Today is the “16th Annual Executive Compensation Conference”; yesterday was the “Proxy Disclosure Conference” (for which the video archive is already posted). Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” – on the home pages of those sites – will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: HTML5, Windows Media or Flash Player). Here are the “Course Materials.”
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s conference agenda; times are Central.
– How to Earn CLE Online: Please read these “FAQs about Earning CLE” carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your Bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see this “List: CLE Credit By State.”
Streamlined MD&As: How to Handle Retrospective Accounting Changes
Under the Fast Act, Item 303(a) now allows companies that provide three years’ worth of financials in their 10-K to omit from their MD&A a discussion of the earliest year. We’ve heard some companies ask how they should handle disclosure if they’ve retrospectively adopted a new accounting principle for that earliest year. These notes from a recent meeting between the CAQ & Corp Fin Staff shed some light on the SEC’s expectations (see pg. 3):
The Committee asked the staff how registrants should consider the effect of retrospective changes in omitting the earliest year discussion, given that registrants must disclose the location in the prior filing where the disclosure can be found. The staff noted that this amendment does not change the standard that applies to all of MD&A – a registrant shall provide such other information that it believes to be necessary to an understanding of its financial condition, changes in financial condition and results of operations.
Accordingly, where there has been a retrospective change, a registrant should assess whether the previously filed disclosure that it is considering omitting and making reference to continues to provide the information necessary to understand the registrant’s financial condition, changes in financial condition and results of operations.
XBRL: What’s It Good For?
XBRL has been around 10 years! A lot of people would say it’s still good for absolutely nothing – among other reasons, because it requires extra software to consume, doesn’t cover non-GAAP disclosures and can be error-prone. But there are a few cheerleaders. This FEI interview gives some insight into how Famous Dave’s CFO Paul Malazita is using data tags to evaluate acquisition targets and the company’s competitive position:
We’re working with a third-party company right now to use their software to build out a peer set of companies with certain metrics that we look at in the restaurant industry for the purposes of setting up templates and data for when we perform our annual Goodwill impairment analysis. It also helps us to understand certain transaction multiples. We pay close attention to what’s going on in our industry. Why certain brands traded at different multiples is not necessarily apparent at the outset.
Being able to use XBRL data to normalize the company, looking at the strength of their balance sheet, the strength of their revenues, their profitability metrics, things like that, really starts to get a sense of what our company is truly worth. We’re a public company. But, oftentimes, there is intrinsic value that might not be captured by the market. As we look either into acquiring other companies or what we look like in the market, using XBRL data is extremely helpful in being able to do those analyses.
Also, our note disclosures and financial statements are compared across our industry using software that provides search function on XBRL filings. So, for example, when I have something come up in a certain quarter and we’ve never had to disclose it before, I go out and search through XBRL filings to find similar companies within our industry that have had to present certain similar things in the past. And that really helps me in crafting our disclosures to make sure that we’re complying with the spirit of GAAP and providing the information that we’re supposed to be providing.
Here’s another tip from Paul: moving away from narrative disclosure in 10-Qs and 10-Ks and more toward a tabular format doesn’t just make the report easier to read for normal humans – it also makes it easier (and presumably less expensive) to add the XBRL tags.
Today is the “Proxy Disclosure Conference”; tomorrow is the “16th Annual Executive Compensation Conference.” Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” – on the home pages of those sites – will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: HTML5 or Flash Player). Here are the “Course Materials.”
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s conference agenda; times are Central.
– How to Earn CLE Online: Please read these “FAQs about Earning CLE” carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your Bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see this “List: CLE Credit By State.”
10b-5 Liability: Exec Gets Sanctioned for “Failure to Correct”
Earlier this year, John blogged that the US Supreme Court gave the SEC a big win when it held – in Lorenzo v. SEC – that individual anti-fraud liability can apply under Rules 10b-5(a) and (c) to someone who “disseminates” false or misleading statements, even if that person didn’t “make” the statement under Rule 10b-5(b). Now, the 10th Circuit has become the first circuit court to apply Lorenzo – and it couldn’t have gone much better for the SEC. This Arnold & Porter memo explains the facts of this case – Malouf v. SEC:
Dennis Malouf served as an executive at both a securities brokerage and an investment adviser. He subsequently sold his interest in the brokerage in a transaction in which he continued to receive installment payments based on the commissions the brokerage collected from securities sales. Malouf facilitated these installment payments by routing client trades through the brokerage without disclosing his financial interest to clients or to the investment adviser and despite knowing that the investment adviser represented that Malouf did not have any conflicts of interest.
