The hilarious picture below made me want to discuss the topic of “whether it’s okay to use footnotes when you write.” My take is that it depends on the context. In my opinion:
1. They’re okay for court opinions, SEC releases and research papers when authority needs to be cited.
2. But it’s not okay to bury substantive commentary in footnotes, even in the types of documents in #1 above. If it’s important enough to include in a document, put it in the body – don’t bury it in a footnote.
3. It’s never okay for informational articles. You might notice that nearly all of our content doesn’t include footnotes. For example, authority is cited within the body of our Handbooks. And commentary that might be considered as an “aside” is mentioned as an aside within the main body of our stuff. We don’t force our readers to dig around.
The Footnote of All Time
Saw this wonderful picture on @footnoted’s Twitter feed (courtesy of @AcademiaObscura). The footnote in the picture makes fun of footnotes (click the image to enlarge it & read footnote 1 at the bottom):
Poll: The Appropriateness of Footnotes
Take a moment for this anonymous poll to indicate your feelings towards footnotes:
I was excited to get an email from the SEC last night with the title of “Technical Issue Resolved.” Figuring that the SEC was finally ready to be transparent when Edgar goes down – yes, Edgar was down again yesterday – I eagerly opened the email. It said:
A technical issue that arose during routine maintenance caused a cache of previously issues materials to be be resent. The issue has been resolved but you may receive a limited number of additional outdated emails. We regret any inconvenience to you.
In other words, the SEC is willing to be transparent when it accidentally sends out old press releases – but the agency is still not willing to address the “elephant in the room.” As I have been doing for some time (see this blog for one of many), I will continue to hammer home the importance of fixing Edgar – and also hammer home the much easier fix of just informing us when Edgar is down (and then back up)…
More on “Big Brother’ is Watching You (Reading That Proxy)”
Got a number of interesting responses to my blog a few days ago about the SEC’s Edgar logs. This one was my favorite:
In its 2008 interpretive release about ‘use of company websites,’ the SEC was adamant that companies not track visitors to IR websites, in order to maintain anonymity of site visitors – but the SEC not only captures similar information on Edgar but actually makes that information publicly available. I’m baffled by the logic.
Director Compensation: Post-Investor Bancorp Reversal World Ain’t Pretty
We are beginning to see the impact of the Delaware Supreme Court’s reversal in the Investors Bancorp case – and it is not pretty. Two companies/boards recently agreed to settle lawsuits over non-employee director compensation and the attorneys for the parties and the Chancery Court Judge acknowledged that the settlement was influenced by Investors Bancorp.
In Solak v. Barrett, the lawsuit alleged that the directors of Clovis Oncology paid themselves excessive compensation in breach of their fiduciary duties and wasted corporate assets. According to the complaint, non-employee directors received an average of $617,700 in 2015, which was more than twice the average compensation of non-employee directors in the Fortune 50. Clovis is well outside the Fortune 500.
One of the areas that companies most frequently benchmark themselves is insider trading policies/blackout periods. We’ve surveyed that area over a dozen times over the past 15 years. We’re holding our semi-regular webcast about this area next month: “Insider Trading Policies & Rule 10b5-1 Plans.”
Another good source is the NASPP’s “Domestic Stock Plan Administration Survey” that it conducts every three years or so with Deloitte Consulting. Last year’s NASPP survey revealed that 100% percent of respondents to have an insider trading policy – and these other tidbits:
– 81% require officers/directors to acknowledge understanding and/or receipt of the policies of the insider trading compliance program
– 85% require insiders to pre-clear their trades
– 94% prohibit hedging
– 94% also prohibit trading in puts, calls, and similar derivatives
– 80% prohibit pledging
– In-house counsel is most commonly responsible for preparing Section 16 filings (64% of respondents), followed by stock plan administration (31%) and corporate secretary (21%). This was a ‘check-all-that-apply’ question; at some companies, multiple people might have this responsibility.
Insider Trading Policies: The Infographic
Here’s a nifty infographic from the NASPP with some of the survey stats:
Making IPOs Easier: Latest Congressional Activity
This Davis Polk blog lists all the latest attempts by Congress to pass legislation that would enable companies to go public more easily. Also see this Cooley blog about attempts by other organizations to push IPO reform…
Then there is this Kevin LaCroix blog about John Coffee’s views: “Is Over-Regulation Really the Reason There are Fewer IPOs?”…
Recently, John blogged about a Bloomberg piece that covered a study that uses Edgar’s logs – which are publicly available! – to track which SEC filings are being read by hedge funds. The upshot is that you can then infer whether a big name investor was looking into a particular company.
There also is this study that tracks whether mutual funds or proxy advisors are reading your proxy. Here’s an excerpt:
For 97 large mutual fund families and 3,706 companies over seven years, we can determine the precise times when each investor accessed each SEC filing for each company. In addition, for the three most recent calendar years within our sample, we also observe the number of times the largest proxy advisory service company, Institutional Shareholder Services (ISS), accessed each company filing.
