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."
Recently, I’ve blogged about how the SEC Commissioners increasingly seem to be at odds with each other. It doesn’t seem like that trend will turn anytime soon as this NY Times article highlights last week’s unusual dissent from Commissioner Aguilar in an enforcement case. It is rare for a Commissioner to publicly issue a dissenting statement in an enforcement action.
In the dissent, Aguilar described a settlement with the former CFO of Affiliated Computer Services as “a wrist slap at best.” The case against the company was for financial fraud – and compensation was clawed back from the company’s former executives. Interestingly, this is one of the companies charged with options backdating a while back…
Whistleblowers: SEC Gives Internal Auditor $300K Award
Last week, the SEC awarded more than $300k to an internal auditor, the 1st time that the SEC has granted an award for a whistleblower with an audit or compliance function within a company.
Meanwhile, Steve Quinlivan reports about how the SEC is fighting off phony whistleblower submissions…
Spotlight on Vote Counting: Our 10 Question Checklist
Last week, we mailed the August-September Issue of The Corporate Counsel that includes pieces on:
– A Spotlight on Vote Counting: Our 10 Question Checklist
– The Latest on Shareholder Proposal Litigation
– Staff Discusses Shareholder Proposal Trends at 2014 Stakeholder Meeting
– Rule 144 and Shell Companies—Back on Our Wish List
– Rule 506(c) Verification—Recent Guidance from the Staff and from SIFMA
On Friday, the SEC issued its 1st fee advisory for 2015 (along with this methodology). Right now, the filing fee rate for Securities Act registration statements is $128.80 per million (the same rate applies under Sections 13(e) and 14(g)). Under the fee advisory, this rate will dip to $116.20 per million, a 10% drop. Nice to see another reduction after last year’s 6% drop (which combined, almost offset a hefty price hike two years ago).
As noted in the SEC order, the new fees will go into effect on October 1st like the last three years (as mandated by Dodd-Frank) – which is a departure from years before that when the new rate didn’t become effective until five days after the date of enactment of the SEC’s appropriation for the new year – which often was delayed well beyond the October 1st start of the government’s fiscal year as Congress and the President battled over the government’s budget.
Jim Schnurr Tapped as SEC Chief Accountant
Last week, SEC Chair White hired Jim Schnurr as SEC Chief Accountant starting in October. Jim recently retired from Deloitte, where he was Vice Chair and a senior professional practice director. As noted in this Reuters article and FEI Daily, this is an important job as always…
Our September Eminders is Posted!
We have posted the September issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
A few days ago, the SEC adopted new rules for asset-backed issuers governing the disclosure, reporting, and offering process. This is the 1st part of the new rules relating to Regulation AB II. The adopting release is sorta not out yet (it’s out in draft form while pending OMB review). And here are notes from the open meeting from Alston & Bird and MoFo.
In addition, the SEC adopted rules to reform credit rating agencies. The adopting release is posted.
Rebuttal to “Shareholder Proposals: 10 Things About NY Times’ ‘Gadflies’ Column”
After my blog last week that parsed this DealBook column, Professor Bainbridge went through my “10 Things” in this blog and gave his 10 cents on each. He embraces the “gadfly” term for openers…
Something Cool to Talk About at Labor Day BBQs? Cinemagraphs
You gotta check out these animated photos called “cinemagraphs“…
Last week, it was big news that DOJ announced a record $16.7 billion settlement with Bank of America to put its mortgage-backed issues – part of the ’07 financial crash – behind it. This civil action from the DOJ was brought for violations of FIRREA (Financial Institutions Reform, Recovery, and Enforcement Act of 1989).
Dwarfed by that announcement was that the SEC also secured a civil settlement for MD&A violations (press release & complaint). MD&A cases are not brought all that frequently – read about other MD&A enforcement actions on pages 48-52 of our “MD&A Handbook”
This is the BofA case in a nutshell: BofA admitted that it failed to disclose known uncertainties regarding potential increased costs related to mortgage loan repurchase claims stemming from more than $2 trillion in residential mortgage sales from ’04 through ’08 by the bank and certain companies it acquired. In connection with these sales, BofA made contractual representations and warranties about the underlying quality of the mortgage loans and underwriting – in the event that a loan buyer claimed a breach, the bank could be obligated to repurchase the related loan. The known uncertainties included whether Fannie Mae, a mortgage loan purchaser from Bank of America, had changed its repurchase claim practices after being put into conservatorship, the future volume of repurchase claims from Fannie Mae and certain monoline insurance companies that provided credit enhancements on certain mortgage loan sales, and the ultimate resolution of certain claims that Bank of America had reviewed and refused to repurchase but had not been rescinded by the claimants.
