MarketWatch’s reporters have been reading your earnings releases – and this article says they’re not impressed. It surveys a number of major companies’ releases, concluding that they’re generally a “confusing mess.”
However, the article saves its most pointed criticism for the practice of using releases simply to point readers to corporate website pages for earnings information:
MarketWatch has written before about the delay caused when companies make investors, and the reporters who serve them, search for earnings on a website, which almost invariably crashes under the strain of so many attempting to access it at the same time. The worst offender, in our view, is the video-streaming giant Netflix. This season, Netflix shares had moved almost 10% by the time most news services had started reporting the numbers, suggesting a clear advantage for institutional investors with machine-readable trading services that can scrape websites for relevant information at high speed. Retail investors are losing out.
My guess is that this practice is intended to provide shareholders with access to a more robust earnings presentation than what could be provided within the confines of a press release – but it looks like it’s giving retail investors the short end of the stick, and needs to be rethought.
Update: One of our members pointed out to me that for microcap companies, the costs associated with using news services for extensive earnings releases are often a factor – and that issuing a brief release directing investors to the website for more information is much more cost-effective for them. I think that’s a point worth acknowledging.
Enforcement: SEC Targets Control Contest Disclosures
Yesterday, the SEC’s Division of Enforcement announced two new actions involving disclosure violations that took place in the heat of takeover & activist battles. Disclosure in this arena seems to be an area of emphasis for the SEC – it recently sanctioned Allergan for failing to disclose merger negotiations with third parties while it was the subject of a tender offer from Valeant.
The first proceeding involves allegedly inadequate disclosures about “success fees” payable by CVR Energy to two investment banks that it retained to help fight off a tender offer. The second targets failures by individuals and investment funds to comply with beneficial ownership reporting obligations under Section 13(d) and 16(a) of the Exchange Act in connection with their joint efforts in several activist campaigns.
It’s interesting to note that disclosure of banker success fees was addressed in one of the new tender offer CDIs (159.02) issued in late 2016. Last month, I flagged a Cooley blog that said market practice on success fee disclosure would need to change as a result of the new CDI. The SEC’s press release notes that CVR’s cooperation and remedial actions resulted in a decision not to impose any monetary sanctions on it – but I suspect the fact that the company’s disclosures may have been consistent with market practice might have played a role in it as well.
Public companies and their advisors can be excused for enjoying the predicament of the targets of the second enforcement action – they’ve long complained about activists playing fast and loose with beneficial ownership disclosure requirements, and undoubtedly are relishing their comeuppance in this instance.
Speaking of disclosure requirements, there’s now one less – the SEC’s resource extraction rules are no more. This Davis Polk memo has the details.
Transcript: Privilege Issues in M&A
We have posted the transcript for the recent DealLawyers.com webcast: “Privilege Issues in M&A.”
Last month, the SEC settled no fewer than seven enforcement proceedings involving alleged GAAP violations. Drinker Biddle’s Steve Stroup reviews the results of these proceedings – and draws some conclusions about trends & priorities in accounting enforcement actions. Here’s an excerpt on the SEC’s increasing reliance on non-fraud based allegations:
The SEC has pursued fraud-based claims in accounting matters with less regularity in recent years and, in turn, has increased its reliance on the less-imposing strict-liability provisions under Section 13 and negligence-based antifraud provisions under Section 17. January was no exception. None of the accounting settlements during the month included alleged fraudulent conduct, even though, in several instances, the tenor of the settlement language arguably signaled a more culpable state of mind than the violations required.
Until recently, fraud-based allegations were routinely raised in these proceedings. The ensuing legal battle often focused on whether the SEC could establish the scienter required under Rule 10b-5. Under the current enforcement landscape, the absence of non-fraud claims takes the scienter issue off the table, and often incentivizes cooperation and settlement.
Tune in tomorrow for the DealLawyers.com webcast – “Activist Profiles & Playbooks” – to hear Bruce Goldfarb of Okapi Partners, Tom Johnson of Abernathy MacGregor, Renee Soto of Sotocomm and Damien Park of Hedge Fund Solutions identify who the activists are – and what makes them tick.
Broc & John: Beach Podcasting is Now a Thing. . .
