We’ve previously blogged about legislators’ efforts to pin-down SEC Chair Jay Clayton’s views on whether the agency would permit corporate bylaws compelling investors to arbitrate securities fraud claims. Last month, Rep. Carolyn Maloney & 25 other Democratic lawmakers became the latest to take a crack at Clayton – asking him to reaffirm that “forced arbitration provisions in the corporate governance documents of public companies harms the public interest and violates the anti-waiver provisions of the federal securities laws.”
That didn’t happen. Instead, last week, she received this letter from the Chair in response. Here’s what he said would be the SEC’s approach if an IPO company sought to include such a provision in its charter:
It is my view that if we are presented with this issue in the context of a registered IPO of a U.S. company, I would expect that any decision would involve Commission action (and not be made through delegated authority) and that the Commission would give the issue full consideration in a measured and deliberative manner. Such a review would take into account various considerations, including developments in applicable law and any other relevant considerations. I have reiterated these views and sought to appropriately frame this issue and my preference for such a process in my public statements.
He added that he had “not formed a definitive view” on whether mandatory arbitration is appropriate in the context of an IPO for a U.S. company, but that the issue is “not a priority” for him. Well, Rep. Maloney, it was a good try. Also see this Kevin LaCroix blog…
D&O Insurance: Do You Have What You Need?
Ahead of our upcoming webcast on D&O insurance, this Simpson Thacher memo reviews the key provisions of a D&O policy in order to help companies assess whether they have the coverages that they need. Here’s an excerpt on the complexities of coverage for SEC & other governmental investigations:
Courts continue to uphold D&O insurers’ declination of coverage for investigations by the SEC and other government investigations that do not target a specific director or officer but seek documents and interviews without specifying the alleged wrongdoing that is the focus of the investigation. Such investigations may not constitute a “Claim” under a D&O policy. Thus, there may be no coverage for the costs of complying with subpoenas and other investigative efforts.
Certain D&O policies offer provisions that afford at least some coverage. For example, policies will provide “Pre-Claim” coverage or “Noticed Investigations” coverage. Essentially, if an investigation does not constitute a Claim but later develops into a Claim, coverage will relate back to the point at which the investigation began, subject to certain limitations. Thus, the policyholder can keep track of its costs in connection with an investigation and if it turns into a Claim, those costs may be covered.
Some D&O policies provide coverage for complying with SEC subpoenas and other similar investigations, e.g., in the form of “Inquiry Coverage,” which may reimburse the insured for certain costs associated with preparing and accompanying directors, officers or other covered individuals who are called in for an interview by a government agency pursuing an investigation.
Legal Proceedings Disclosure: What If You’re the Plaintiff?
Most securities lawyers are accustomed to thinking about disclosure of legal proceedings from the perspective of a defendant. This “SEC Institute” blog “flips the script” by discussing how ASC 450 & Item 103 of S-K apply when you’re a plaintiff in a lawsuit. This excerpt reviews Item 103’s requirements:
The language “material pending legal proceedings” does not limit the disclosure to just defendant actions. And, to reinforce this conclusion, the SEC has issued the following Compliance and Disclosure Interpretation:
Section 205. Item 103 — Legal Proceedings
205.01 The bank subsidiary of a one bank holding company initiates a lawsuit to collect a debt that exceeds 10% of the current assets of the bank and its holding company parent. Due to the unusual size of the debt, Item 103 requires disclosure of the lawsuit, even though the collection of debts is a normal incident of the bank’s business. [July 3, 2008]
This CDI also illustrates the application of the 10% disclosure threshold and an interesting interpretation about normal course of business issues. And, it clearly shows that Legal Proceedings disclosure should include material lawsuits in which the company is a plaintiff as well as a defendant.
When the SEC issued new cybersecurity disclosure guidance earlier this year, you just knew that a “message” enforcement action couldn’t be too far behind. Yesterday, the SEC delivered that message to Altaba (f/k/a Yahoo!) – in the form of this consent order & accompanying $35 million civil monetary penalty.
The action focused on alleged disclosure shortcomings associated with the company’s massive 2014 cyber breach. Here’s an excerpt from the SEC’s press release:
The SEC’s order finds that when Yahoo filed several quarterly and annual reports during the two-year period following the breach, the company failed to disclose the breach or its potential business impact and legal implications. Instead, the company’s SEC filings stated that it faced only the risk of, and negative effects that might flow from, data breaches.
