If you put up a statue called “Fearless Girl” that’s intended to point a finger at Wall Street’s lack of gender diversity, you shouldn’t be surprised if people ask whether you’re “walking the walk.” That’s the position State Street finds itself in – and according to this recent Guardian article, it hasn’t lived up to its rhetoric:
As selfies with Fearless Girl shot across social media, State Street, one of America’s leading money managers, was quietly and consistently voting down gender equality proposals at some of the country’s largest corporations.
On a shareholder proposal calling for Alphabet, Google’s parent company, to disclose any pay disparities between men and women, State Street voted no. On the same proposal before Wells Fargo, State Street voted no.
According to SEC records seen by the Guardian, in 2017 alone State Street rejected shareholder proposals to tackle gender inequality at least a dozen times – including at Aetna, American Express, Bank of America, Express Scripts, JP Morgan Chase and MasterCard.
In State Street’s defense, when it announced its gender diversity initiative, it focused on diversity at the board level & said that it would give portfolio companies a year to get their acts together. So, State Street’s efforts are still a work in process – but the media’s decision to scrutinize its voting record on gender diversity shouldn’t come as a shock.
SEC Staff Comments: 2017 Trends
This EY memo surveys trends in Corp Fin comment letters during the year ended June 30, 2017. As this excerpt suggests, there aren’t a lot surprises when it comes to areas of the Staff’s focus:
– Non-GAAP financial measures topped our list of the most frequent topics in SEC staff comment letters for the year ended 30 June 2017.
– Emerging topics of SEC staff focus include how companies are applying the new revenue recognition standard as well as what they are disclosing about cyber risks and cyber incidents.
– The SEC staff also frequently comments on management’s discussion and analysis, segment reporting and income taxes.
The memo also shares some thoughts on best practices in responding to Staff comments:
– Responses to each comment should focus on the specific question(s) asked by the SEC staff, and those responses should cite authoritative literature wherever possible.
– Responses should address the registrant’s unique facts and circumstances. While it may be helpful to consider response letters from other registrants as a resource, registrants should not just repeat responses made by other registrants to similar comments.
– If revisions are being made to a filing as a result of a comment from the SEC staff, responses should indicate specifically where these revisions are being made. If additional disclosure will be included in a future filing, the registrant should consider providing the proposed language in its response letter to avoid an additional comment once the disclosure is filed.
– Companies should seek the input of all appropriate internal personnel and professional advisers (such as legal counsel and independent auditors) to determine whether they have responded to the comment letter in a complete and accurate manner. Waiting until a later round of comments to involve the necessary resources may delay or hinder a successful resolution.
Our November Eminders is Posted!
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Here’s an interesting survey from Clermont Partners. Building on a recent book that contends GAAP reporting is no longer useful to investors, the survey asked 56 institutions with active (as opposed to passive) investment strategies 14 questions relating to the usefulness of GAAP information. Here are some of their responses:
– 74% of respondents said they rely on non-GAAP more than GAAP reporting
– 64% said they use non-GAAP 60% of the time or more when analyzing stocks as compared to GAAP
– 44% agreed that, over time, non-GAAP measures have become more important in evaluating a company’s financial performance, while 28% disagreed
– Only 36% agreed that GAAP paints a true picture of a company’s finances
The non-GAAP measures respondents most prefer are free cash flow, EBITDA or adjusted EBITDA, and adjusted net income or adjusted EPS. The survey asked for investor comments – and got an earful. Here’s a selection:
– “GAAP is rarely comparable and doesn’t show us the underlying trends in the business.”
– “GAAP means nothing to me.”
– “Cash flow is all that matters.”
Not all investors were this dismissive of GAAP. Here are some of their comments:
– “We look at GAAP. But for growth companies there are always adjustments that make sense.”
– “We look at both and blend together. We take GAAP and then back out truly non-recurring charges with adjustments to reflect reality.”
– “I start with GAAP and make small adjustments. I’ll ignore amortization of acquired intangibles if the company is good at R&D and buys long-lived assets. I’ll normalize the tax rate. I might look at maintenance capex instead of depreciation. I always leave SBC (stock-based compensbation) in as a real expense.”