Because no sacrifice is too great for our members, Broc & I recently held an intensive, multi-day strategic planning retreat at TheCorporateCounsel.net’s winter headquarters in Siesta Key. We took a break when the saloon made us clear out our tab – and headed down to the beach to record this 5-minute podcast on the appointment of a deal lawyer as SEC Chair & “Weekend at Bernie’s.”
This podcast is also posted as part of our “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…
Cooley’s Cydney Posner blogs about a number of reported changes relating to corporate governance & executive compensation that have been incorporated into the latest version of the “Financial Choice Act” – Rep. Jeb Hensarling’s bill to consign Dodd-Frank to the ash heap of history. Changes to the bill include new provisions that would:
– Modernize shareholder proposal & resubmission thresholds for inflation
– Raise SOX 404(b) internal control audit threshold from $250 million to $500 million
– Prohibit SEC from promulgating a rule to require the use of “universal proxies”
– Modernize Section 12(g) registration requirements for smaller companies, including increasing the revenue/shareholder thresholds, indexing the revenue test for inflation and eliminating annual verification of accredited investor status
– Increase Rule 701 cap from $10 million to $20 million with an inflation adjustment trigger
– Expand provisions of Title I of the JOBS Act to apply more broadly by allowing all companies, not just emerging growth companies, to “test the waters” & file IPO registration statements with the SEC on a confidential basis
– Increase Reg A+ ceiling from $50 million to $75 million annually with an inflation adjustment trigger
So does any of this have a prayer of getting through the Senate without Republicans eliminating the filibuster? Maybe. It’s been suggested that some aspects of the bill might be passed under “reconciliation,” which requires only a majority vote & can be used for legislation that changes spending, revenues or the debt limit.
By the way, kudos to Bass Berry’s Jay Knight who – in this blog – tracked down the memo from Jeb Hensarling that started all the speculation about “Financial Choice Act 2.0.”
FASB: 2016 in Review
This BDO report reviews FASB’s work in 2016 – which was a very busy year. Here’s the intro:
During 2016 the Financial Accounting Standards Board (FASB) completed several major, long-term projects, and also issued guidance to resolve related practice issues. The FASB and the International Accounting Standards Board (IASB) focused on implementation issues related to the new revenue recognition standard, which resulted in several clarifying amendments during the year. Both boards also issued their respective lease standards, and the FASB finalized guidance on the classification, measurement and impairment of financial instruments.
In addition to reviewing last year’s guidance & previewing coming attractions, the report includes a helpful appendix showing the effective dates of recently issued accounting standards.
Transcript: “Conflict Minerals -Tackling Your Next Form SD”
We have posted the transcript for our recent webcast: “Conflict Minerals: Tackling Your Next Form SD.”
Over on “The Accounting Onion,” Tom Sellers blogs that Wells Fargo could be the next major MD&A enforcement case for the SEC. He notes that Wells Fargo’s former CEO told Congress that the board was aware of the bank’s unauthorized account issues in 2014. Tom focuses on MD&A’s “known trends” requirement, & says that the bank ran afoul of it here:
Companies often produce lengthy MD&A disclosures from core requirements that boil down to two criteria:
– As of the time of filing, what management knows.
– Whether a transaction, event or uncertainty that management does know about had, or is reasonably likely to have, a material effect on profitability, liquidity or capital resources.
As indicated by the following from Francine McKenna’s article, the first criteria would have been met more than a year ago:
“Stumpf testified management and the board was informed of the issues in 2014. The Los Angeles City Attorney filed a lawsuit against the bank in 2015 after Los Angeles Times first published reports of the problems in 2013.” [italics supplied]
Even so, no disclosure was made in an SEC filing through the second quarter of 2016. And just in case you are wondering, the MD&A rules do not permit a company to omit required MD&A disclosures out of concern for their effect on future litigation, creating a competitive disadvantage, or resulting in a self-fulfilling prophesy.
Tom goes on to suggest that while the financial impact of the $185 million settlement itself may not have been material to Wells Fargo, the collateral damage to the bank’s reputation & business was much larger – and should have been taken into account in management’s materiality assessment.
I admit that when I first read this, I was a little skeptical about the argument – hey, I’m a petite bourgeois corporate tool, so I have my biases. Wells Fargo’s flat-footed response suggests that management viewed this situation primarily as a regulatory matter, and assessed its downside by reference to what the expected settlement with the CFPB and other regulators would be. Should they have anticipated the firestorm that followed, and factored that into the materiality assessment?