In addition, the SEC’s order found that Yahoo did not share information regarding the breach with its auditors or outside counsel in order to assess the company’s disclosure obligations in its public filings. Finally, the SEC’s order finds that Yahoo failed to maintain disclosure controls and procedures designed to ensure that reports from Yahoo’s information security team concerning cyber breaches, or the risk of such breaches, were properly and timely assessed for potential disclosure.
Without admitting or denying the SEC’s allegations, the company consented to an order requiring it to cease and desist from further violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, Section 13(a) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-11, 13a-13, and 13a-15.
In addition to alleged shortcomings in Yahoo!’s periodic reports, the order calls out this Form 8-K filing announcing its deal with Verizon as another source of disclosure violations. The order notes that despite the company’s awareness of the breach, the stock purchase agreement filed with that 8-K contained affirmative reps & warranties by Yahoo! denying any significant data breaches.
The SEC’s use of reps & warranties as a premise for disclosure violations hearkens back to the 2005 Titan 21(a) report. After Titan, it became customary to include disclaimers clarifying that reps & warranties weren’t intended to be affirmative statements of fact. Those disclaimers were prominently displayed in Yahoo!’s 8-K, but they didn’t make much of an impression on the Division of Enforcement. We’re posting the related memos in our “Cybersecurity” Practice Area (see this Cooley blog – and D&O Diary blog).
Auditor’s Reports: What Can KAMs Tell Us About CAMs?
As companies & auditors wrestle with the implications of the PCAOB’s new audit report standard, companies in the rest of the world are assessing the early returns from changes to their audit reports that were adopted by the IAASB in 2014.
The IAASB’s new format required auditors to include a discussion of “key audit matters” – known as “KAMs” – in their audit reports. KAMs are matters communicated to those charged with governance that, in the auditor’s professional judgment, were of most significance in the audit. That’s a pretty close analog of the PCAOB’s “critical audit matters” – known as “CAMs” – which are matters communicated to the audit committee that relate to material accounts or disclosures and involve complex auditor judgment.
Concern have been expressed about the PCAOB’s new standard – and the CAMs concept in particular. Most critics have suggested that auditors will result to defensive disclosures of CAMs and will use “boilerplate” to protect themselves. But this recent report from the Association of Chartered Certified Accountants says that these concerns may be overblown. Here’s an except:
While these concerns are reasonable, ACCA’s research and roundtable feedback did not indicate that either of them is actually happening. And while there was evidence of common innovations among audit firm networks, ACCA has not seen widespread sharing of standardised wording. While the US legal environment is distinct from that of other countries, ACCA nevertheless believes that there are grounds to be optimistic about how the publication of critical audit matters will affect the financial reporting supply chain.
Tomorrow’s Webcast: “The Latest on ICOs/Token Deals”
Tune in tomorrow for the webcast – “The Latest on Token Deals” – to hear Pillsbury Winthrop’s Daniel Budofsky, Morrison & Foerster’s Susan Gault-Brown, Hunton Andrews Kurth’s Scott Kimpel and Smith Anderson’s Margaret Rosenfeld review the mechanics of ICOs/token deals as well as the latest trends & developments.
This “Corporate Secretary” article says that – for the first time in a generation – E&S shareholder proposals topped governance proposals during 2017. This excerpt provides some of the details:
In 2017, E&S proposals accounted for 54 percent of all ESG proposals in the US, whereas in 2012 they accounted for 39 percent, according to data ISS Corporate Solutions has shared with Corporate Secretary. The number of E&S proposals has increased by 41 percent during this five-year period, while fewer governance proposals have been filed.
‘The dip in governance resolutions likely reflects the fact that reforms such as proxy access, board declassification and repealing poison pills have taken hold across a wide swath of US companies, and so fewer companies are being targeted for governance reforms,’ Leah Rozin, principal ESG adviser at ISS Corporate Solutions, tells Corporate Secretary. ‘By contrast, environmental and social resolutions continue to climb, and we expect this trend to continue into 2018.’
Interestingly, the article also reports that efforts to engage with proponents may be faltering – for the first time in more than a decade, fewer than 20% of proposals were withdrawn.
NY’s Martin Act in the Crosshairs
I don’t think I’m sticking my neck out when I say that you’d be hard pressed to find a more intimidating statute than New York’s Martin Act. The Martin Act cuts a very wide path. Over the years, it has been used by New York authorities in a number of high profile criminal and civil actions – and was the lever that Eliot Spitzer used to extract the global research settlement from major Wall Street firms.