I’m of two minds when it comes to GAAP v. non-GAAP. The capital markets lawyer in me thinks that GAAP numbers mean something important and are really indispensable to any financial analysis of a company. On the other hand, the M&A lawyer in me realizes that GAAP earnings mean nothing when it comes to how buyers and sellers approach valuation.
Maybe that’s why the investor comment that resonated most with me when it comes to GAAP v. non-GAAP was this one that essentially split the baby – “A large and persistent divergence between the two is a HUGE warning sign.”
ISS Updates “QualityScore” Ratings: Core Factors Increase to 21
Yesterday, as reflected in this press release, ISS announced methodology changes to QualityScore – with an increase from 6 to 21 of the core factors considered. There is a data verification period between November 13th-28th for the changes – and the new changes are effective December 4th. Among others, new factors include evaluation of independence of the audit, nomination & compensation committees; unequal voting rights; and vesting periods for option & restricted stock awards.
Audit Committees: Implementing New GAAP Standards
Here’s an excerpt from a recent speech by the SEC’s Deputy Chief Accountant, Sagar Teotia, about the role of audit committees in implementing new GAAP standards:
The process of implementing the new GAAP standards is a collaborative effort from different stakeholders, and the importance of the audit committee in promoting an environment for management’s successful implementation of the new GAAP standards cannot be overstated. Through its oversight function, audit committees play a key role in establishing the right “tone at the top” for a company. The tone at the top establishes the environment and culture within which financial reporting occurs, and is a key factor contributing to the integrity of the financial reporting process.
Audit committees should continue to set the tone for the adoption of the new GAAP standards. This should include actively monitoring the implementation efforts, including taking the time to understand, and assess the quality and status of implementation. Simply put, I believe the tone set by an audit committee can affect the quality of a company’s implementation, including judgments made by management, and, ultimately, the quality of information provided to investors.
The speech covers a lot of other ground when it comes to implementation of the new revenue recognition standards, as well as the new lease and credit losses standards that are just around the corner.
According to this WSJ article, a change in the SEC’s approach to enforcement may be on the way. Here’s an excerpt:
The Securities and Exchange Commission on Thursday signaled a pivot away from the prosecutorial approach to enforcement that the agency pursued after the financial crisis.
Steven Peikin, co-director of the SEC’s enforcement division, indicated the regulator would drop the “broken windows” strategy of pursuing many cases over even the smallest legal violations, and may also pull back from trying to make some companies admit to wrongdoing as a condition of settling with the SEC.
The SEC’s post-financial crisis “broken windows” approach to enforcement has been controversial – even among SEC Commissioners. As Broc blogged, Commissioner Piwowar sharply criticized the approach in a 2014 speech, where he contended that “if every rule is a priority, then no rule is a priority.”
On a related note, this Bloomberg article quotes Steve Peikin as saying that the SEC needs to better communicate the potential benefits of cooperation with the agency’s enforcement efforts:
The SEC should tell securities lawyers and their clients more about how to benefit from cooperating with the commission in an enforcement action, a top enforcement official said Oct. 26.
The Securities and Exchange Commission should be more specific about what a company or an individual did to merit cooperation credit or didn’t do if credit is denied, said Steven Peikin, a co-director of the SEC Enforcement Division. Enforcement targets that cooperate with investigators can receive perks such as reduced sanctions or even no action at all.
The framework for determining cooperation the SEC laid out in its 2001 report of investigation into Seaboard Corp., including self-reporting and remediation, is still in effect, Peikin said. The co-director, a former Sullivan & Cromwell LLP partner, appeared to sympathize with people who are still unsure about the exact benefits of cooperation, however. “I think we have room for improvement,” said Peikin at Securities Docket’s annual Securities Enforcement Forum in Washington.
On self-reporting, the SEC could do more to emphasize the “carrots” over the “sticks” in obtaining cooperation, former Enforcement directors said during the gathering.
At the risk of sounding like a cynic, I think I’ve seen this movie before – when Harvey Pitt replaced Arthur Levitt as SEC Chair in 2001, that era gave us the Seaboard 21(a) Report on cooperation that Steve referenced in his remarks – but it only lasted about 90 days; then Enron came along and ruined it for everybody.