My first inclination was to say no – that kind of speculation is beyond what’s required by MD&A. I still think that’s the case in most situations. But the more I thought about it, the more troubled I became by the bank’s failure of imagination. Two million unauthorized accounts? More than 5,000 employees terminated because of this mess? Under those circumstances, was it reasonable for Wells Fargo to think that a $185 million settlement with regulators would be the end of it?
There’s still at least one aspect of the case that makes me think this isn’t really a slam dunk – we’re talking about management’s subjective opinion about the downside risk, & that means Virginia Bankshares may come into play. Wells Fargo could argue that while management’s opinion about the downside may have been wrong, it’s only actionable if management didn’t really believe it. Fait v. Regions Financial is the leading case when it comes to the applicability of Virginia Bankshares to accounting & financial judgments – and Omnicare doesn’t seem to have put much of a dent in it.
Data Breaches at Yahoo! – Another Potential SEC Poster-Child?
According to a recent WSJ report, the SEC is investigating the timing of Yahoo!’s disclosure of its highly-publicized data breaches. Kevin LaCroix of the “D&O Diary” speculates that Yahoo! may find itself as the poster-child for the SEC’s cybersecurity disclosure guidelines:
The question the agency likely will be examining is whether Yahoo’s apparent delays in reporting the breaches ran afoul of the requirements specified in the 2011 guidelines that “material information regarding cybersecurity risks and cyber incidents is required to be disclosed when necessary in order to make other required disclosures, in light of the circumstances under which they are made, not misleading.”
As the WSJ article notes, if the SEC were to bring a case against Yahoo, it could “make clearer to other companies what type of disclosures it views as potentially violating the law in this area.” An SEC case against Yahoo “could help clarify rules over timing because the guidance doesn’t lay out detailed requirements.”
Webcast: “Alan Dye on the Latest Section 16 Developments”
Tune in tomorrow for the Section16.net webcast – “Alan Dye on the Latest Section 16 Developments” – to hear Alan Dye of Section16.net and Hogan Lovells discuss the most recent updates on Section 16, including new SEC Staff interpretations and Section 16(b) litigation.
The SEC’s DERA Division recently published a White Paper examining the over-the-counter market. It doesn’t pull any punches. Here’s an excerpt from the conclusion:
These studies provide evidence that OTC stocks are predominantly illiquid, generate negative and volatile returns, are frequently targeted by alleged market manipulation schemes, and rarely transition to an exchange. These relationships worsen as OTC Markets’ self-established eligibility requirements pertaining to disclosure are reduced.
I’ve worked with several companies that either started on the OTC market or ended up there. Nothing the SEC says in its report is news to me or anyone else who’s worked with one of them. The deck is stacked against these companies – most of them have all of the costs associated with public company status, and none of the benefits in terms of liquidity or access to capital. Most of the time, they’re waging a desperate struggle to stay afloat. Many of these companies are forced to turn to a motley assortment of lenders of last resort & various other bottom feeders to meet their capital needs.
Remember Jack Lemon in Save The Tiger? There are a lot of folks like that out there in microcap land.
The precarious position most OTC companies find themselves in leaves their investors with the short end of the stick too – & to make matters worse, there are a lot of sharks in these waters. It isn’t too hard to manipulate a stock that has no institutional ownership, no analyst coverage, and – at the lowest ends of the food chain – minimal disclosure.
The SEC has brought dozens of penny stock enforcement proceedings in recent years & has issued three investor bulletins in recent months about the risks of the microcap market. Despite that, its White Paper concludes that “the size of the OTC market is large and has grown by dollar volume in recent periods, especially in the tier with the weakest disclosure-related eligibility requirements.”
Can the news about OTC stocks get any worse? Yeah, it can. Here’s the last sentence of the White Paper:
Demographic patterns reveal that OTC investor outcomes are especially negative for investors living in areas with greater proportions of older, retired, low-income, low-wealth, and low-education individuals.
In response to the Delaware Chancery Court’s 2014 decision in ATP Tour v. Deutscher Tennis Bund, the Delaware legislature amended Section 109(b) to prohibit fee-shifting bylaws for “internal corporate claims” – those alleging breaches of fiduciary duty or as to which the DGCL gives the Chancery Court jurisdiction.