Meanwhile, Citigroup’s settlement with the SEC earlier in the month means that it is now a “bad actor” – and perhaps the SEC won’t waive the restrictions this time around as reported by this Reuters article…
The Debate Over Disclosing “Critical Audit Matters” in Audit Reports
This CFO.com article lays out how the PCAOB’s proposal to beef up the audit report is causing concern for both auditors and CFOs…
Here’s a Cooley blog about the PCAOB preparing to finalizing a standard for identifying lead audit engagement partners – and here’s a letter from CII weighing in on that upcoming action…
More on our “Proxy Season Blog”
We continue to post new items regularly on our “Proxy Season Blog” for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– CalPERS Lauds Majority Support for Voting Calculus Proposal
– Recommendation Against Target Directors: Did ISS Get It Right?
– State Street’s Director Tenure Policy: May Result in Votes Against Directors
– Shareholder Proposals: No-Action Letter Stats
– Europe: Proxy Advisors Respond to Shareholder Rights Directive
A few days ago, the NY Times ran this DealBook column – “Grappling With the Cost of Corporate Gadflies” – by Professor Steven Davidoff Solomon. Here are 10 thoughts that I had right off the bat:
1. Never Use the Loaded “Gadfly” Term – It’s politically incorrect to call someone a “gadfly.” Trust me, it is. Even though the definitions of the term don’t appear to be offensive: “A gadfly is a fly that annoys horses and other livestock, usually a horse-fly or a botfly” or “A gadfly is a person who upsets the status quo by posing upsetting or novel questions.”
2. Gilbert Brothers Brought Rule 14a-8 to Life – Davidoff calls Evelyn Y. Davis the “doyenne of this business” (yes, I had to look up “doyenne” in the dictionary) – but it was the Gilbert Brothers who were the first individual proponents that absolutely dominated the shareholder proposal scene before – and for decades longer – than EYD. In addition, they were the ones responsible for the shareholder proposal rule surviving in court against business interests a few years after the SEC adopted the rule (the Transamerica Corporation case in ’46, frequently referred to as the Magna Carta of the rights of shareholders – see page 221 of my “Shareholder Proposal Handbook“). I will be blogging more about the Gilbert Brothers soon.
3. Most Individual Proponents Don’t Like Being Grouped Together – John Gilbert hated being lumped together with EYD in media articles. They didn’t act in concert.
4. Remarkable That Anyone Bought EYD’s “Highlights & Lowlights” – It’s amazing to me that any company would cave to what is essentially blackmail and buy Evelyn Davis’ “Highlights & Lowlights” – which essentially was a publication about herself. But it was a smart investment for anyone that didn’t want EYD to cause trouble at the annual meeting. Did Ford really give her a Jaguar? (I believe the answer is “no” – just that Bill Ford showed up when the car was delivered. But EYD paid full price.) Not sure if companies would be buying EYD’s newsletter today as I think they would get called out for it in this social media age.
5. What Is a “Successful” Shareholder Proposal? – Davidoff presumes that a shareholder proposal is successful only if it receives majority support from shareholders. But I define it much differently. For the proponent who brought the proposal, the definition of success may vary. They merely might want to force the board to consider the issue of the proposal. They actually might want to use a proposal to gain attention so they can obtain a meeting to discuss a more pressing issue (for which they don’t want to publicly disclose).
For many proposals, obtaining support much below the 50% threshold is considered a “success” as it might force the board to act – look what happens if a say-on-pay vote garners 30% support (ie. ISS-mandated consequences kick in). And remember that shareholder proposals are nonbinding. Companies can – and sometimes do – ignore them even if they obtain majority support.
6. Most Recent Court Cases Have Resulted in Losses for Companies – Davidoff brings up the fact that some companies have sued proponents – but he neglects to mention that companies have tended to lose these cases starting this year.