What makes the statute so intimidating it that it weds severe remedies – including criminal penalties – to very broad “fraud” provisions that don’t require scienter to impose criminal liability (at least in the case of misdemeanors). As a bonus, it’s also one of the most dense & turgid pieces of legislative prose that you’ll find this side of the Tax Code. As the WSJ once observed, the statute’s first sentence laying out the NY AG’s investigative authority is a “40-line, 535-word preamble, sweeping in all manner of fraudulent behavior.”
Now it looks like the Martin Act is drawing fire from some pretty big guns. This NYT article says that – after recently settling his own long-running Martin Act battle with the NY AG – former AIG CEO Hank Greenberg has set his sites on the statute:
“I care about my country and I care about the rule of law,” Mr. Greenberg, a veteran of World War II and the Korean War, said in a feisty interview this past week. “I fought two wars for my country. This is another war.”
The Martin Act, a 1921 New York securities law that predates the creation of the federal Securities and Exchange Commission, grants sweeping powers exceeding even those of Washington. In addition to bringing the case against Mr. Greenberg, the former New York attorney general Eliot Spitzer used the act to force investment banks to curb abuses related to how analysts overhyped stocks and to crack down on illegal trading in the mutual fund industry.
Although there have been attempts to limit the Martin Act in the past, Mr. Greenberg’s bid is gaining traction. He is working alongside a powerful ally, the U.S. Chamber of Commerce, and has the backing of Wall Street Journal editorial page. And he has had a warm relationship with President Trump.
Legislation that would declaw the Martin Act was recently introduced by Rep. Tom MacArthur (R-NJ) – a former AIG exec. His proposed legislation – “The Securities Fraud Act of 2018” – would only apply to listed companies. But the statute would preempt all state civil fraud actions against those companies – and because it would give federal courts exclusive jurisdiction over “securities fraud” claims, it looks like it would also undo the result in the Supreme Court’s recent Cyan decision for listed companies.
ICOs: Speaking of the Martin Act. . .
A few weeks ago, I blogged about how the states were ramping up their enforcement efforts on coin deals. Now this Jenner & Block memo says that New York’s Attorney General has launched a fact-finding inquiry into 13 cryptocurrency exchanges. The AG’s press release says that the inquiry “seeks to increase transparency and accountability as it relates to the platforms retail investors rely on to trade virtual currency, and better inform enforcement agencies, investors, and consumers.”
What was one of the statutes cited by the AG as giving him the authority for this particular fishing expedition? You guessed it – the Martin Act. Sometimes these blogs practically write themselves.
Broc recently blogged about the insider trading case involving an Equifax executive. While it appears on the surface to be pretty plain vanilla, this McGuireWoods blog says that the case may be pushing the envelope when it comes to what “knowledge” is required to support insider trading charges. This excerpt points out what’s unusual about the case:
Both the SEC and DOJ acknowledge in their charging papers that, at the time of his trading, Ying was not “aware” of Experian’s data breach – at least not explicitly. Indeed, when he traded, Equifax had disclosed this information to only a select few insiders, of which Ying was not one. To the contrary, Equifax had explicitly lied to Ying and told him that the data breach he and his team were working on was for an Equifax client.
As one of Equifax’s business lines is assisting clients with data breaches, this explanation seemed plausible. As time went on, however, the behavior of his superiors and colleagues made Ying suspicious that there was no “client” and that it was Equifax that had been breached. Based on his suspicions, Ying exercised his outstanding Equifax options and sold his shares.
But suspicions were all they were – Ying is alleged to have “put 2 and 2 together” according to the SEC’s Complaint. Indeed, Equifax did not reveal to Ying that it was the hacking victim until days later. Nevertheless, notwithstanding his avowed lack of actual knowledge, Ying was charged with criminal insider trading by the DOJ and sued civilly by the SEC.
When you put it that way, this case looks a little more interesting. When you consider that Bloomberg’s Matt Levine recently flagged a 2010 insider trading case involving similar guesswork that the SEC lost – it becomes downright fascinating. Don’t forget our upcoming webcast: “Insider Trading Policies & Rule 10b5-1 Plans.”