In Solak v. Sarowitz, the Chancery Court recently applied this statute to invalidate a fee-shifting provision attached to a forum selection bylaw. This K&L Gates memo reviews the decision. Here’s an excerpt summarizing the Court’s holding:
To the extent it was unclear following the 2015 DGCL Amendments, the Court of Chancery’s decision in Solak confirms to practitioners that any fee-shifting bylaw (or charter provision) adopted by a stock corporation and relating to internal corporate claims is invalid. Indeed, in its decision, the Court discussed at length the motivations behind the 2015 DGCL Amendments, including the Corporation Law Council of the Delaware State Bar Association’s desire to limit fee-shifting following the Delaware Supreme Court’s decision in ATP Tour, Inc.
IPOs: 2016 at a Glance
Because I have the attention span of a guy who basically surfs the Internet for a living, I’ve started to develop a real fondness for infographics. Here’s a good one from MoFo highlighting the year in IPOs.
In 2016, individuals in more than 67 countries outside the United States accounted for more than 460 tips under the SEC’s whistleblower program – that’s 10% of the total, and the number is growing. This Dechert memo suggests that the number of tips from abroad will continue to increase, and offers some thoughts on best practices for multinational corporations’ compliance programs. This excerpt says that an appropriately designed program should include, at a minimum:
– Convenient and confidential channels for employees to report concerns and complaints;
– Proper recordkeeping and tracking of complaints from initial report to resolution;
– Pre-existing protocols setting forth how to properly engage whistleblowers, investigate allegations of misconduct and when to retain external counsel;
– Well-trained staff empowered to independently identify misconduct and thoroughly investigate complaints, possibly in conjunction with external counsel;
– Proper documentation of the results of investigations, including any remedial measures adopted in response; and
– Well-designed internal controls to reduce the incidence of complaints and reduce the likelihood of retaliation against complaining employees.
Even with a properly implemented program, a company may not be able to completely avoid whistleblower complaints. But companies with established policies and procedures for appropriately handling whistleblower complaints will be in the best position to defend themselves against government investigations, & their efforts will likely be favorably viewed by the authorities.
Cross-Border Investigations: Expect Another Active Year in 2017
This Skadden memo reviews recent developments in cross-border investigations and enforcement, while this DLA Piper memo suggests that companies should brace for another very active year in cross-border investigations. Here’s an excerpt highlighting some of the ongoing cross-border cooperation initiatives between the UK’s Serious Fraud Office (SFO) & US authorities:
The SFO and US regulatory authorities, including the US Department of Justice and the US Securities and Exchange Commission, have also stated that they are committed to cooperating on cross-border investigations. As part of that cooperation, the UK and US agencies announced in early December 2016 that the DOJ will be assigning one of its attorneys to work in London, the first year with the Financial Conduct Authority (FCA) and the second with the SFO. US Assistant Attorney General Leslie Caldwell stated that this position “builds on years of parallel investigations and significant cooperation” and that the FCA and SFO are “highly interested in reciprocating” with a position assigned from the UK to the US.
John Travolta Was Right. . .
Since we’ve got kind of an international focus today, I thought it was a good time to point out that John Travolta’s character in Pulp Fiction was right – they do call it a “Royal with Cheese” in France (or a “Royal Deluxe” if you get yours with lettuce & tomato). Note also the mayo with the fries. I’ll never doubt a character in a Tarantino movie again:
By the way, if you’re concerned about the potential decline & fall of Western Civilization, here’s something you probably don’t want to know — this McDonald’s is at the Louvre.
Okay, I really had a lot of fun thinking about possible titles for this blog – “Harold & Kumar Go to Wall Street”, “Jay & Silent Bob Get on the Big Board”, “Dazed & Confused & Listed”, “Cheech & Chong’sUp in Smoke in Heavy Trading”. . . I could go on, and definitely would if I was back sitting in a college dorm room with my buddies.
Anyway, this Duane Morris blog points out a milestone in the history of the NYSE – the listing of its first cannabis-related stock:
In a major positive step for the cannabis industry, the New York Stock Exchange last month listed a new real estate investment trust called Innovative Industrial Properties (NYSE:IIPR), the first cannabis company to be listed on a US national exchange. The company plans to invest solely in real estate intended to be leased out to cannabis growers. In the IPO they raised $67 million, much less than expected. The price has not moved above the IPO price, but it has moved steadily up recently after an initial drop on its first few days of trading.
