stream and spun off their consulting businesses.
You can argue that an organization such as Korn Ferry is large enough to establish an effective barrier between its general services and its consulting business to avoid actual conflict situations (and, I suspect, that’s exactly what they will do). However, for many companies, it’s the appearance rather than the reality of a conflict which caused them to shy away from relationships with companies where they may have been receiving both consulting and non-consulting services. This may, in fact, happen here.
While the rules don’t prevent anyone from using Korn Ferry for their general services and Hay Group for their compensation consulting, it’s probably going to lead to a little extra diligence to justify the arrangement to be able to respond to inquiries about independence.
SEC Girds for Government Shutdown
Even though it now looks likely that Congress will not shut down the government – they have three days to avoid that result – the SEC has posted a note on its home page that it will remain “open and operational” if there is a lapse in appropriations on October 1st. If a shutdown is extended, the SEC has posted this 19-page operations plan if this “worst case” scenario happens. The operations plan doesn’t cover a partial shutdown if the SEC still has some funds available, which is what happened in 2013…
As noted in this article, there is a movement afoot for directors to annually declare what is “material” for the company. This campaign – calling for a “Statement of Significant Audiences and Materiality” – has been launched by Harvard’s Bob Eccles & Tim Youmans through this paper, and is in conjunction with the UN Global Compact, UN PRI, UN Environment Programme Finance Initiative and the American Bar Association’s Task Force on Sustainable Development. A first example was issued by Aegon. Here’s an excerpt from the article:
Given that a board may have obligations to multiple stakeholders or audiences, we suggest that a company’s board of directors issue an annual “Statement of Significant Audiences and Materiality” (The Statement), which identifies the company’s significant audiences — and, by implication, those that are not significant. These audiences may include shareholders, bondholders, employees, or NGOs representing a variety of environmental, social, and governance (ESG) issues.
Only a page in length, The Statement enables the board to clearly and concisely communicate which issues are material to which of its audiences, and over what time frame. The benefits are clear for corporate reporting on material issues in financial or integrated reports: If, for example, a board decides that the only significant audience is short-term shareholders, then the only issues that are material are those that affect short-term financial results. Alternatively, a board may decide that the most significant audience is the company’s employees, and that it will cut dividends before approving layoffs.
Climate Change: More Pressure on Companies Belonging to Chamber
Recently, this letter – signed by over 60 investors – was sent to 50 companies who serve as board members or prominent company members of the US Chamber of Commerce urging them to act in the climate change area. Many of the companies receiving the letters already have strong policies addressing climate change, but this group of investors want to ensure those strong policies aren’t undermined by the Chamber lobbying against the EPA & the Clean Power Plan.
More on “Shareholder Approval – SEC Seeks Comment on NYSE’s “Early Stage Companies” Proposal”
Last month, I blogged about the SEC seeking comment on a NYSE proposal regarding the shareholder approval rules regarding “early stage” companies. I forgot to blog about the novelty of how the SEC went about this – here’s an excerpt from this blog by Cooley’s Cydney Posner that fills that bill:
This certainly appears to be an unusual action by the SEC. The SEC had received no comments on the proposal either when it was first published or when the comment period was extended. But because of the legal and policy issues involved, the SEC instituted “disapproval proceedings” to encourage comments to inform the SEC’s analysis. Notwithstanding the title, the Order contends that the proceedings do not mean that the SEC has reached any conclusions.
Rather, the SEC is seeking input on whether the proposal is consistent with the Exchange Act requirement that the rules of the securities exchanges be designed to, among other things, prevent fraud and manipulation, promote just and equitable principles of trade and protect investors and the public interest. The proposal would allow shares to be issued, even at a discount, to related parties, without shareholder approval, and the SEC questions whether audit committee approval of these types of potentially dilutive transactions should suffice.
Cydney subsequently has noted that the NYSE is the only one who has commented – on its own proposal!
Last week, the SEC brought an enforcement action in the perks/related-person/internal controls area – In the Matter of MusclePharm Corporation – about how a company paid the spa tab for its CEO and his spouse, etc. The CEO is an ex-NFL football player as noted in this Bloomberg article. Good tabloid stuff to read upon my return.
But buried in the enforcement action is a claim that we don’t often see that made my head spin:
Retention of Signature Pages for Commission Filings
23. MSLP failed to maintain signed signature pages for most of its filings with the Commission from 2010 through 2013 as required under Rule 302 of Regulation S-T. MSLP failed to receive or maintain any manually signed signature pages prior to December 2012. After December 2012, while MSLP had made over 23 Commission filings, MSLP only received or maintained original signature pages for all signatories on eight filings.