The Securities and Exchange Commission (SEC) brought an enforcement action against Malouf, and the Tenth Circuit affirmed an administrative law judge’s finding that Malouf had violated Exchange Act Rules 10b-5(a) and (c) and Sections 17(a)(1) and (a)(3) of the Securities Act. The Tenth Circuit reasoned that Malouf had engaged in an unlawful fraudulent scheme because he knew that a conflict existed while the investment adviser was telling clients that he was independent and, despite this knowledge, failed to take steps to correct the misstatements or to disclose the conflict. The Tenth Circuit rejected Malouf’s argument that the SEC had “obliterated[d] the distinction” between Rule 10b-5 subsections (b) on one hand and (a) and (c) on the other because, as the Court in Lorenzo expressly held, defendants could be liable under sections of the Securities Act and Rule 10b-5 dealing with fraudulent schemes in connection with misstatements without having been the “maker” of misstatements.
Malouf was fined $75,000, had to disgorge $562,000 in profits, and is now barred for life from working in the securities industry. To me, it seems pretty clear that someone should correct known misstatements about their own conflicts – and if you dig into the facts of this case, you’ll see that the defendant was also involved with causing the misstatement in the first place. But, this wasn’t a slam dunk case for the SEC since there’s still some uncertainty around how Lorenzo will be applied. The memo notes that the holding gives the SEC even more encouragement to pursue anti-fraud charges against individuals who aren’t “makers” of statements. We don’t know yet whether plaintiffs will try to extend these theories to private class actions. . .
Delaware Company Adopts “Gender Quota” Bylaw
A Delaware-incorporated company that’s headquartered in California has filed a Form 8-K to report adoption of a “board diversity” bylaw. The 8-K says that the company took this step to implement the requirements of SB 826, the California law that requires female representation on boards. This blog from Allen Matkins’ Keith Bishop dives into the details:
The Bylaw operates by dividing NantKwest’s board into two classes. To be qualified for a “Class 2 Directorship”, the individual must self-identify her gender as a woman, without regard to her designated sex at birth. Consonant with SB 826, the number of Class 2 Directorships will eventually depend upon the “number of directors”. All directorships that are not Class 2 Directorships are Class 1 Directorships.
Keith highlights that nothing in SB 826 requires companies to amend their bylaws – and that doing so might cause issues under California’s Civil Rights Act. He also raises a few questions about how this particular bylaw will operate.
If you’re looking to meld with your couch this holiday weekend, Matt Kelly has identified the best shows and films about corporate compliance, business ethics and regulatory issues (and since he published this, Homecoming also came out – which I knew Matt would also endorse, and he’s now informed me that he devoted an entire separate post to it). Binge-watching these definitely can be justified as “work-related.” Here’s the criteria for the lists:
Several weeks ago I posted a question on LinkedIn: What are some of the best representations of corporate compliance, business ethics, or regulatory issues that you’ve ever seen?
My only requirements were that the shows be fictional, and portray a legal business behaving in a corrupt manner (rather than an illegal business like a drug cartel). The response was overwhelming — nearly 28,000 views of the post in less than a week, plus dozens of suggestions.
We’ve seen people in the “sustainability” industry starting to call for a uniform ESG disclosure framework – like this article from the CEO of the Global Reporting Initiative (GRI). A few bills on that topic also have been introduced. Now, a recent McKinsey study says that investors are also calling for change.
This Cooley blog summarizes the findings – here’s the intro:
Although there has been an increase in sustainability reporting, McKinsey’s survey revealed that investors believe that “they cannot readily use companies’ sustainability disclosures to inform investment decisions and advice accurately.” Why not? Because, unlike regular SEC-mandated financial disclosures, ESG disclosures don’t conform to a common set of standards—in fact, they may well conform to any of a dozen major reporting frameworks and many more standards, selected at the discretion of the company.
That leaves investors to try to sort things out before they can make any side-by-side comparisons—if that’s even possible. According to McKinsey, investors would really like to see some type of legal mandate around sustainability reporting. The rub is that, ironically, it’s the SEC that isn’t on board with that idea—at least, not yet.
As this blog from Elm Sustainability Partners points out, executives also aren’t enthralled with the current approach – they spend a ton of time responding to specialized surveys for what is essentially the same info – e.g. emissions data that is tabulated in different ways to conform to different standards.
Of course, “something is better than nothing” – so companies need to continue to attempt to meet investors’ information demands by providing relevant sustainability info. To get the scoop how companies that may have fewer resources are implementing sustainability initiatives – and making their disclosure as usable as possible – tune in to our October 16th webcast, “Sustainability Reporting: Small & Mid-Cap Perspectives.”