Insider Trading: Equifax Highlights Need for “Data Breach” Trading Halts
While we’re on the topic of the Equifax insider trading case, this Patterson Belknap blog says that the case – along with the SEC’s recent cybersecurity disclosure guidance – has at least one important takeaway for public companies:
In updated cybersecurity disclosure guidance issued by the SEC last month, the Commission highlighted the risk posed by insiders who trade securities between the time a breach is discovered and its public disclosure. As we noted in our recent client alert, the Commission “encourages” public companies to implement policies and procedures – including internal controls – to prevent trading on material non-public information relating to cybersecurity risks and incidents.
The guidance should spur companies to revisit their incident response plans, and if appropriate, consider imposing a temporary trading halt for insiders in defined circumstances. Companies would be “well-served,” suggests the SEC, by implementing a trading halt plan while investigating and assessing data breaches.
The trading halt plan should be part of comprehensive efforts to ensure that codes of ethics & internal policies properly anticipate the heightened risk of insider trading during a breach incident. By the way, Mark Borges extensively analyzed Equifax’s proxy statement in his blog over on CompensationStandards.com.
ICOs: This is Why We Can’t Have Nice Things. . .
This DLA Piper memo reviews the whirlwind of enforcement activity currently surrounding the cryptofinance industry. There seem to be a fair number of bad guys out there, but it’s important not to paint everybody with the same brush. For instance, this FT Alphaville story about Savedroid’s ICO & the world’s least funny practical joke shows that not every person involved in a sketchy looking deal is a crook – some are just knuckleheads.
Broc recently blogged about last month’s Rule 701 enforcement proceeding against Credit Karma. As he pointed out, Rule 701 enforcement actions are pretty rare, but this “Compliance Week” article suggests that more may be on the way – thanks to an enforcement “sweep” being conducted out of the SEC’s San Francisco regional office. This excerpt says the sweep’s another reminder that private companies aren’t immune from SEC scrutiny:
“They came out pretty loudly in 2016 and said they had concerns that, as private companies grow ever-larger without going public, the SEC Enforcement Division ought to be paying more attention to those companies,” says Michael Dicke, co-chair of law firm Fenwick & West’s securities enforcement group, formally associate regional director for enforcement in the SEC’s San Francisco regional office.
“Everybody needs to understand that just because you are not a public or publicly reporting company you cannot think that the securities laws don’t apply to you. It doesn’t mean that the SEC cannot investigate you.”
Recently the Enforcement Division conducted a “sweep” through its San Francisco office and sent Rule 701 information requests to large pre-IPO companies.
“When they do a sweep, they are not targeting a particular company—and when they ask for information, they usually have a specific reason to ask for it,” Dicke explains.
The article says that the sweep may have been prompted by employee complaints about companies’ failure to provide the disclosures required under Rule 701.
This “Audit Analytics” blog reports that tax reform’s impact has added complexity to 4th quarter earnings disclosures – and that its effects on earnings will remain a moving target throughout the year:
Although the SEC issued guidance on how companies should explain the Tax Cut and Jobs Act’s impact in their fourth quarter earnings releases, the SEC said companies can use “reasonable estimates” to report charges or benefits now and update those figures later.
From a practical perspective, it means that the numbers may change throughout the year and that we would not understand the full impact of the tax reform until the end of 2018. While the Commission provided a general guideline, certain nuances of the disclosure such as presentation in the non-GAAP section, are out of the scope of the guidance.
In the past few years, aggressive non-GAAP adjustments were criticized more than once for masking significant expenses. Yet, in this case, companies almost have to exclude the one-time tax reform impact from the non-GAAP EPS data during earnings calls to give investors a more-accurate picture of company’s earnings.
The blog notes that 80% of S&P 500 companies adjusted their GAAP EPS for the impact of tax reform. Of those, 72% present the adjustment as a separate line item, while 28% combined it with other tax related items. Audit Analytics says it’s important to differentiate between adjustments related to tax reform & other non-standard tax adjustments, and points out some disclosure practices that it views as potential “red flags.”
Tax Reform: Financial Statement Impact
Tax reform disclosures are challenging because the legislation impacts financial statements in so many ways. Unrepatriated foreign earnings, tax levies, stranded tax effects, valuation allowance and disclosures all need to be addressed in financial reporting. This FEI blog reviews the potential impact of tax reform on each of these matters. Here’s an excerpt addressing stranded tax effects:
The tax effect related to changes in the tax law is always reflected in income tax expense (or benefit) from continuing operations, regardless of where the related tax provision or benefit was previously recorded. For entities that must remeasure for example, their available for sale security deferred tax positions for the new rate change, that may create a mismatch with the remeasured deferred tax position and the contra-AOCI asset or liability embedded in ‘All Other Comprehensive Income.’