7. $87 Grand for No-Action Requests? Call My Lawyer – The gist of the Davidoff article is that shareholder proposals are costing companies so much money. Of course, that depends on whether a company decides to seek no-action relief from Corp Fin to exclude them. Davidoff throws out that it costs companies $87,000 per proposal for “dealing with them.” The link to the Chamber of Commerce page cited for this number is dead. So I have no idea what the basis for this number is, but I can pretty safely say it’s way off the mark in my experience. To prepare a typical no-action request, research and writing by outside counsel is probably $20k to $30k. It’s cheaper if it’s done in-house in terms of money laid out – but probably not in terms of resources used. [This Activist Investor blog dug and found the source of this number to be a rudimentary survey from ’97.]
8. No-Action Process Ripe for Reform? – Anyways, if the real beef is cost – why not go to the heart of the matter and reduce the costs inherent in the no-action process? One idea is for the SEC to force companies to use a checklist format when seeking exclusion. That would enable research to be much easier, as well as simplify the drafting of the NOA requests. Not to mention it would make it easier for Corp Fin to process them.
9. Do Institutional Investors Support Proposals From Individual Proponents? – It appears that Davidoff didn’t bother to talk to any institutional investors to ask their opinion about individual proponents. If he did, I can tell you that most would support the right of these shareholders to submit proposals (in fact, EYD was known to pick topics that would receive wide support on purpose). And that institutions have supported their proposals many times over the years. Some of them actually get very concerned about Corporate America railing so hard against the right of retail shareholders to voice their opinion, wondering whether they have something to hide. This tone clearly doesn’t fit in this era of shareholder engagement. [Great quote from The Activist Investor blog: We also object to the idea that companies need to “grapple” with its own investors.]
10. Shouldn’t the Topic of the Proposal Matter, Not Who Submitted It? – Yep. Amen. The article piggybacks off this Manhattan Institute study which dissects which individuals submitted the most proposals compared to other individuals. Not that important a topic IMHO.
There are other issues tackled in – and with – the Davidoff piece:
– There is wacky math throughout the Davidoff piece. He says there were 286 no-action requests over a one-year period. And that they cost $87k each. But when he multiplies those numbers, he says the aggregate cost to companies is $90 million? No idea how that works as my calculator comes up with a number that’s less than a third of that.
This Activist Investor blog highlights that the majority vote rate of the three proponents highlighted in the Davidoff column fits squarely within the average range if the timeline is enlarged to ’06-’14 instead of just calculating that figure for the past year.
And Davidoff points out that 71% of no-action requests are granted – but his denominator is no-action requests – not the # of proposals submitted to companies in total, which is more pertinent to the point he is making in that part of the article (which would lower this percentage to the teens).
– Alter egos continue to be a concern of mine. If someone doesn’t meet the minimum ownership standard in the rule – which is pretty low – they shouldn’t be eligible to submit a proposal. This continues to be a battle with Chevedden.
– In this blog, Jim McRitchie has weighed in with a lengthy rebuttal to the Davidoff piece.
Shareholder Proposals: Need to Rethink Resubmission Thresholds?
The Davidoff column plays up the fact that AutoNation has gotten a proposal from Chevedden for 14 years in a row. So apparently his proposals are garnering more than 10% to satisfy the resubmission thresholds in Rule 14a-8(i)(12). Maybe it is time to rethink the parameters of that exclusion basis. But remember that opening up the shareholder proposal to reform will not solely go the way that most companies want.
There is no more highly contested area of rulemaking than the shareholder proposal rule. It’s been over 15 years since the last rulemaking in this area – and now with social media a factor in campaigns, I can see a rulemaking proposal about shareholder proposals garnering half a million comment letters (nearly all of them in favor of changes that benefit shareholders). Not a reason to avoid rulemaking necessarily – I just want to point out that it’s not as easy as you would think. There typically are trade-offs – if companies get a rule change that benefits them; then shareholders will also get a change that benefits them. So be careful what you wish for. There are very few companies that perhaps are unfairly impacted by the existing resubmission thresholds…
Shareholder Proposals: Evelyn Y. Davis Video
I’ve been dribbling out a series of short videos covering narrow aspects of Rule 14a-8 on CorporateAffairs.tv. Plug “shareholder proposals” into the “search” tool and you will see these 7 videos so far. 8 more to come. Not the best quality but I just read a bunch of books during my vacation about how to make better videos. So they will get better after this series of 15 videos runs (I’ve already taped all 15 – just haven’t posted them all yet). Here’s a 2-minute video about EYD that I posted this morning:
A few days ago, the PCAOB issued this 47-page “Staff Consultation Paper” about accounting estimates and fair value measurements. What is a “Staff Consultation Paper”? It appears to be similar to the SEC’s concept release – except it is issued at the Staff level and not by the PCAOB Board itself. I believe this is the first time that the PCAOB has issued this type of thing. Learn more about the paper in the FEI Daily and AccountingWeb.com…
This “Barely Legal Pawn” video featuring Bryan Cranston, Aaron Paul and Julia Louis-Dreyfus is hilarious!