Making Sense of ESG Reporting Frameworks
Until we get a standardized approach to ESG disclosure, companies (and investors) will continue to wade through the current “alphabet soup” of reporting frameworks – and this issue of “Corporate Secretary” is worth a read to make sense of it all. Starting on page 5, it details how companies can use the GRI, SASB and other approaches to ESG disclosure. Here’s an excerpt from the write-up on SASB’s recent work:
In March 2019, SASB and the Climate Disclosure Standards Board published “Laying the groundwork for effective TCFD aligned disclosures,” which includes on page 8 a checklist of 11 preliminary steps companies can take to start integrating the recommendations of the Task Force on Climate-related Financial Disclosures. This is a hands-on, how-to resource that can help both directors and management get started.
Companies can also start their reporting journey by conducting a materiality assessment with the SASB materiality map, an interactive tool to look up industry-specific disclosure topics and metrics and identify and compare disclosure topics across different industries and sectors. SASB’s Engagement Guide for Asset Owners & Asset Managers can be a valuable resource for companies just starting to think about sustainability disclosures.
EU Credit Ratings: Impact of ESG Factors
I’ve blogged about how some credit rating agencies are voluntarily committing to look at ESG criteria in a more systemic way, and are starting to offer one-off explanations of how social issues can diminish or enhance credit ratings. In the EU, regulators appear to be imposing a more uniform approach. This announcement from the European Securities & Markets Authority says that credit rating agencies aren’t required to consider sustainability in their assessments (as explained in more detail in this 38-page document). But if they do, they need to follow new guidelines in explaining how ESG factors impact the rating.
Page 26 of the guidelines say that if ESG factors are a “key driver” behind a change to a credit rating or rating outlook, the rating agency’s accompanying press release or report should:
– Outline whether any of the key drivers behind the change to the credit rating or rating outlook correspond to that CRA’s categorisation of ESG factors
– Identify the key driving factors that were considered by that CRA to be ESG factors
– Explain why these ESG factors were material to the credit rating or rating outlook
– Include a link to either the section of that CRA’s website that includes guidance explaining how ESG factors are considered as part of that CRA’s credit ratings or a document that explains how ESG factors are considered within that CRA’s methodologies or associated models
Yesterday, SEC Commissioners Rob Jackson & Allison Herren Lee issued this joint statement about the “modernization” amendments to Reg S-K that were proposed several weeks ago. Although they’re in favor of the proposed addition of human capital disclosure requirements, they want to encourage comments on the shift towards principles-based disclosure and the absence of the topic of climate risk. Here’s the body of their statement:
The proposal favors a principles-based approach to disclosure rather than balancing the use of principles with line-item disclosures as investors—the consumers of this information—have advocated. The flexibility offered by principles-based disclosure makes sense in some cases, but the benefits of that flexibility should be carefully weighed against its costs.
One concern with principles-based disclosure is that it gives company executives discretion over what they tell investors. Another is that it can produce inconsistent information that investors cannot easily compare, making investment analysis—and, thus, capital—more expensive. Our concern is that the proposal’s principles-based approach will fail to give American investors the information they need about the companies they own.
For example, the proposal takes a crucial step forward for investors who have long asked for transparency about whether and how public companies invest in the American workforce. But, because it favors flexibility over bright-line rules, the proposal may give management too much discretion—sacrificing important comparability—when describing a company’s investments in its workers.
That’s why investors representing trillions of dollars, and our Investor Advisory Committee, have urged the SEC to require specific, detailed disclosures reflecting the importance of human capital management to the bottom line. We hope that commenters will make sure we get this balance right by letting us know what, if any, specific measures would be useful for investors.
Additionally, the proposal does not seek comment on whether to include the topic of climate risk in the Description of Business under Item 101. Estimates of the scale of that risk vary, but what is clear is that investors of all kinds view the risk as an important factor in their decision-making process. Yet it remains tough for investors to obtain useful climate-related disclosure. One argument against mandating such disclosure is that climate risk is too difficult to quantify with acceptable accuracy. Whatever one thinks about disclosure of climate risk, research shows that we are long past the point of being unable to meaningfully measure a company’s sustainability profile.
For example, recent work shows that some sustainability measures reveal material information to the market. Despite early skepticism about the utility of those measures, recent efforts to refine them through engagement with issuers and investors have borne real fruit. We hope commenters will weigh in as to whether and how this topic should be included in a final rule. In addition, to the extent the SEC may consider whether and how additional rules should be updated to provide more transparency on climate risk, we hope commenters will provide data and analysis to help guide that important work.
Audit Committee Disclosure: Cyber Risks Getting More Play
Deloitte’s annual survey on audit committee disclosure shows that large companies are continuing to increase the amount of information they voluntarily provide – with more than half now explaining why the audit committee decided to appoint the independent auditor, and nearly 80% explaining how the independent auditor is evaluated.