Under FASB ASU 2018-02, entities must reclassify the stranded tax effects from AOCI to retained earnings for each period in which the effect of the tax rate change is recorded. The amount of the reclassification would be the difference between (1) the amount initially charged or credited directly to OCI at the previously enacted U.S. federal corporate income tax rate that remains in AOCI, and (2) the amount that would have been charged or credited directly to OCI using the newly enacted 21 percent rate, excluding the effect of any valuation allowance previously charged to income from continuing operations.
We’ve previously blogged about the recent popularity of the “Simple Agreement for Future Tokens” among companies engaging in coin offerings – and noted that questions had been raised about whether it was a viable solution for securities law compliance in token deals. Now, this “Crowdfund Insider” article suggests that Corp Fin may have a problem with the SAFT’s structure.
The issue seems to be whether the structure complies with the requirements of Securities Act CDI 139.01, which relates to registration of convertible securities and says that in the case of securities convertible only at the option of the issuer, the underlying securities must be registered at the time the convertible securities are registered. Here’s an excerpt:
A SAFT sold in a private security sale would give the investor the right to automatically receive tokens once the issuer registers its tokens with the SEC for public sale. Put another way, by using a SAFT an issuer is essentially doing a private pre-sale of its future public securities which is a big no-no in eyes of the SEC.
The above C&DI may not seem readily applicable on its face. However, I am currently working with CERES Coin LLC in connection with its proposed Rule 506(c)/Regulation A+ cryptocurrency offering, and have personally discussed this issue directly with the SEC.
The most important language with respect to the use of SAFTs is the underlined language above. As the SEC sees it, if a SAFT investor will automatically receive tokens in the future when (and if) the tokens are registered, without any other investor involvement, then the tokens need to be registered as of the date the SAFT is sold … period.
This Proskauer blog also suggests that the SAFT structure is under scrutiny by the SEC. Given the SAFT’s apparent popularity, if the concerns reflected in the article represent the Staff’s consensus view, some more formal guidance may be appropriate. Don’t forget our upcoming webcast: “The Latest on ICOs/Token Deals.”
ICOs: Blue Sky Cops Are On the Crypto Beat
This Cleary blog says that it isn’t just the SEC that’s on the prowl for rogue coin deals – the blue sky folks are getting into the game as well. The blog reports that Massachusetts just made a big splash by putting a halt to 5 offerings that failed to comply with state securities registration requirements. Here’s the intro:
On March 27, 2018, Massachusetts Secretary of State William Galvin announced that the state had ordered five firms to halt initial coin offerings (“ICOs”) on the grounds that the ICOs constituted unregistered offerings of securities but made no allegations of fraud. These orders follow a growing line of state enforcement actions aimed at ICOs.
This was not Massachusetts’s first foray into regulating ICOs. On January 17, 2018 the state filed a complaint alleging violations of securities and broker-dealer registration requirements against the company Caviar and its founder for an ICO that sought to create a “pooled investment fund with hedged exposure to crypto-assets and real estate debt.”
As the blog suggests, Massachusetts isn’t alone – other states are applying a gimlet eye to coin offerings in their jurisdictions.
It looks like the message regulators are sending about the applicability of the securities laws to token deals is getting across. For instance, this WSJ article says that cryptocurrency firm Coinbase is exploring the possibility of registering as a broker-dealer.
ICOs: Your Wu-Tang Clan Crypto Update
When we last updated you on the Wu-Tang Clan’s cryptocurrency activities, we reported that Ghostface Killah was planning to launch his own $30 million coin offering. We don’t know whether the current regulatory environment has put a damper on that deal – but this “Coindesk” article says that another person connected to the Wu-Tang Clan is launching an ICO of his own:
The son of ODB, the late hip-hop artist and Wu-Tang Clan member who passed away in 2004, is launching a cryptocurrency.
Young Dirty, real name Bar-Son James, is the face of the appropriately named Dirty Coin, a cryptocurrency being produced in partnership between the estate of Ol’ Dirty and Link Media Partners, an entertainment industry firm. Dirty Coin (ticker symbol ODB) will exist as a token on the TAO blockchain network, and is set to be traded on the AltMarket exchange later this year when the coin goes live.
It’s a notable launch, given last year’s spate of celebrity-endorsed ICOs – and the subsequent warning from the U.S. Securities and Exchange Commission that such endorsements may break “anti-touting” laws.