Holy cow! I bet quite a few people aren’t even aware of the requirement under Rule 302 of Regulation S-T to retain signature pages for five years. And I’m certain no one would expect the SEC’s Enforcement Division to care! In his Section16.net Blog, Alan Dye noted last week:
While the Rule 302 violation may never have been raised if the SEC hadn’t concluded that more serious violations occurred, the fact that the SEC considered the 302 violation to be worthy of a separate claim suggests that the SEC is serious about the rule’s record retention requirement. Compliance personnel should, therefore, make sure that they are keeping manually signed copies of insiders’ Section 16(a) reports and, equally important, are storing the copies in a way that allows for easy location and retrieval by both current and future employees.
Retaining Manually Signed Signature Pages: Four Issues to Consider
This SEC enforcement case might be opening a can of worms. I doubt that many have been keeping a manually-signed original signature pages – if what that means is a “signed in ink or pencil” original – for their SEC filings, particularly for Section 16 filings. For a Form 4, it’s just too easy for the attorney-in-fact to file electronically without signing anything. Here’s some fodder to consider:
1. We haven’t saved a signed copy for the past five years, what should we do?
2. Can a scanned image of the manually signed document satisfy the five-year retention requirement?
3. How about filings by the company (eg. 10-K or registration statement) where the director or officers faxes or emails in signature pages – does the company need to follow-up to obtain originals?
4. How about where the manual signature is captured electronically in the first place (e.g., from a tablet or some board portals)?
The Mary Jo “Dump Truck”
As noted in this blog, the group that had plastered the DC subway system with posters asking Mary Jo White to be fired as SEC Chair is now using a mobile billboard over the next three days as part of their campaign. Send me a pic if you spot it!
Tomorrow’s Webcast: “Whistleblowers – What Companies Are Doing Now”
Tune in tomorrow for the webcast – “Whistleblowers: What Companies Are Doing Now” – to hear the Chief of the SEC’s Office of the Whistleblower, Sean McKessy – as well as Goodwin Procter’s Jennifer Chunias, DLA Piper’s Deborah Meshulam and K&L Gates’ Shanda Hastings, as they explore the latest developments at the SEC – and the issues that companies should consider when adopting changes to their whistleblower policies and procedures.
Ahead of our webcast in two days that features the SEC’s Chief of the Office of Whistleblower – Sean McKessy – the Second Circuit agreed with the SEC in a split decision that a Dodd-Frank whistleblower did not have to make a report directly to the SEC to bring a Dodd-Frank retaliation claim. As noted in this Cooley blog, the three-judge panel in Berman v. Neo@Ogilvy LLC reversed and remanded a decision of the SDNY, which had dismissed a claim for retaliation by a former employee on the basis that Dodd-Frank’s whistleblower protections apply only to employees discharged for reporting violations to the SEC and not to employees who report violations only internally. This 2nd Circuit decision splits with the 5th Circuit – and as noted in this blog, it may be headed for the US Supreme Court…
Meanwhile, the SEC has posted its amicus curiae brief filed in Vincent Beacom v. Oracle America, a Eighth Circuit case about the interpretation of the anti-retaliation protection provisions to whistleblowers who report violations of securities laws internally without making a separate report to the SEC.
Yates Memo: D&O Insurance Considerations
Following up on my blog yesterday about the DOJ’s Yates memo, here’s a Mintz Levin blog about questions you should be asking now concerning your D&O insurance…
Tomorrow’s Webcast: “Evolution of M&A Executive Pay Arrangements”
Tune in tomorrow for the DealLawyers.com webcast – “Evolution of M&A Executive Pay Arrangements” – to hear Morgan Lewis’ Jeanie Cogill, Sullivan & Cromwell’s Matt Friestedt, Cravath’s Eric Hilfers and Wachtell Lipton’s Andrea Wahlquist cover the latest about executive compensation arrangements in deals.
Just got a mailer to promote a teleconference on “Holiday Party Law.” Too soon? Like putting up holiday decorations in mid-September…
Farewell to Sir Adrian Cadbury
I’m sad to note the recent passing of corporate governance statesman and change-agent, Sir Adrian Cadbury. In addition to being an Olympic rower, Sir Adrian was a warm and generous thought leader and many of his ideas for corporate governance were reflected in the UK’s “Cadbury Code” first adopted in the early 1990s – which became a template for governance reform all over the world. Here’s a farewell note from the ICGN:
Adrian is known to many of us as a global governance pioneer having chaired the development of the world’s first ‘corporate’ governance code. He drew upon a deep understanding of business ethics throughout his work – as chairman of the family firm Cadbury, which he developed into an international brand whilst remaining firmly rooted in his Quaker values. What is perhaps not quite so well known is that Adrian also sowed the seeds of investor stewardship. The inaugural UK Code set out principles of good governance practices for corporate boards but also made clear reference to the responsibilities of investors to enter into dialogue with companies and make considered use of their votes. This dialogue is the essence of what ICGN stands for today – to inspire good governance practices for companies and investors alike in their mutual responsibility to protect and generate sustainable value.