As has been the case for a few years, 99 companies in the S&P 100 also disclose the audit committee’s role in risk oversight. What’s new on that front is that a growing number specifically describe whether & how the audit committee is involved in overseeing cyber risks.
Deloitte gives these suggestions to further enhance transparency & usefulness of the proxy (also see our newly updated “Audit Committee Disclosure Handbook“):
3. Discuss issues encountered during the audit and how they were resolved (see KMI’s 2019 proxy statement)
4. Enhance readability by using graphics, or personalize the audit committee with photos or other messages tailored to readers (see Visa’s 2019 proxy statement)
Transcript: “Company Buybacks – Best Practices”
We’ve posted the transcript for our recent webcast: “Company Buybacks – Best Practices.”
Last week, the SEC issued this fee advisory that sets the filing fee rates for registration statements for fiscal 2020. Right now, the filing fee rate for Securities Act registration statements is $121.2 per million (the same rate applies under Sections 13(e) and 14(g)). Under the SEC’s new order, this rate will increase to $129.8 per million, a 7.1% increase.
Although we saw a modest 2.6% reduction in fee rates last year, this price hike puts fees back on the upward trajectory – they increased by 7-15% in fiscal 2018 and 2017. And since the annual adjustments to the SEC’s fee rate have been made under a formula prescribed by the Dodd-Frank Act since 2010, the “politics” of the timing and amount have been removed for a while.
As noted in the SEC’s order, the new fees will go into effect on October 1st (as has been the case since 2011, and as mandated by Dodd-Frank). That’s a departure from the old way of doing things – before Dodd-Frank, the new rate didn’t become effective until five days after the date of enactment of the SEC’s appropriation for the new year – which often was delayed well beyond the October 1st start of the government’s fiscal year as Congress and the President battled over the government’s budget.
Low-Cost Index Funds: Management’s “Absentee” Best Friend?
John’s blogged a couple of times about efforts by large institutional investors to avert a gathering storm of criticism. Maybe they can add this research to their fodder – it says that index funds are 12.5% more likely than “active” funds to vote with management’s recommendations when they differ from ISS, with that percentage being even higher for funds with low expense ratios (presumably, because they have fewer resources to spend on monitoring).
The research acknowledges that funds could be voting with management and still monitoring to ensure corporate governance – by either selling their shares, or by engaging with the company and then supporting pre-negotiated proposals. Sales are rare, as you’d expect from an index fund. But here’s the surprising part: in a complete departure from all anecdotal evidence and company complaints about the outsized influence of institutional investors, the researchers conclude that there’s no evidence of engagement. Zero!
If they’re right, maybe companies really can rest easy about the prediction that the “Big 3” will control 40% of the S&P 500 within the next 20 years. In my opinion, though, they’ve reached that conclusion based on a flawed understanding of Schedule 13D filing requirements and the shareholder proposal & engagement process. Specifically:
– They ignore the fact that engagement on executive compensation, social issues and corporate governance doesn’t disqualify a shareholder from filing a Schedule 13G
– They assume that there’s no engagement in the absence of a fund submitting its own proposal or voting against the company in a proxy contest
Glass Lewis Going “All In” With CGLytics…And Considering Pay-for-Performance Changes
Here’s something I blogged yesterday on on CompensationStandards.com: In June, I blogged that Glass Lewis is now using CGLytics (instead of Equilar) for compensation & data analysis of North American companies. According to this Georgeson blog, Glass Lewis has now elaborated on what that means – and confirmed that its new business partner will be its exclusive global provider of peer groups, compensation data and analytics.
In light of this move and client & company feedback, the proxy advisor is considering changes to its pay-for-performance peer review and scoring methodology. We’ll know more about the potential changes in a few months. For now, effective January 1st, Glass Lewis will:
– Use CGLytics as the sole provider of compensation data and analytical tools globally
– Provide model access exclusively through Glass Lewis and CGLytics
– No longer use Equilar’s peer groups
– No longer use Equilar data in any of their products
– Be the exclusive access point to Glass Lewis research reports and vote recommendations
FASB is taking pity on smaller reporting companies – who are finding it especially challenging to implement the slew of recent changes to accounting standards. According to this Proposed Accounting Standards Update, the Board has tentatively approved a new philosophy that will extend how effective dates are staggered between larger public companies and all other entities – including smaller reporting companies, private companies and employee benefit plans. This Deloitte blog explains:
The FASB tentatively decided that – subject to the Board’s discretion – a major accounting standard would become effective for entities in Bucket 2 (SRCs, etc.) at least two years after the effective date applicable to entities in Bucket 1 (large public companies). Further, the FASB indicated that entities in Bucket 1 would apply the new accounting standard to interim periods within the fiscal year of adoption while entities in Bucket 2 would apply it to interim periods beginning in the fiscal year after the year of initial adoption.