In the case of Dirty Coin, the project is aimed at both serving as a funding base for an upcoming Young Dirty album, as well as a means for fans to access shows and buy merchandise. The coin will be able to be used to purchase merchandise tied to the late rapper as well.
In 2010, the SEC issued guidance about climate change disclosures. The GAO recently issued this report reviewing steps that the SEC has taken since then to clarify climate-related risk disclosure requirements, the SEC’s climate disclosure review process, & the constraints the SEC faces in that process. The report also assessed stakeholder views of climate-related risk disclosures.
The GAO says that the biggest constraint that the SEC faces in reviewing the adequacy of climate-related disclosure is its dependence on self-reporting. Here’s an excerpt:
SEC faces constraints in reviewing climate-related and other disclosures because it primarily relies on information that companies provide. SEC senior staff explained that SEC’s Division of Corporation Finance Staff assess filings for compliance with federal securities laws—which require companies to disclose material risks—but do not have the authority to subpoena additional information from companies. Additionally, companies may report similar climate-related disclosures in different sections of the filings, and climate-related disclosures in some filings contain disclosures using generic language, not tailored to the company, and do not include quantitative metrics.
When companies report climate-related disclosures in varying formats & specificity, Corp Fin reviewers and investors may find it difficult to compare & analyze related disclosures across companies’ filings. The SEC has tools, mechanisms and resources — including internal supervisory controls, regulations & guidance, a two-level filing review process, internal & external data, and staff training and experience — that help SEC staff consistently review filing disclosures, according to SEC documents and staff.
In fairness, the GAO was asked to look into the constraints on the SEC’s disclosure review by Congress – but this conclusion is still kind of goofy. The GAO is essentially saying that the SEC’s ability to review disclosures is constrained by the content of the disclosures that companies provide. Exactly! That’s how this works. . .
The GAO also found that, not surprisingly, companies think they’re doing enough in terms of climate-related risk disclosure. But while some investor groups push for more, the GAO says there’s not a clear consensus on how big a priority this should be.
Enforcement: The SEC Cyber Unit’s First 6 Months (And What’s Next)
Last September, the SEC highlighted its increasing enforcement emphasis on cyber-related threats by announcing the creation of a “Cyber Unit” within the Division of Enforcement. This Cleary memo reviews the Cyber Unit’s first six months of work & previews coming attractions. The memo notes that – so far – the unit’s attention has focused on allegedly improper trading involving hacking and cryptocurrency & ICO fraud claims. And it speculates that the next target may be cybersecurity lapses. Here’s an excerpt:
While it is safe to assume that the Cyber Unit will pursue trading, cryptocurrency, and disclosure cases in the months ahead, there are also signs that the SEC may seek to bring enforcement actions in an area that has been somewhat less publicized — alleged failures to maintain reasonable cybersecurity safeguards. In a October 2017 speech, Avakian identified safeguarding information and ensuring system integrity as another area of “enforcement interest” for the Cyber Unit.
The memo says that the speech pointed to SEC Regulations S-P, SCI and S-ID – which require that covered entities “understand the risks they face & take reasonable steps to address those risks” – including putting “reasonable safeguards in place to address cybersecurity threats.” While noting that no cases involving failure to maintain proper cybersecurity safeguards have been brought as yet, other enforcement proceedings under those rules may provide a roadmap for future actions.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor 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:
– Risk Reduction from Sustainability is a Myth?
– White Collar: DOJ Extends FCPA Declinations Policy
– Foreign Affiliates: BEA Survey Forms Issued
– Blockchain: “Read All About It!”
– How ISS Analyzes Proxy Fights
This MarketWatch article says that some companies have included the potential impact of a trade war in their Form 10-K “risk factors” disclosure. The article provides some examples of companies that have flagged the current unpleasantness between the U.S. & China as a potential risk – and suggests that more companies may opt to address the risks of a trade war in future filings.
This Form 10-K (pg. 26) from TravelCenters of America has the most extensive disclosure among the examples cited in the article. This excerpt provides a summary:
“Any changes in U.S. trade policy could trigger retaliatory actions by affected countries, resulting in ‘trade wars,’ in increased costs for goods imported into the United States, which may reduce customer demand for these products if the parties having to pay those tariffs increase their prices, or in trading partners limiting their trade with the United States,” according to TravelCenters’ filing. “If these consequences are realized, the volume of economic activity in the United States, including trucking freight volume, may be materially reduced. Such a reduction may materially and adversely affect our sales and our business.”