Financials: New “FASB Credit Loss Standard” Handbook
If you’re one of the few companies that’s ahead of the curve on FASB’s new revenue recognition standard – you aren’t out of the woods yet. Two additional standards – dealing with leases and credit losses – are barreling down on companies like a locomotive. Fortunately, KPMG has provided some help in the form of this handbook on ASC Topic 326, Financial Instruments—Credit Losses.
While financial institutions will be most significantly impacted by the new standard, this excerpt says that it will affect virtually all businesses:
This is not just a standard for banks. All entities that engage in lending activities and invest in debt securities that are classified as available-for-sale or hold to maturity will be affected. Additionally, entities with trade receivables, reinsurance recoverables, and loans to equity method investees also will be affected by Topic 326. Topic 326 is expected to require management to make new judgments and calculations when measuring expected credit losses. This may require changes in policies, processes and internal controls.
Public companies are required to implement the new standard for interim and annual periods in fiscal years beginning after December 15, 2019.
Transcript: “Cybersecurity Due Diligence in M&A”
We have posted the transcript for our recent DealLawyers.com webcast: “Cybersecurity Due Diligence in M&A.”
There has been a lot of recent discussion about the merits of shareholder proposal reform. As this Davis Polk blog notes, the US Chamber of Commerce has submitted a proposal to tighten the eligibility criteria & other aspects of the shareholder proposal process – and SEC Chair Jay Clayton has expressed concern about “the cost[s] that the quiet shareholder, the ordinary shareholder, bear for idiosyncratic interests of others.”
In a recent meeting with Chair Clayton, the Council of Institutional Investors & other investor reps said that concerns about shareholder proposal “overload” are simply inaccurate. According to a series of FAQs provided by the CII, most companies don’t receive a single shareholder proposal:
On average, 13% of Russell 3000 companies received a shareholder proposal in a particular year between 2004 and 2017 according to the ISS database. In other words, the average Russell 3000 company can expect to receive a proposal once every 7.7 years. For companies that receive a proposal, the median number of proposals is one per year.
Large companies were far more likely to receive shareholder proposals. According to the FAQs, S&P 500 companies received 77% of the 852 proposals received by Russell 3000 companies. In contrast, only 3.7% of shareholder proposals were submitted at companies with a market cap under $1 billion.
Annual Meetings: Making Yours “Shareholder-Oriented”
In addition to the proposals submitted at your annual meeting, CII has some ideas about how you should conduct the meeting. Here’s a recent CII memo with some thoughts about how make your next meeting “shareholder-oriented.” Here’s an excerpt with some thoughts on conducting the meeting:
Rigid adherence to a brief and arbitrary meeting schedule (e.g. precisely one hour) may cut off responses to substantive questions, raising particular concern if the meeting begins with an extensive presentation from management, or if one general type of question appears to be favored and directors seem to sidestep other questions that are perhaps uncomfortable but pertinent.
Some shareholders attend meetings for the chance to interact on an informal basis with company leadership after the meeting’s formal conclusion. Company leaders, including directors in attendance, should welcome these opportunities for casual engagement by remaining for a limited period after the meeting has adjourned.
ISS Issues Draft Policies: Poison Pills, Director Compensation & Gender Pay
Yesterday, ISS released draft policy changes for comment in 13 areas spanning the globe (based on these survey results from constituents) – the deadline for comment is November 9th. It’s expected that ISS will release its final policies in late November (although burn rate thresholds & pay-for-performance quantitative concern thresholds are typically announced through updated FAQs in mid-December; here’s info about the ISS policy process).
These are the three main areas up for consideration in the US:
– For the director compensation draft policy, here’s how Wachtell Lipton describes it: “ISS states that median pay for non-employee directors has increased every year since 2012 and was approximately $211,000 in 2016. In response to alleged “extreme pay outliers,” ISS is proposing to recommend voting against or withholding votes from members of board committees responsible for setting non-employee director compensation when there is a “pattern” (over two or more consecutive years) of “excessive” non-employee director pay without a compelling rationale or other mitigating factors. Among other things, ISS is seeking feedback regarding the circumstances for which large non-employee director pay magnitude would merit support on an exceptional basis, e.g., one-time onboarding grants for new directors.”