Earlier in 2016, Nasdaq rejected the listing application of MassRoots, a Facebook-like social networking platform for . . .uh. . . stoners. Nasdaq apparently was concerned that listing the company could be seen as aiding the distribution of an illegal substance.
Broc recently blogged about the legal uncertainties – for both companies & lawyers – associated with doing a marijuana-related deal. These uncertainties may increase with the new Administration. Attorney General nominee Sen. Jeff Sessions is strongly opposed to marijuana legalization, and as Duane Morris notes, that may make marijuana’s status in the states that have legalized it even more tenuous:
Congress has kept the feds from using money to go after those properly complying with state cannabis laws. But those actions, in appropriation bills, have to be renewed each year, and recent parliamentary changes may make that more difficult. The key question will be whether Trump allows Sessions free rein on the issue. That’s the unknown.
I like to think of this as the “Battle of the Jeffs” – Jeff Sessions vs. Jeff Spicoli from Fast Times at Ridgemont High. In the long run, I guess my money’s on Spicoli, but in the short-term, I’m not underrating Sessions.
Director Removal: Delaware Nixes Supermajority Requirement
Yesterday, the Chancery Court invalidated a corporate bylaw requiring a vote of 2/3rds of the outstanding shares of a Delaware corporation to remove a director. In Frechter v. Zier, Vice Chancellor Glasscock held that the provision was inconsistent with the requirements of Section 141(k) of the DGCL – which generally provides that any or all of the directors may be removed without cause by a majority of the outstanding shares.
Vice Chancellor Glasscock rejected the defendant’s contentions that the relevant language of Section 141(k) was permissive, & concluded that the removal provision was inconsistent with the plain language of the statute:
The DGCL is, broadly, an enabling statute. Section 109(b) of the DGCL states, in relevant part, that “[t]he bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders . . . .”
Section 141(k) of the DGCL, however, provides that “[a]ny director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors” subject to two exceptions not pertinent here. The Plaintiff asserts persuasively, that the bylaw in question is “inconsistent with law,” and thus not permitted under Section 109(b).
As Broc blogged last year, the Chancery Court had previously invalidated charter & bylaw provisions that purported to make directors removable only for “cause” – holding that such a limitation was only permissible for companies with classified boards or that allowed for cumulative voting.
The Year in PIPEs
This MoFo blog and infographic reviews the year in “private investment in public equity” or “PIPE” deals. PIPEs have long been a capital-raising alternative when the public markets are inhospitable, and issuers in several out-of-favor sectors – including biotech, mining & energy – turned to them last year. Nearly $52 billion was raised in PIPE offerings during 2016 – a 27% increase over the $41 billion raised in 2015. The number of deals rose more than 12%, from 1,066 in 2015 to 1,199 in 2016.
Here’s a blog that I posted last week on the new “John Tales” Blog on DealLawyers.com:
Yesterday, the SEC announced that Allergan had admitted securities law violations and agreed to pay a $15 million penalty for failing to disclose merger negotiations that were taking place with third parties while the Company was the target of a tender offer from Valeant in 2014. The SEC’s order summarized the applicable disclosure requirement:
Rule 14d-9 and Item 7 of Schedule 14D-9 (incorporating Item 1006(d) of Regulation M-A) provide . . . that the person filing the statement must disclose “subject company negotiations.” Item 1006(d) requires disclosure of any negotiation which is underway or is being undertaken and which relates to, among other things, a tender offer or a transfer of a material amount of assets by the subject company. Item 1006(d)(2) of Regulation M-A requires disclosure of any transaction, board resolution, agreement in principle, or signed contract that is “entered into in response to [a] tender offer.” Item 1006(d)(1) of Regulation M-A requires a subject company to state “whether or not [it] is undertaking or engaged in any negotiations in response to [a] tender offer” that relate to an extraordinary transaction.
Allergan ran afoul of these requirements by failing to disclose discussions with two prospective merger partners – one of which it was looking to buy – that took place while the tender offer was ongoing. The admission is an unusual step, but it may reflect the fact that the Staff raised the possible need for disclosure of these negotiations on several occasions – and Allergan pushed back for some time before ultimately making disclosure.
In other settings, the Staff has taken a flexible approach to disclosure of preliminary merger negotiations. For example, it generally takes the position that MD&A’s known trends requirement does not mandate disclosure of such negotiations. However, if your deal is a tender offer, and you engage in negotiations with another bidder after the tender offer’s been launched, you’ll have an obligation to disclose those negotiations without regard to how preliminary they are.