Historically, the FASB has issued standards with different effective dates for (1) public companies and (2) all other entities. Note that the Board’s tentative decisions would not affect the relief granted under SEC rules related to the adoption of new accounting standards by emerging growth companies.
For smaller reporting companies, this new philosophy would apply to the standard on current expected credit losses – so the proposal would extend the effective date by three years, to 2023. A lot of companies stand to benefit, especially in light of the SEC’s recent expansion of the SRC definition. But not everyone thinks this new philosophy is a good approach. This “Accountancy Daily” article reports on Moody’s anxiety about the change:
The proposal – initiated to give smaller companies more time to implement the new accounting changes – would hinder the credit analysis process by compromising comparability between public and private issuers and delaying, for adoption laggards, the enhanced disclosures these new standards bring.
New PCAOB Staff Guidance: Auditing Estimates & Use of Specialists
Last week, the PCAOB announced Staff guidance on four requirements that will be effective at the beginning of 2021. Here are the new guidance documents:
According to the announcement, the first two documents explain aspects of the PCAOB’s new auditing standard for accounting estimates & fair value measurements (AS 2501). That standard enhances the process for auditors to assess the impact of estimates on the risk of material misstatements. The other two documents highlight aspects of new requirements in AS 1201 and AS 1210 that apply when auditors use the work of specialists in an audit and when an auditor uses the work of a company specialist as audit evidence.
Report From the SEC’s “Small Business Capital Formation” Meeting
The SEC held its 38th annual “Small Business Forum” a couple weeks ago, along with a meeting of the “Small Business Capital Formation Committee” the day before. This Cooley blog summarizes some of the happenings – including a tentative timetable for revising the “accredited investor” definition and this background on the SEC’s proposal to change the definition of “accelerated filer”:
Director Hinman said the question was whether to pursue the SEC’s more nuanced approach or to just conform the non-accelerated filer definition with the SRC definition? Is an attestation worthwhile for companies with public floats over $75 million? According to Hinman, the reason the SEC proposed the narrowly tailored exception for low-revenue companies—“fine-tuning” as Hinman characterized it—was that the DERA analysis was more supportive of that approach: the DERA analysis showed that the risk of problems was greater for companies with revenues in excess of $100 million.
In any case, even without the auditor attestation, the auditors still need to review the quality of the controls as part of the audit, he noted, and the management is still required to perform a SOX 404(a) assessment of internal controls. And there are certainly costs associated with the attestation, especially “system upgrades” that are needed when the attestation process commences. A number of comments received on the proposal argued that, while an attestation can add to the company’s cost, it also saves funds by reducing the cost of capital. As structured, the proposal allows low-revenue companies to make that decision.
Chair Clayton observed that, first, it was important to emphasize that high-quality financial statements are the bedrock of our system. But, with more than a decade of experience with SOX 404(b) and over five years of experience with the JOBS Act and its exemption from 404(b) for EGCs, he suggested, the market is telling us something. With many EGCs now starting to “age out” of that exemption, is the market just “rubbing its hands” in anticipation of 404(b) attestations for these post-EGC companies? He wasn’t seeing it (and some of the company representatives later indicated that, although they were aging out of EGC status, their investors were not asking for 404(b) attestations). Was there a “Wild West” premium for non-accelerated filers?
Although the SEC cancelled its open Commission meeting that had been scheduled for yesterday, the Commissioners voted to issue this 116-page proposing release to modernize parts of Regulation S-K – specifically, Item 101 (business description), Item 103 (legal proceedings) and Item 105 (risk factors).
I speculated on Monday that some parts of the proposal might be somewhat based on the SEC’s Reg S-K concept release from 2016 – and it appears that they are (though the proposal doesn’t cover everything that was in the concept release). Another part of the proposal relates to human capital – a topic that SEC Chair Jay Clayton has indicated in recent speeches may be growing in importance. The “Fact Sheet” in the SEC’s press release highlights these proposed changes (also see this Cooley blog):
Item 101(a) (Development of Business):
– Make the Item largely principles-based by providing a non-exclusive list of the types of information that a registrant may need to disclose, and by requiring disclosure of a topic only to the extent such information is material to an understanding of the general development of a registrant’s business;
– Include as a listed disclosure topic, to the extent material to an understanding of the registrant’s business, transactions and events that affect or may affect the company’s operations, including material changes to a registrant’s previously disclosed business strategy;
– Eliminate a prescribed timeframe for this disclosure; and
– Permit a registrant, in filings made after a registrant’s initial filing, to provide only an update of the general development of the business that focuses on material developments in the reporting period, and with an active hyperlink to the registrant’s most recent filing that, together with the update, would contain the full discussion of the general development of the registrant’s business.