– For the gender pay gap draft policy, here’s how Wachtell Lipton describes it: “ISS notes that there has been an increasing number of shareholder proposals requesting that companies report whether a gender pay gap exists, and if so, what measures will be taken to address the gap. ISS is proposing to vote case-by-case on requests for reports on a company’s pay data by gender, or a report on a company’s policies and goals to reduce any gender pay gap, taking into account the company’s current policies and disclosure related to its diversity and inclusion policies and practices, its compensation philosophy and its fair and equitable compensation practices. ISS will also take into account whether the company has been the subject of recent controversy or litigation related to gender pay gap issues and whether the company’s reporting regarding gender pay gap policies or initiatives is lagging its peers.”
– For the poison pills draft policy, here’s how Wachtell Lipton describes it: “ISS’s current policy provides that if a company maintains a long-term (>1 year) shareholder rights plan that has not been approved by shareholders, ISS will recommend voting against all nominees every year if the company’s board is classified. However, if the board is annually elected, ISS will recommend voting against the entire board once every three years.
ISS proposes changing its policy to recommend voting against all directors of such companies at every annual meeting. In addition, commitments to put a long-term rights plan to a vote the following year would no longer be considered a mitigating factor by ISS (but may still be relevant to individual shareholder voting decisions). ISS would also eliminate the exemption for 10-year rights plans adopted prior to November 2009, which would affect approximately 90 companies. ISS notes that short-term rights plans would continue to be assessed on a case-by-case basis, but states that the updated policy would focus more on the rationale for the rights plan’s adoption than on the company’s governance and track record.”
I’m not very good at coming up with code names for deals. When asked, I usually default to a color – Project Blue, Project Red, etc. I guess I’ve always thought that if colors were good enough for the “Reservoir Dogs” guys, then they were good enough for me.
This Intralinks blog listing 2016’s top deal code names shows that I’m not the only one who is bad at this stuff. The list is heavy on colors & birds (“Project Blue” is #1!), and transparently smarmy efforts to ingratiate the name-giver to the client (e.g., “Project Diamond”).
And then there’s “Project X”. . . Seriously? You had a choice and you picked Project X?
Creativity doesn’t seem to be a strong suit among the bankers (usually) & lawyers (sometimes) who come up with these names, but the blog points out that this shortcoming can cause real problems:
Overuse of the same, easily-guessed code names for M&A deals not only risks compromising the parties’ identities by hackers or eavesdroppers; it also increases the likelihood that confidential information will be sent to the wrong person. For junior bankers under pressure and working long hours on multiple deals, mistaking one Project Blue with another Project Blue could be a catastrophe. Sending confidential information, or mixing up buyer information across several data rooms, could result in the type of exposure no dealmaker wants.
Fortunately, there’s an alternative to this potentially hazardous lack of imagination. There are a whole bunch of random deal code name generators available online. I tried some & they churned out some good code names – I was particularly taken with the lyrical “Project Mountain Sky” – and not a single “Project Blue.”
IPOs: JOBS Act Leading to Underpricing?
This recent article from MarketWatch’s Francine McKenna flags a new study that contends that emerging growth companies’ ability to furnish less disclosure in IPOs is having an unintended consequence – underpricing of their offerings. Here’s an excerpt:
The Jumpstart Our Business Startups Act, or JOBS Act, is causing initial public offerings to leave cash on the table, according to new research, because fewer mandatory disclosures create wary investors that demand bigger post-IPO share price pops.
All three measures of underpricing—market-adjusted stock returns based on the offer price and the closing price on the day of the IPO, the closing price on the day after the IPO, and the closing price 30 trading days after the IPO—are larger for emerging growth companies, or EGCs, according to Mary E. Barth, professor of accounting at Stanford University, Wayne R. Landsman, professor of accounting at the University of North Carolina’s Kenan-Flagler Business School and Daniel J. Taylor, associate professor of accounting at the University of Pennsylvania’s Wharton School.
So why aren’t these companies complaining? The study says that’s because EGC executives are benefitting from lower levels of disclosure in other ways – including lower priced IPO equity awards & reduced comp disclosure.