Why? Because – as the SEC’s order points out – there is a specific line item in Schedule 14D-9 that will prompt this disclosure. Item 7 of Schedule 14D-9 – and Item 1006 of Reg M-A, which is incorporated into it – requires the target of a tender offer to disclose if any negotiations are going on. In some circumstances, you may be able to avoid disclosing the identity of the other party or the terms of the transaction, but you’ll still have to disclose the existence of those negotiations. (This is also true for “Going Private” deals – even if they don’t involve a tender – Item 1006 of Reg M-A applies there too.)
If the negotiations are ongoing when you make your first 14D-9 filing, you need to disclose them there. If they happen after you file the 14D-9, you’ll have to immediately (as in one day) amend it to disclose them. The SEC is dead serious about this and has been for a long time – when I started practice, a very prominent Wall Street lawyer got in the enforcement staff’s cross hairs because he told his client that it didn’t have to disclose merger negotiations during the pendency of a tender offer until they were material.
Unfortunately for him, he was a director of the company, and the SEC went after him for causing their violation of law. The ABA and the securities bar went ballistic – and the full SEC ultimately backed off – but nobody who was practicing in this area at the time will ever forget that situation. In fact, it even got a mention in the poor guy’s obituary when he passed away a few years ago.
Every 33 Years Like Clockwork: ABA’s Newly Revised “Model Business Corporation Act”
The ABA recently announced that it has issued the first comprehensive revision to the “Model Business Corporation Act” since 1984:
Beginning in 2010, the Corporate Laws Committee has undertaken a thorough review and revision of the Model Act and its Official Comment. This effort has resulted in the adoption and publication of the Model Business Corporation Act (2016 Revision). The 2016 Revision is based on the 1984 version and incorporates the amendments to the Model Act published in supplements regularly thereafter, with changes to both the Act and its Official Comment. Also included are notes on adoption and revised transitional provisions that are intended to facilitate legislative consideration in adopting the new version of the Model Act.
The MBCA is the model for more than 30 state corporate statutes, so it’s an extremely influential publication. On a personal note, the foreward to the new edition gives special recognition to the MBCA’s Reporter Emeritus – the late Prof. Michael Dooley. I was fortunate enough to have Prof. Dooley for Securities Regulation when I was in law school – he was an excellent teacher, a distinguished scholar & a real gentleman.
Board Committees: How the S&P 500’s Approach is Evolving
This EY study addresses how practices regarding the use of board committees are evolving among large-cap companies. The study reviewed board structure at S&P 500 companies between 2013 and 2016 made five observations about changes in committee practices during that period:
– Over 75% of S&P 500 companies have at least one board committee in addition to the required audit, nominating/governance and compensation committees, up from 61% in 2013.
– Executive committees are the most common type of additional committee. Finance, compliance and risk committees are also becoming more common, reflecting the benefits to some boards of having specialist committees on these oversight areas.
– Cyber & IT matters are not only for the Audit Committee. While over half of the companies that address these matters ,a growing number assigned responsibility to an additional committee. In the past year alone, the number of such committees grew by one-third.
– Compliance, risk & technology committees have seen the most growth over the past three years.
What about small caps? EY reviewed the S&P SmallCap 600 board committee structure and noted that 46% of smaller companies have at least one additional board committee, with the five most common being the executive, risk, finance, strategy & compliance committees.
This blog from Steve Quinlivan shares the details on the Trump Administration’s decision to order an immediate freeze on the adoption of new regulations. Media reports have noted that the incoming Obama and Bush Administrations both instituted a similar freeze – but as this Davis Polk blog points out, those reports have overlooked the fact that Trump’s freeze doesn’t apply to independent agencies, like the SEC:
Like past memoranda, the Priebus Memo does not attempt to freeze rulemaking by independent agencies, nor does it request that independent agencies voluntarily comply with a regulatory moratorium, as did a similar memorandum issued shortly after the inauguration of President George W. Bush. Accordingly, the Priebus Memo means little for the financial sector, because most financial regulatory agencies—including the CFTC, FDIC, Federal Reserve, OCC, SEC and, at least for the meantime, the CFPB—are treated as independent agencies.