Item 101(c) (Business Narrative):
– Clarify and expand its principles-based approach, by including disclosure topics drawn from a subset of the topics currently contained in Item 101(c);
– Include, as a disclosure topic, human capital resources – including any human capital measures or objectives that management focuses on in managing the business – to the extent such disclosures would be material to an understanding of the registrant’s business,such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the attraction, development, and retention of personnel; and
– Refocus the regulatory compliance requirement by including material government regulations, not just environmental provisions, as a topic.
Item 103 (Legal Proceedings):
– Expressly state that the required information about material legal proceedings may be provided by including hyperlinks or cross-references to legal proceedings disclosure located elsewhere in the document in an effort to encourage registrants to avoid duplicative disclosure; and
– Revise the $100,000 threshold for disclosure of environmental proceedings to which the government is a party to $300,000 to adjust for inflation.
Item 105 (Risk Factors):
– Require summary risk factor disclosure if the risk factor section exceeds 15 pages;
– Refine the principles-based approach of that rule by changing the disclosure standard from the “most significant” factors to the “material” factors required to be disclosed; and
– Require risk factors to be organized under relevant headings, with any risk factors that may generally apply to an investment in securities disclosed at the end of the risk factor section under a separate caption.
This proposal was based on seriatim action taken by the Commissioners. As to the issue of whether the SEC is required to propose (or adopt) rules at an open Commission meeting, see Broc’s blog entitled “When is the SEC Required to Hold an Open Commission Meeting?”
Shareholder Proposals: Big Year for “Political Spending”
In March, Broc blogged on our “Proxy Season Blog” that lobbying & political spending proposals were “coming up big” this year. And now that the height of proxy season is behind us, the Center for Political Accountability is elaborating on their recent successes in this blog. Here’s an excerpt:
The average vote was 36.4 percent at 33 companies that held annual meetings. That was up from 34 percent last year, when 18 resolutions went to a vote. In 2017, the resolution averaged 28 percent over the 22 resolutions that went to a vote. CPA and its shareholder partners reached disclosure agreements and withdrew resolutions at 13 companies this year. That compares with three in 2018 and seven in 2017.
The 2019 Proxy Season breakdown is as follows:
– Two majority votes in support of the resolution at Cognizant Technology Solutions Corp. (53.6%) and Macy’s Inc. (53.1%).
– Eleven votes in the 40% range, including Kohl’s Corp. (49.8%), NextEra Energy Inc. (48.7%), Allstate Corp. (46.9%), Chemed (46.2%), Western Union Co. (44.3%), Fiserv Inc. (43.8%), Alaska Air Group (43.5%), Roper Technologies Inc. (43.0%), Netflix Inc. (41.7%), Centene Corp. (41.6%) and Nucor Corp (40.6%).
– Twelve votes in the 30% range. The companies included Illumina Inc. (37.7%), Simon Property Group Inc. (37.1%), American Water Works Company Inc. (37.0%), Duke Energy Corp. (35.8%), Wyndham Destinations (35.6%), American Tower Corp. (35%), Royal Caribbean Cruises Ltd. (34.5%), Wynn Resorts Ltd. (34.4%) CMS Energy Corp. (34.3%), Equinix Inc. (34.2%), DTE Energy Co. (33.6%), and J.B. Hunt Transport Services Inc. (31.7%).
This Cooley blog explores why companies might be coming around to greater oversight of this type of spending, and discusses some of the CPA’s recommendations…
Just Mailed: July-August Issue of The Corporate Counsel
1. Early Returns From the Fast Act Rule Changes
– Changes to the Form 10-K Cover Page
– Item 102 of S-K—Description of Property
– Item 303 of S-K—MD&A- Item 601 of S-K—Exhibits: Description of Securities
– Some Takeaways
2. Unpacking Stock Splits
– Stock Split v. Stock Dividend: What’s the Difference?
– Companies Need “Surplus” To Pay Dividends
– Do You Have Enough Shares?
– Directors’ Fiduciary Duties
– Reverse Splits: Appraisal Rights & Fair Value of Fractional Shares
– Federal Income Tax Treatment of Splits & Reverse Splits
– Federal Securities Law Compliance
– Exchange Act Compliance
– Stock Exchange Rules
– 5 Key Takeaways
3. A Few Words About Delaware’s “Legal Capital” Requirements
A couple weeks ago, Broc blogged about some confusion around the Inline XBRL requirements that will be required for Form 10-Q filings by large accelerated filers this quarter. And with the 10-Q deadline looming for those with a June 30th quarter-end (tomorrow!), the dialogue has continued in our “Q&A Forum” (see #9960). Yesterday, Bass Berry also shared this blog about how to handle the iXBRL requirements. Here’s an excerpt about Form 10-Q – as well as Form 8-K (and see this Gibson Dunn blog for even more pointers):
Form 10-Q Question: As a large accelerated filer, should our 10-Q exhibit list include a separate reference to Exhibit 104?