D&O Insurance: Outlook for 2018
It’s getting to be renewal time for a lot of D&O policies, and this Woodruff Sawyer article reviews market conditions, claims trends and coverage issues. Here’s an excerpt on pricing expectations:
For most public companies, renewal pricing outcomes can be divided into two categories: the primary layer of the program; and, the excess and Side A layers of the program. Since fewer carriers have the appetite to write the primary layer of a D&O tower, pricing for the primary layer has held firmer. This is especially true for those companies that carriers regard as having particular markers for risk: larger market caps, challenging industries,existing or likely litigation, financial woes and other similar factors.
While the market for the primary layer has tightened, market for excess layers – including Side A – is highly competitive & often results in a year-over-year decrease in the total premium.
Last month, Congress passed the “Fair Access to Investment Research Act” – signed by the President into law a few weeks later – which requires the SEC to ease restrictions on broker-dealer research reports on ETFs and other investment company securities. The FAIR Act requires the SEC to expand an existing safe harbor for research reports that prevents them from being considered an “offer” under the Securities Act, and to limit SEC & FINRA filing requirements for those reports.
I know, I know – “yada, yada, yada” – but here’s the thing, the legislation has a unique provision designed to prod the SEC to act on the rulemaking required by the statute. This Davis Polk blog explains:
The bill includes a provision that one sponsor of the bill described as an effort to “hold[] the SEC accountable to follow Congress’ direction.” The bill directs the SEC to amend its rules, within 270 days of enactment, to implement the safe harbor in a manner consistent with specific parameters set forth in the bill. If the SEC fails to do so by the 270-day deadline, however, the bill provides for an “interim effectiveness” during which the expansions to the safe harbor would automatically be deemed to be in effect, “as if revised and implemented” in accordance with Congress’ directions.
Some members of Congress have not been happy about the SEC’s inability to adopt the roughly 12 trillion regs required under Dodd-Frank & the JOBS Act on a timely basis – and this is intended to prod the agency to act more quickly:
The interim effectiveness provision may spur the SEC to act more quickly to implement the FAIR Act in order to address the inevitable ambiguities contained in legislation—facilitating its implementation through their expertise in administering the securities laws. If this device is successful in forcing the SEC to accelerate its rulemaking efforts, look for Congress to employ it in future legislation.
Of course, while Congress is telling the SEC to speed up, the agency’s been getting a different message from the courts – the blog points out that the DC Circuit has invalidated recent SEC rulemaking “for failure to conduct sufficient analysis, including in terms of the cost-benefit analysis of new rules.”
SCOTUS: MD&A “Known Trends” Case Goes Away. . .
As Broc previously blogged, last March, the Supreme Court granted cert to a 2nd Circuit case involving whether MD&A’s “known trends” line-item disclosure requirements can give rise to 10b-5 liability. Now, it looks like resolution of that issue will have to wait for another day – this Hunton & Williams memo says that the parties to Leidos v. Indiana Public Retirement System have reached a settlement.
ICOs: Nasdaq-Listed Company to Take the Plunge
Steve Quinlivan recently blogged about a Nasdaq-listed issuer that’s considering an initial coin offering. Steve does his best to describe what the company’s proposing in plain English. See if you can figure it out – I’m admittedly not the sharpest knife in the drawer, but I have absolutely no idea.
Naturally, the company’s stock shot up 70% on the news. Resistance is futile.
Yesterday, bumping up against a deadline to act, the SEC unanimously approved the PCAOB’s new audit reporting standard, AS #3101 – the first major overhaul of the audit report in more than 50 years. Here’s the SEC’s order. We’ll be posting memos in our “Audit Reports” Practice Area.
As Liz blogged at the time of the PCAOB’s adoption of the standard, audit reports will look fundamentally different under the new regime. Among other items, they will need to describe the auditor’s take on “CAMs”(“critical audit matters”) – matters communicated to the audit committee that relate to material accounts or disclosures and involve complex auditor judgment. These changes become effective for annual periods ending on or after June 30, 2019 for large accelerated filers & on or after December 15, 2020 for all other filers.
The new standard also requires audit reports to include information about auditor tenure, and to clarify the language addressing the auditor’s responsibilities. It also completely revamps the report’s organization and formatting. These changes will become effective for audits of annual periods ending on – or after – December 15, 2017.