Broadridge’s 2014 Proxy Season Stats
Last week, Broadridge released its 2014 proxy season stats. Most of the stats were in line with recent years, except mobile voting grew to over 1.5 million shareholders, a 300% increase over since ’12 and 70% from ’13…
Kevin LaCroix opens this blog with “In the latest fiscal year report of the SEC Office of the Whistleblower, the agency reported that as of the end of the 2013 fiscal year it had received a total of 6,573 whistleblower reports since the the Dodd-Frank whistleblower program’s inception. These figures include not only domestic whistleblower reports but also reports from a total of sixty-eight different countries. During fiscal year 2013, there were 404 whistleblower reports from outside the U.S. representing nearly 12% of all reports during the year. Clearly, whistleblower reports from non-U.S. countries have represented a significant part of the whistleblower program, and foreign whistleblowers have been drawn to the program.” He then goes on to discuss a new 2nd Circuit appellate court decision – Liu Meng-Lin v. Siemens AG – that found that Dodd-Frank’s whistleblower anti-retaliation protections do not apply extraterritorially. We are posting memos about that case in our “Whistleblowers” Practice Area…
Have you ever wanted to swear when drafting disclosure? I have. So exactly when is it acceptable to write f%ck&ng a$$h@le in a prospectus? Perhaps when you are offering shares to raise production funds for a particular type of feature film – see this example from “Lydia Slotnick Unplugged.” Profanity sometimes also appears in the SEC’s administrative proceedings, like this example.
This Bloomberg article notes that the use of profanity in earnings calls varies with economic conditions…
In-House: What You Need to Know Before You Start Negotiating
Tying in the webcast transcript I just posted – see below – this blog has useful information for those going in-house or those already in-house that want a raise. Here’s an excerpt:
They forget one crucial distinction between the law firm and in-house environment. While associates and partners are an integral part of the law firm’s “profit centers” and help generate millions of dollars in revenues on behalf of the firm, when they transition in-house, they become “part of the overhead.” In-house counsels, with very few exceptions in the licensing area, do not generate revenues. At best, they protect a company from liability. Unlike a law firm that sees the hiring of associates and partners as a means to increase productivity and revenues, companies must determine whether hiring an attorney in-house is cost effective, in both the short and long run. The value proposition changes drastically, and therefore, so does the compensation.
While in-house salaries have traditionally been more negotiable than law firm salaries – whether or not the firms operate under a lock-step compensation plan – there are real limits to what can be negotiated. That said, while larger companies may be able to offer more attractive packages – they typically offer little in terms of negotiations. Larger organizations have to worry about setting precedent with other employees. Smaller organizations, on the other hand, may have more flexibility, especially with respect to intangibles.
Transcript: “Career Advice: The In-House Perspective”
We have posted the transcript for the recent webcast: “Career Advice: The In-House Perspective.”
I have posted the results of our survey regarding CEO succession planning, repeated below (compare to a similar survey from ’11):
1. Our company:
– Has a written CEO succession plan in a formal document or policy – 14%
– Has a written CEO succession plan in the form of a board resolution or as part of the board minutes – 19%
– Has a CEO succession plan, but its not memorialized in writing – 62%
– Doesn’t have a CEO succession plan – 5%
2. Our company:
– Reviews and updates the CEO succession plan at least annually – 57%
– Reviews and updates the CEO succession plan on occasion – 38%
– Doesn’t review the CEO succession plan (but it does have one) – 0%
– Doesn’t have a CEO succession plan – 5%
Congress & OpenSecrets: You Can Now Track Your Senator’s Trades!