Based on our discussions with SEC Staff within the SEC’s Division of Corporation Finance, we understand the position of the Staff in Corp Fin’s Office of Chief Counsel is that a registrant should explicitly reference an Exhibit 104 in the list of exhibits. And because the recent EDGAR Filer Manual makes clear that a registrant meets its obligation under Exhibit 104 by providing the cover page interactive data file using an Inline XBRL document set with Exhibit 101, the registrant should simply cross-reference to Exhibit 101.
For example, Exhibit 104 could include a cross-reference as follows: “104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).”
We also remind large accelerated filers that the recent instructions to Item 601(b)(101) of Regulation S-K were amended to require that for interactive data files, the Exhibit Index must include the word “Inline” within the title description for any XBRL-related exhibits. See Instruction 1 to Paragraphs (b)(101)(i) and (ii) of Regulation S-K.
Form 8-K Question: In a Form 8-K, are you required to explicitly reference Exhibit 104 in the Exhibit Index?
Answer: In discussions with SEC Staff within the SEC’s Division of Corporation Finance, we received the following guidance related to a registrant’s Exhibit 104 reference obligation in 8-Ks:
– If the 8-K does NOT otherwise have an exhibit being filed or furnished under Item 9.01(d), then the company does not need to include Item 9.01(d) in the 8-K solely for the Exhibit 104 reference. (The cover page tagging is still required in the background, but there is no standalone Exhibit 104 reference in an Item 9.01.)
– In contrast, if the 8-K does have another exhibit being filed or furnished under Item 9.01(d) (e.g., there is a material contract), then the company should include a reference to Exhibit 104 in the Item 9.01(d) disclosure because there is already disclosure being provided under this Item. For example, the reference could be as follows: “104 Cover Page Interactive Data File (embedded within the Inline XBRL document)”
– The principle behind this position is that Item 9.01 is intended to have an informational component to it, and if an Exhibit 104 reference is required in every 8-K then the informational benefit of item 9.01 is weakened.
Fast Act: SEC Issues “Technical Corrections”
A couple weeks ago, Broc noted in his Inline XBRL blog that an incorrect eCFR of the Item 601(a) table was causing some confusion about iXBRL requirements. The SEC has now issued this 18-page release, which corrects the exhibit table and a few other items from the original Fast Act amendments. The technical corrections to the final rules do the following:
– Reinstate certain item headings in registration statement forms under the Securities Act of 1933 that were inadvertently changed
– Relocate certain amendments to the correct item numbers in these forms and reinstates text that was inadvertently removed
– Correct a portion of the exhibit table in Item 601(a) of Regulation S-K to make it consistent with the regulatory text of the amendments
– Correct certain typographical errors and a cross-reference in the regulatory text of the amendments
Today’s Open Commission Meeting: Cancelled
The SEC has cancelled the open meeting that it had previously scheduled for today to consider whether to propose additional Regulation S-K disclosure reforms. No word on rescheduling yet.
Next Wednesday: SEC’s “Small Business Forum”
The SEC will hold its 38th annual “Small Business Forum” next Wednesday – August 14th – in Omaha, Nebraska (and if you’re like me, you now have this ‘Counting Crows’ song stuck in your head). The SEC’s announcement summarizes what topics will be covered and explains how to access the meeting (you need to register by tomorrow if you want to attend or listen in on any of the breakout sessions):
As in past years, the format of the Forum will include a live webcast informational morning session followed by an afternoon working session where participants will formulate specific policy recommendations in groups. The morning panels will cover capital formation (“success stories from the Silicon Prairie”) and efforts to harmonize the offering framework, based on the SEC’s June concept release.
The afternoon breakout group sessions will not be webcast but will be accessible by teleconference for those not attending in person. Anyone wishing to participate in a breakout group either in person or by teleconference must register online by August 9.
Also, about a month ago, the SEC posted its final report from last year’s Forum – which included recommendations about modernizing disclosure requirements and harmonizing private offering exemptions.
Here’s something from Dan Goelzer’s latest newsletter: A challenge faced by a company under non-public SEC investigation is whether to publicly disclose the investigation before the company knows whether it will result in any charges. There are no firm rules on whether investigations must be disclosed. The decision is inherently a judgment call and depends on an assessment of materiality after considering the costs and consequences of the investigation, the issues underlying the inquiry, the likelihood and potential impact of any eventual SEC enforcement proceeding, and other factors. It is frequently assumed that transparency is the more conservative approach and that, in the long run, the market rewards candor.