Critics of the proposal contend that the additional disclosures – and particularly the requirement to address CAMs – will lead to more litigation targeting auditors. Those concerns were addressed by SEC Chair Jay Clayton in his statement on the SEC’s approval of the proposed change:
I would be disappointed if the new audit reporting standard, which has the potential to provide investors with meaningful incremental information, instead resulted in frivolous litigation costs, defensive, lawyer-driven auditor communications, or antagonistic auditor-audit committee relationships — with Main Street investors ending up in a worse position than they were before.
I therefore urge all involved in the implementation of the revised auditing standards, including the Commission and the PCAOB, to pay close attention to these issues going forward, including carefully reading the guidance provided in the approval order and the PCAOB’s adopting release
The statement went on to note that the PCAOB will monitor the results of the new standard’s implementation – “including consideration of any unintended consequences.”
I’m old enough to remember the days of counting paragraphs in an auditor’s opinion – if there were more than 3, that meant the opinion was qualified. But counting paragraphs was all anybody did – the rest was useless boilerplate. That boilerplate was nibbled at around the edges over the years, but the report still didn’t convey much useful information.
Yesterday, the SEC didn’t just pare back the boilerplate – it blew up the boiler. Time will tell if anybody gets scalded. But CAMs have been disclosed in the UK for several years without much consequence…
Multi-Class Stock: Reports of Its Death Greatly Exaggerated?
To the extent institutional investors expected that promising companies, especially technology companies, would choose being listed in one of the indexes rather than implementing governance structures that these companies (and their boards and earliest investors) believed better suited their businesses in the long-term, the institutions have clearly been disappointed.
Indeed, in just the few weeks since the indexes announced their decision, there have been several prominent—and very successful—IPOs by tech companies with dual-class stock. Examples of such recent offerings include Roku and CarGurus, which have both benefited from substantial stock increases since the first day of trading; and data center operator Switch, which also continues to trade nicely above its IPO price.
The memo notes that several other companies with multi-class structures are planning to launch IPOs during the 4th quarter.
Multi-Class Stock: BlackRock Opposes Exclusion from Indexes
Here’s another sign that multi-class structures are … uh… “undead.” (Sorry, Halloween’s coming & I couldn’t resist.) BlackRock recently issued this statement saying that it opposes the exclusion of companies with multi-class stock from major indexes. This blog from Davis Polk’s Ning Chiu discusses BlackRock’s position. Here’s an excerpt:
BlackRock believes that these actions limit access to the universe of public companies for their index-based clients, depriving them of opportunities for returns. Policymakers should set corporate governance standards through regulation. Index providers should reflect the “investable marketplace” in diverse and expansive benchmark indices, in order to facilitate investors’ use of those indicies and align them with the objectives of public equity investors.
BlackRock’s statement goes on to say that it is a strong advocate of equal voting rights – and, among other things, wants companies with dual or multi-class structures to periodically submit those structures to shareholders for approval.
Recently, the PCAOB issued this Staff audit alert to assist independent auditors in applying PCAOB standards when they audit their client’s implementation of FASB’s new revenue recognition standard. Topics covered include:
– Transition disclosures & adjustments
– Internal control over financial reporting
– Fraud risks
– Revenue recognition
– Disclosures
Here’s an excerpt from the alert’s discussion of key factors for auditors to consider when assessing the internal control implications of the new standard:
PCAOB standards require the auditor to obtain a sufficient understanding of each component of internal control over financial reporting to (a) identify the types of potential misstatements, (b) assess the factors that affect the risks of material misstatement, and (c) design further audit procedures.
Changes to company processes for the implementation of the new revenue standard can affect one or more components of internal control. For example, the auditor is required to obtain an understanding of the company’s control environment, including the policies and actions of management, the board of directors, and the audit committee concerning the company’s control environment.
Check out this recent blog from Steve Quinlivan for more on the PCAOB’s alert. And we’re posting numerous memos on transition issue – and the new revenue recognition standard more specifically – in our “Revenue Recognition” Practice Area.