The article cites two other companies – Fossil Group (pg. 27) and Amphenol (pg. 13) – that disclosed the risk of a trade war in their 10-Ks. However, unlike TravelCenters, their disclosures were not broken out under a separate caption. Instead, they were included in a bullet point list of various risks associated with their operations.
Based on a recent Edgar search for 10-Ks referencing “trade war” or “trade wars,” it looks like the approach taken by Fossil Group and Amphenol is more typical – at least so far. I found a total of twelve 10-Ks that contained either of these terms. And only one company – G-III Apparel Group (pg. 30) – broke out the risk of a trade war separately in its 10-K.
While only a dozen companies referenced a trade war in their 10-Ks, there are a couple of things to keep in mind. First, it’s possible that others that others may have addressed the risk using other terminology – e.g. “retaliatory tariffs” – which wouldn’t have been caught by my search. Second, many larger companies would have made their filings before the President fired what may turn out to have been the trade war’s first volley on March 1st.
Enforcement: SEC Targets the Man Who Traded Gretzky
If you’re not a hockey fan, the name Peter Pocklington probably doesn’t mean much to you. But if you are, you’ll always remember him as the man who traded Wayne Gretzky to the Los Angeles Kings. That decision earned Pocklington the undying enmity of many Edmonton Oilers fans and – at least temporarily – the title of “the most hated man in Canada.”
Apparently, the SEC’s not too fond of him either. Last week, the agency announced an enforcement action alleging that Pocklington, a convicted felon, concealed his ownership & control of a company from investors in a private placement.
I’m not an Oilers fan, so I don’t have a dog in this fight – like any good citizen, I simply hope that justice prevails. On the other hand, if this was Art Modell. . .
Warm Remembrances: A Farewell to Fred Cook
Here’s a note from Broc: I’m sad to report that Fred Cook passed away last week. Widely considered “the Dean” of the compensation consulting world, Fred was much more than just a genius. Warm, kind – always with a sparkle in his eye. I was pretty new to the executive pay world when I launched CompensationStandards.com and our annual “Proxy Disclosure Conference” fifteen years ago – but Fred was more than willing to spend time with me and explain the basics. When I last saw him two years ago, he still seemed so young – so eager to share.
Fred always talked truth. And with his vast experience, he could give the proper perspective to what makes sense – and what doesn’t. Take some time to find out for yourself – this speech by Fred that we transcribed in 2005 still can provide numerous valuable learning lessons. We will miss you Fred!
Fred was married for 54 years and raised three daughters. Here’s an excerpt from Fred’s obituary in the NY Times:
Fred had a lifelong passion for the outdoors and physical fitness, completing many marathons without once training on a treadmill, and climbing the 46 High Peaks in New York State’s Adirondack Mountains. He climbed many of those peaks multiple times, in both summer and winter. He particularly loved introducing his family and friends to the Adirondacks he loved so much, with large family reunions, college reunions, hikes to swimming holes, outdoor hot tub soaks, and trips with his granddaughters up some of those same High Peaks. In life as in business, he loved to create traditions and share his passions.
We’ve all heard the mantra that blockchain is a disruptive technology that will turn entire industries upside down, including legal services and public accounting. Well, according to this Bloomberg blog, the big winners of disruption in the accounting industry will be – wait for it – the Big 4!
Wait – what? Yup, that’s what it says. This excerpt notes that the Big 4’s key advantage is their technology infrastructure:
As a result of technology transforming the accounting profession, “If you look at the breakdown of the profession over the next five to eight years you are going to see much more consolidation than we have seen in the past. The top four are going to be acquiring some of those in the next twenty firms. Auditing is going to be done by firms with far more technical ability than we have seen in the past. I think a large number of firms are going to disband,” said Richardson.
Translation? Regardless of your firm’s aggregate technical knowledge in auditing procedures and regulatory guidance, if you don’t have the technology systems in place, or are shortly behind in development, you simply won’t be able to keep pace with those who do.
As the accounting profession migrated from a paper and pen to fingers and spreadsheets, there was a element of instability that rocked the industry. The transition to nodes and blocks will be even more uncomfortable, but the ultimate beneficiaries will remain the same. Expect another generational wave of “Big Four” dominance in the accounting sector, even in a blockchain disrupted universe. If anything, it is another layer of concrete on top of a foundation that never seems to crack.