This Market Watch article talks about a website – OpenSecrets.org – that allows anyone to follow the stock trades of members of Congress (Senate trades aren’t online yet on this site – but they are online as part of a Senate site that doesn’t have great navigation). The online database draw on the disclosures now required under the STOCK Act. Pretty scary in this age of little privacy. And definitely will be fodder for the mass media and tweeting members of the public alike…
There are 5 jobs currently listed on our “Job Board.” Don’t forget to post your own details if you are looking for a job. Your identity is anonymous as listed on the Job Board…
Cap’n Cashbags: ALS Ice Bucket Challenge
In this 15-second video, Cap’n Cashbags – a CEO – tries to avoid the ALS Ice Bucket Challenge:
In the course of my blog entitled “Shareholder Engagement: Should Directors Be Politicians? 10 Things to Consider,” I noted that 1000 companies recently received a letter from SDX asking boards to “consider adopting and clearly articulating a policy for shareholder-director engagement, whether through adoption of the SDX Protocol or otherwise.”
Although the letter doesn’t specifically ask for a response, a number of members have asked what other companies are doing with the letter. Here’s a poll to address that query:
Regulation A+ Comment Letters: 9 Senators Weigh In
Recently, I blogged about some humor in comment letters sent in on the SEC’s Regulation A+ proposal. Now, a group of 9 Senators sent in their own comment letter, expressing concern about state regulator preemption. Not a new theme as this blog notes a comment letter along the same lines from 20 members of the House. Here are all the comments so far on this proposal.
Meanwhile, the latest state government – Kansas – is in trouble for their disclosures regarding their pension plan. As this SEC enforcement release states, one reason the Kansas plan is underfunded is that the state has not made the annual required payments into the plan, leaving it just 59% funded. In the SEC release, it notes an “outside accountant” advised the government they did not need to make the disclosures – but the SEC release fails to report who that accountant was (see paragraphs 7 and 8).
Delaware Supreme Court: Strine Wears New Robes – News at 11
I chuckled to see this article from DelawareOnline about the new style of judicial robe that Chief Justice Strine is rocking. Legal fashion is “in” baby! Justice of a different stripe?
Let’s not forget that SCOTUS Chief Justice Rehnquist upped the ante in judicial attire when he became Chief Justice in 1994. A local Gilbert & Sullivan troupe – Victorian Lyric Opera Company in Rockville – takes credit for the inspiration as a few months before Rehnquist’s duds were introduced as they had judges robes in “Trial by Jury” that were almost identical.
Perhaps as a reaction to the SEC’s SLB 20 – or Commissioner Gallagher’s continuing war of words against the current state of proxy advisors – yesterday, ISS announced the upcoming launch of a new “data verification portal” for equity-based compensation plans up for shareholder approval. ISS also released a set of 19 FAQs to help explain this new portal (pet peeve: if you create a set of FAQs, please number them).
Here are 10 things to know:
1. Portal officially launches September 8th
2. Data verification only for equity comp plan approval (in other words, this is different than what S&P 500 companies now enjoy for their entire ballot; see FAQ #14)
3. All US companies can participate
4. Companies have to register for the portal before they can use it (do so soon since it takes 5-7 business days for ISS to process and you might forget if you procrastinate)
5. Only companies can use the portal; not their advisors
6. Can’t verify data until after proxy statement is filed with the SEC
7. After proxy filed, ISS will send an alert saying the data verification window is open (alert will come roughly within 12 business days after the proxy filing)
8. Once alert is sent, companies only have 2 business days to verify the data and request changes. Repeat: just two business days!
9. ISS will send responses to request for changes within 5 business days of the request
10. Review list of 27 questions in Appendix A of the FAQs to comprehend what ISS is looking for in equity comp plans
Pay-for-Performance Disclosure: CII Sends Recommendations to SEC
Last week, CII sent this letter to Corp Fin Director Keith Higgins providing recommendations on the implementation of Section 953(a) of Dodd Frank. The letter provides these recommendations:
– Do not make changes to the existing Summary Compensation Table.
– Provide a graphic representation of pay for performance for the CEO individually and the named executive officers in the aggregate.
– Provide, at a minimum, a five-year comparison of executive compensation to performance.
– The required disclosure, at a minimum, should compare executive compensation to total shareholder return.
– Disclosure about executive compensation actually paid should not exclude any components of pay.
Also see the new comment letter from the AFL-CIO on this topic. It was the first comment letter posted regarding the 3 rulemakings the executive pay area that have not yet been proposed in 10 months. Here’s all of those comment letters…
Transcript: “Executive Pay Basics: The In-House Perspective”
We have posted the transcript for the recent CompensationStandards.com webcast: “Executive Pay Basics: The In-House Perspective.” This was a tremendous program – perfect for anyone who needs some comfort if they are relatively new to being in-house or isn’t very well steeped in a wide scope of pay issues…