Revenue Recognition: SEC Comments for Early Adopters
This “SEC Institute” blog reviews Corp Fin’s comments on filings by two early adopters of FASB’s new revenue recognition standard. The Staff’s comments – which are set forth in full in the blog – focus on MD&A and financial statements. And their emphasis is on the adequacy of disclosure and seeking to understand how the company made judgments in applying the new principles-based standard.
While the two companies that received comments were able to resolve them quickly, the blog also includes a reminder that not all comments on new accounting standards have happy endings:
New accounting standards always draw attention from the SEC. Way back in the 1990s, SFAS 133 (now of course ASC 815) was issued to create dramatically different new guidance for derivative and hedge accounting. Louis Dreyfus Natural Gas early adopted the new standard. After certain issues were raised in an SEC review, Louis Dreyfus Natural Gas was forced to restate its initial application of the new derivative accounting model.
“Black Monday”: 30 Years Ago Today!
It’s hard to believe, but “Black Monday” – the great stock market crash of 1987 – happened 30 years ago today, October 19, 1987. This Bloomberg article recounts memories of that day from a cross-section of Wall Street players. So much that was once unthinkable has happened to the markets & the world since that day that I’m sure some of our younger readers are asking themselves, “what’s the big deal?”
Well, the greatest single one day drop in Wall Street’s history didn’t occur in 1929 or 2008 – it happened on Black Monday in 1987. The market lost nearly 23% of its value in a single day. This quote from a trader will give you some sense of how many people felt that day:
I was so scared that I got $10,000 out of the bank, took it home, and stored it in the rafters.
Personally, I remember that day vividly. I was in a drafting session for a public offering, and the bankers kept nervously calling their office to find out how the market was doing. By the time the market closed, it was very apparent to everyone that our deal was stone dead.
In a recent speech, SEC Chief Accountant Wes Bricker highlighted some of the financial reporting issues associated with initial coin offerings. His remarks addressed matters that should be considered by both issuers & investors in coin offerings.
For issuers, Wes cited the need to consider the application of GAAP guidance addressing questions such as:
– What are the necessary financial statement filing requirements?
– Are there liabilities requiring recognition or disclosure?
– Are there previously recognized assets that require de-recognition?
– Are there revenues or expenses requiring recognition or deferral?
– Is there a transaction with owners, resulting in debt or equity classification and possibly compensation expense?
– Are there implications for the provision for income taxes?
For coin investors, Wes noted the following topics for consideration:
– Does specialized accounting guidance (such as for investment companies) apply to the holder’s financial statement presentation?
– What are the characteristics of the coin or token in considering whether, how, and at what value the transaction should affect the holder’s financial statements?
– What is the nature of the holder’s involvement in considering whether the issuer’s activities should be consolidated or accounted for under the equity method?
Bricker’s remarks came at the end of a tough week for ICOs – China’s central bank announced an outright ban on them – and are another reminder that the SEC is watching, and expects companies involved in these deals to comply fully with applicable securities laws.
On a related note, the SEC issued an “Investor Alert” in late August about scams involving companies making claims about being involved in ICOs. And on Friday, the SEC busted a few of the scams.
ICOs: Get Ready for the Lawsuits
Money has been pouring in to ICOs – about $1.3 billion has reportedly been raised during 2017 alone – and a lot of that funding has been provided by unsophisticated investors, unaccompanied by regulatory scrutiny (until recently). This Bloomberg article says that’s a recipe for a wave of private litigation:
The soaring valuations of new tokens and the major blockchain technologies underlying them, such as Bitcoin and Ethereum, have drawn new investors that may not understand how the tokens work, could lose money, and may not know how to recognize whether the tokens should be valued as a security, cryptocurrency, or utility.
Those factors are attracting bad actors and artificially driving up valuations of some assets that, once deflated, are likely to spur private litigation against companies and individuals issuing and exchanging these tokens, attorneys and research groups said.
According to the article, 3 lawsuits involving ICOs have already been filed – although none involve claims against issuers or exchanges on which the tokens trade.
Blockchain: Sorry Delaware, Nevada & Arizona Got There First
Of course, we wouldn’t be talking about ICOs and cyptocurrencies without blockchain – the distributed ledger technology that makes them possible. Delaware’s recent legislation allowing blockchain to be used for corporate recordkeeping has been hailed as cutting edge – with one nitwit even going so far as to say that Delaware’s actions “opened the door” for the use of blockchain in this fashion.