So, in the accounting profession, the results of this revolution may end up looking a lot like many others before it – “Meet the new boss. Same as the old boss.”
Big Data: Facebook Sells User Data – But Edgar Gives it Away!
Facebook’s in the hot seat these days for its practices regarding user data – but move over Mark & Sheryl, because it turns out that Edgar just might be a gold mine for data harvesters too. According to this Matt Levine column, a new study reveals that not only can you review a company’s SEC filings, but you can often find out who else has taken a peek. Here’s an excerpt:
But here’s another wild thing about this paper: You can go find out which hedge funds accessed which documents on Edgar! I mean, that seems wild to me, but the authors’ literature summary mentions several other papers that use the same technique. In each case researchers use public records to figure out which hedge funds own which IP addresses, and then match the IP addresses to Edgar traffic logs that the SEC makes available.
The Edgar logs are posted quarterly with a six-month lag, and you can’t necessarily match up every hedge fund with an IP address, so you can’t find out, say, what companies Dan Loeb or Bill Ackman are looking at today. But you can at least find out what companies some hedge funds were looking at a year ago, and what sort of research they did. It might tell you interesting things about their investing processes.
I had no idea that you could do that, and I doubt many other people did either. But whether the info is dated or not, in an era where everyone’s an activist target and hedge funds rely so much on stealth, is there any reason that companies shouldn’t put their big data folks to work crunching those traffic logs?
ESG: 85% of S&P 500 Issue Sustainability Reports
According to this new report from the Governance & Accountability Institute, 85% of the S&P 500 published sustainability or corporate responsibility reports in 2017. As this excerpt illustrates, that percentage has risen dramatically since 2011:
During the year 2011, just under 20% of S&P 500 companies reported on their sustainability, corporate social responsibility, ESG performance and related topics and issues;
– In 2012, 53% of S&P 500 companies were reporting — for the first time a majority;
– By 2013, 72% were reporting — that is 7-out-of-10 of all companies in the popular benchmark;
– In 2014, 75% of the S&P 500 were publishing reports;
– In 2015, 81% of the total companies were reporting;
– In 2016, 82% signaled a steady embrace by large-cap companies of sustainability reporting;
– And in 2017, the total rose to 85% of companies reporting on ESG performance.
This Audit Analytics blog reviews the 13 reasons why (sorry, Netflix – I couldn’t help myself) companies amended their Form 10-Ks last year. Not surprisingly, the most common reason was a need to include Part III information due to an inability to get their definitive proxy materials on file within 120 days of the fiscal year end. In fact, these amendments accounted for 52% of total 10-K/A filings in 2017. In fact, here are the top 5 reasons for filing a 10-K/A:
– Part III information – 52%
– Signatures & exhibits – 8%
– Auditor’s consent – 7%
– Auditor’s report – 7%
– CEO & CFO certifications – 6%
Most of these reasons for amending involved pretty technical stuff – but there were some more problematic reasons for amending a 10-K as well. Modifications to disclosure controls & procedures or ICFR disclosures accounted for 5% of amended filings, while restatements accounted for 4%.
Reflecting in part the continuing downward trend in the number of public companies, a total of 340 10-K/As were filed last year – that’s a decline of nearly 20% from the roughly 420 10-K/As filed in 2016.
Lease Accounting: Fear & Loathing on “The Implementation Trail”
According to this recent Deloitte survey, all is not well on the path to implementation of FASB’s new lease accounting standard. With less than 9 months to implement the new standard, most public companies are still woefully underprepared. Here’s an excerpt from the press release announcing the survey results:
Just 21.2% of finance, accounting and other professionals say their companies are “extremely” or “very” prepared to comply with the FASB’s and International Accounting Standards Board’s (IASB) respective new lease accounting standards, according to a recent poll from the Deloitte Center for Controllership™. That’s more than double the number expressing confidence from early 2016 (9.8 percent), when the standards were initially issued, but still relatively low as the deadline for adoption (Jan. 1, 2019 for U.S. publicly traded companies) draws closer.
Most survey respondents don’t think that the FASB’s recent efforts to ease the implementation process will make their lives easier as they work toward compliance. In fact, only 10% of respondents anticipate the FASB’s measures will reduce the amount of time and effort needed to implement the new standard.
Transcript: “Activist Profiles & Playbooks”
We have posted the transcript for the recent DealLawyers.com webcast: “Activist Profiles & Playbooks.”