Dan goes on to say that a recent paper by David H. Solomon, of Boston College’s Carroll School of Management, and Eugene Soltes, of Harvard Business School, casts doubt on these assumptions. Professors Solomon and Soltes conclude:
– Even if no charges are ultimately filed, companies that voluntarily disclose an SEC financial fraud investigation have “significant negative returns, underperforming non-sanctioned firms that stayed silent by 12.7% for a year after the investigation begins.”
– Disclosing in a “more prominent manner” (e.g., in a press release as distinguished from an SEC filing) is associated with worse returns.
– A CEO whose company discloses an investigation is 14 percent more likely to “experience turnover” within two years than a CEO whose company opts to remain silent, regardless of the outcome of the SEC investigation.
These findings won’t come as a surprise to anyone who’s been involved in responding to fraud allegations. Even if the SEC ultimately drops their inquiry, a years-long investigation can tear apart the company and make it pretty hard for management to stay focused on their day jobs. But in his newsletter, Dan notes that:
The circumstances which lead to SEC financial fraud investigations vary widely, as do the pros and cons of voluntary disclosure. The Solomon and Soltes research, while intriguing, should not be a factor in deciding whether to disclose an investigation. The paper does, however, underscore how seriously the markets are likely to take news of a financial fraud investigation. The audit committee needs to treat such a matter equally seriously.
Securities Class Actions: M&A Filings Down, But Plaintiffs Still Loving Disclosure Fraud
Last week, Cornerstone Research published its midyear assessment of securities class action filings. Here’s a few takeaways from the press release:
– Plaintiffs filed 126 “core” class actions (excluding M&A claims) – that’s just one shy of the record set in the first half of 2017 – due to delayed market volatility in late 2018 and an uptick in filings against consumer-focused and tech companies
– Plaintiffs have filed more than 1,000 securities class actions in the last 2.5 years – accounting for more than 20% of the total number of filings since 1997
– M&A-related filings declined more than 20% since last year – to 72 – and dropped below 90 for the first time since the second half of 2016
– Six mega-dollar disclosure loss (DDL) filings (at least $5 billion) and 11 mega maximum dollar loss (MDL) filings (at least $10 billion) propelled aggregate market capitalization losses to the highest and fourth-highest levels on record, respectively
– Due to the Supreme Court’s 2018 Cyan decision, plaintiffs continue to shift securities fraud claims against IPOs from federal to state court – 61 new 1933 Act filings have appeared post-Cyan, which consists of 23 parallel filings, 12 filings in federal courts only, and 26 filings in state courts only
’33 Act Class Actions: NY State May Not Be So Plaintiff-Friendly After All
People have been predicting that SCOTUS’s 2018 Cyan decision – which held that class actions alleging claims under the Securities Act of 1933 may be heard in state court – would be a boon for the plaintiffs’ bar…and a big problem for IPO companies & their D&O carriers. Cornerstone’s midyear assessment of securities class action filings certainly suggests that plaintiffs have found the decision encouraging.
But this D&O Diary blog points to a glimmer of hope in New York – where many post-Cyan suits are being filed because the state’s pleading standards are less onerous than at the federal level. The blog explains that a New York State trial judge recently dismissed a case brought against an IPO company & its underwriters under Sections 11 and 12(a)(2) of the Securities Act. Here’s an excerpt (and here’s a call for reform):
To the extent that the plaintiffs’ lawyers were motivated to file in state court based on perceived advantages at the motion to dismiss stage, Judge Borrok’s decision represents something of a reality check. Judge Borrok’s opinion is thorough, sure-handed, and shows no discomfort in working with the federal securities laws and relevant case law. (In that regard, Judge Borrok’s reliance on the Omnicare decision underscores the importance of that ruling in opinion cases.) The state court pleading standard does not seem to have been a factor in the ruling. And no one would mistake Judge Borrok’s opinion as plaintiff friendly.
The decision in the Netshoes case is of course just one ruling by one trial court judge. It has no precedential value and may have only limited value as an indicator of how New York state courts generally may deal with the new influx of securities cases. Moreover, Judge Borrok’s dismissal of the Netshoes case was without prejudice; the plaintiffs will have an opportunity to try to cure the shortcomings Judge Borrok noted in his decision. For all we know, the plaintiffs might well succeed in amending their complaint and in surviving the next round of dismissal motions.
However, one can hope that Judge Borrok’s ruling may help send a message that the plaintiffs may need to reconsider whatever perceived advantages they may think they have in proceeding in state court rather than federal court.