Although there wasn’t a request for voluntary compliance with the freeze, with an interim GOP Chair now in place, it’s unlikely that the SEC would “go rogue” and issue new regulations in any event.
Unlike the actions taken by the last two incoming Administrations, the Priebus Memo freezes not only executive-agency rulemaking, but also the issuance of any “guidance document[s]” by an executive agency. Again, because the SEC is an independent agency, this directive does not apply to it – but for those agencies subject to it, issuance of formal agency guidance on existing rules & statutory provisions is off the table for the duration of the freeze.
Tomorrow’s Webcast: “Audit Committees in Action – The Latest Developments”
Tune in tomorrow for the webcast – “Audit Committees in Action: The Latest Developments” – to hear Morgan Lewis’ Rani Doyle, Deloitte’s Consuelo Hitchcock and Gibson Dunn’s Mike Scanlon catch us up on a host of new SEC & PCAOB developments that impact how audit committees operate – and more.
Cybersecurity: The Russians Are Coming! The Russians Are Coming!
This Womble Carlyle memo reviews the DHS/FBI report on Russia’s hacking of the DNC in connection with the 2016 election, & says it’s time for US companies to start building cyber-fallout shelters:
The report is best understood as a call to arms for U.S. private sector and government entities to strengthen their vigilance and defenses against Russian Intelligence Services and join DHS and FBI in their effort to counter them. Many organizations believe that because they hold no state secrets, defense related intellectual property, or sensitive information on government employees, they have no stake in geopolitical cyber security. DHS and the FBI are saying that this is not true.
The national interest in cyber security is materially weakened whenever organizations with credibility and standing allow their domains to be breached and used conduits for cyber attacks on others – as happened in the DNC breach. Furthermore, data collected from breaches of non-traditional targets is often used to create the highly targeted and highly credible email packages for use in spear phishing campaigns against more traditional targets.
Aside from the recent unpleasantness, the Center for Strategic & International Studies’ cybersecurity recommendations for the incoming President include actions to “incentivize companies to make cybersecurity and data protection a priority for Boards and C-Suites.”
As we watch the peaceful transition of power & wonder if we will come together as a nation after a deeply divisive election, there’s one question on everyone’s mind this Inauguration Day – “So, is Edgar open?” According to this press release from the SEC, the answer is “yes.”
The SEC’s press release notes that due to Inauguration activities, there will only be limited filer support – as DC is shut down & government employees there aren’t heading into the office. The press release doesn’t address the issue of whether today is a “business day” for purposes of determining filing due dates. However, as Broc pointed out in this blog from 2009, Inauguration Day is not a national holiday – so in the absence of any guidance from the SEC to the contrary, companies should assume that it is a “business day.”
The “Make-Whole” Investor Revolt
This Bloomberg News story tells the tale of a revolt among bond investors over efforts by issuers to change indenture language relating to make-whole payments. Apparently, a number of high-profile issuers were sent back to the drawing board earlier this month after investors refused to come on board for new language intended to prohibit make-whole payments in connection with defaults.
Make-wholes entitle investors who have their notes redeemed to receive the discounted present value of the future payments they would have received absent the redemption. They have historically been payable only in connection with optional redemptions. Last fall, two judicial decisions imposed make-whole obligations on issuers in non-traditional settings. The first, Wilmington Savings v. Cash America (SDNY 9/16) applied a make-whole as a remedy for a “voluntary” non-bankruptcy default. The second, In Re Energy Future Holdings (3d Cir. 11/16) held that a make-whole was payable in a bankruptcy redemption.
In response, issuers added language to indentures “undoing” the result in these cases – by clarifying that no make-whole is due upon default or bankruptcy.
The investor revolt was prompted by comments from a covenant review service to the effect that this new language was “the end of covenants” and the “single worst change” ever to emerge in the bond market. This Davis Polk memo responds to these contentions by trying to provide some historical perspective:
Not all capital markets notes include an optional right of redemption. We believe that market participants and practitioners have generally understood that an issuer’s right of redemption, including at a stated premium or make-whole, exists to provide flexibility for the benefit of the issuer. It would be odd, to say the least, if when an issuer defaults on notes without this feature, the issuer only has to pay principal and interest, but if that additional feature is included–for the issuer’s benefit– the issuer must pay a premium.
Accordingly, the memo contends that this new language “is not really much of a change at all from what has been, in our view, established practice.”