This recent blog from Keith Bishop says “not so fast” – sorry Delaware, it’s Nevada & Arizona that opened the door:
Delaware, which prides itself as a leader in corporate law, was not the first state to enact legislation authorizing blockchain technology, however. Nevada beat the Blue Hen State to the punch by over a month when Governor Brian Sandoval signed SB398 into law on June 5, 2017. Nevada’s legislation, unlike Delaware’s, does not amend Chapter 78, Nevada’s Private Corporation Law. Nevada chose instead to amend Chapter 719, which is its version of the Uniform Electronic Transactions Act. In this respect, Nevada follows Arizona which enacted amendments to its “Electronic Transactions Act” in March of this year (HB 2517)
Our October Eminders is Posted!
We have posted the October issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
– John Jenkins
According to media reports, SEC Chair Jay Clayton faced some tough questioning from the Senate Banking & Finance Committee earlier this week on the Equifax fiasco & the SEC’s announcement that the Edgar system had been hacked.
In addition to concerns about the SEC’s delay in disclosing its own hack, lawmakers focused on the need for new SEC guidelines addressing the disclosure obligations of companies involving data breaches. This Bloomberg article also reports that Jay suggested that he was open to working with Congress on efforts to enact “legislation to ensure executives don’t profit by buying or selling company stock before the public is told about market-moving news.”
What sort of legislation the Chair might back remains to be seen. However, his openness to Congressional action seems to represent a bit of a departure from previous statements – earlier this month, the WSJ reported that Jay said that legislation defining insider trading wasn’t necessary.
Any way you slice it, insider trading law isn’t exactly a model of clarity. As a case in point, this Linked-In article says that if the SEC’s hackers traded on the information they obtained, they likely won’t be subject to liability under insider trading law as it currently exists – instead, the SEC would need to rely on a much less well established “outsider trading” legal theory.
Also this blog by Keith Bishop with some interesting questions about how insider trading laws would work with the hacker of the SEC’s Edgar. As noted in this MarketWatch piece, perhaps the hackers would be prosecuted in same way the SEC went after the Ukranian hackers of the wire services a few years ago…
Litigation Survey: South Dakota Dethrones Delaware
In a development that’s akin to the Alabama Crimson Tide not making the CFB playoff, the US Chamber of Commerce’s recent lawsuit climate survey says that South Dakota has knocked Delaware from its traditional top spot as the state with the most pro-business litigation climate.
There’s been a lot of commentary about the impact of Delaware’s rejection of disclosure-only settlements & changing approach to deal litigation, but according to the Chamber, that’s not what dethroned Delaware. Instead, it’s a pro-plaintiff legislative climate & absence of tort reform that’s soured business on the First State:
“Delaware no longer lives up to its nickname as the ‘First State,’” said ILR President Lisa A. Rickard. “As the competition between states to enact legal reforms gets tighter, Delaware is losing ground.”
Delaware is getting passed by. The state’s main business court has remained solid, repeatedly refusing to approve bogus settlements where lawyers get all the money. But while other states are busy passing tort reforms, Delaware’s legislature is siding more with the plaintiffs’ lawyers than businesses.
According to Bryan Quigley, senior vice president of communications for the ILR, the fee-shifting ban was of particular concern to companies, which complained that the General Assembly essentially overruled the state Supreme Court after the justices OK’d the so-called “loser pays” provisions for nonstock corporations.
Lawmakers, acting on the recommendation of the Delaware State Bar Association, passed the legislation amid fear that the same conditions would be imposed on stock corporations.
After occupying the top spot since 2002, Delaware tumbled to #11 in this year’s survey – that not only will keep it out of the playoff picture, but probably dashes any hope of a New Year’s Day bowl appearance.
SEC Provides Regulatory Relief for Hurricane Victims
Yesterday, the SEC issued an order granting conditional exemptions from filing deadlines and other requirements for companies & others by the series of hurricanes that recently struck the U.S. & Caribbean. It also adopted interim final temporary rules extending filing deadlines for specified reports and forms required under Regulation Crowdfunding & Regulation A. Here’s the SEC’s press release.