We build our dataset using the publicly provided server log files from EDGAR. These files include partially masked internet protocol (IP) addresses, which do not reveal the full identity of the user but which are sufficiently detailed to enable a mapping to the IP address blocks held by institutional investors. Several contemporaneous papers similarly rely on this approach, including for example Chen, Cohen, Gurun, Lou, and Malloy (2017) to study investment decisions; Crane, Crotty and Umar (2018) to study hedge funds; Bozanic, Hoopes, Thornock, and Williams (2017) to study the IRS; and Gibbons, Iliev, and Kalodimos (2018) to study sell-side analysis. However, we are the first to use these data to study the governance-related fundamental research performed by key investors.
The problem is that this approach of using Edgar logs is quite limited. Folks might be accessing SEC filings posted directly on a company’s IR web page. Or in the case of proxies, posted directly on Broadridge’s platform. And of course, folks might be reading proxies in paper. If I was an institutional investor, I would still be asking for paper as that seems like a far easier way to actually read a proxy…
Corp Fin Hires an “Digital Assets & Innovation” Associate Director
As noted in this press release, Corp Fin has hired Valerie Szczepanik as an Associate Director & Senior Advisor for “Digital Assets & Innovation.” Valerie will coordinate efforts across all SEC offices regarding the application of the securities laws to emerging digital asset technologies & innovations, including ICOs and cryptocurrencies. She was hired away from the SEC’s Enforcement Division where she most recently served as an Assistant Director in their Cyber Unit…
Our “Section 16 Forums”: Only a Few Weeks Away!
In response to those doing Section 16 work who have told us that they want to network with those similarly-situated, we are holding a pair of “Section 16 Forums” in June – one on each coast. Hosted by Alan Dye, these are one-day events for all Section 16 practitioners – not just beginners.
Another overseas stock exchange has gotten into the “unilateral” listing business (here’s a blog about the older ones; here’s our “Practice Area” about this stuff). Here’s the intro from this Skadden memo about the latest:
In April 2018, the Moscow Exchange, reportedly the largest exchange in Russia, announced that it intends to admit securities of approximately 50 major U.S. and other foreign companies to public trading in the non-quotation section of the list of securities admitted to trading. The intent of this move is apparently to provide Russian investors with access to a wider range of financial instruments.
Under Russian securities laws, a Russian stock exchange can unilaterally admit foreign securities to trading without the consent of the issuer of such securities. In the last several years, the St. Petersburg Stock Exchange admitted securities of a number of foreign companies to trading in a similar fashion.
Importantly, in the event of such unilateral listing by a Russian stock exchange, responsibilities for public reporting and disclosure requirements, and associated costs, rest with the Russian stock exchange, and issuers of the relevant securities are relieved from such responsibilities and costs.
Insider Trading: Greed Kills
Whenever an i-banker is involved in an insider trading case, I’m shocked. This latest one from the SEC is no different. The dude worked at Goldman Sachs!
According to this article, in 2016, a good performing VP at a bulge bracket firm could expect to make between $375-975k per year – and you know Goldman ain’t at the low end of that. How stupid do you have to be to throw that away? And as noted in this Bloomberg article, some of his inside trades resulted in paltry returns…
1. The SEC All-Stars: A Frank Conversation
2. Parsing Pay Ratio Disclosures: Year 2
3. Section 162(m) & Tax Reform Changes
4. Pay Ratio: How to Handle PR & Employee Fallout
5. The Investors Speak
6. Navigating ISS & Glass Lewis
7. Proxy Disclosures: The In-House Perspective
8. Clawbacks: What to Do Now
9. Dealing with the Complexities of Perks
10. Disclosure for Shareholder Plan Approval
11. The SEC All-Stars: The Bleeding Edge
12. The Big Kahuna: Your Burning Questions Answered
13. Hot Topics: 50 Practical Nuggets in 60 Minutes
14. Dave & Marty: True or False?
15. Steven Clifford on “The CEO Pay Machine”
Reduced Rates – Act by June 29th: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a reduced rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by June 29th to take advantage of the discount.
Let’s say you’ve filed a registration statement & one of your directors – we’ll call him “David Dennison,” for absolutely no reason in particular – signed the document through an attorney-in-fact. Is there a possibility that the now famous “he didn’t sign it” defense could call into question the validity of David’s signature?
This Olshan blog says that if you’ve properly complied with the requirements applicable to powers of attorney, there’s no reason to be troubled by the fact that one or more signatories executed the registration statement through an attorney-in-fact:
Proper powers of attorney should cover the specific filing being made by the company and any and all amendments to that filing, as well as all other documents in connection with the filing. The power of attorney, though electronically filed with a typed conformed signature in the document, should be manually executed by the officer or director and the original should be saved for at least five years.
If the power of attorney is in the Signatures section in Part II of the registration statement (with an appropriate reference thereto in the exhibits index), the manually executed original should be saved for five years, and all amendments to the registration statement manually signed by the attorney-in-fact on behalf of the officer or director should likewise be saved.
There are many valid business reasons to utilize a power of attorney and there is no legal reason why a corporate officer or director should not be deemed to have signed a registration statement in reliance upon a valid power of attorney.
Of course, if David subsequently says that the registration statement is “fake news,” that might be another kettle of fish. . .
Should You File That Shelf Now or Later?
Check out this Bass Berry blog if you’re trying to decide whether you should file a shelf S-3 now or wait until you’re planning to do a deal. For non-WKSI’s, the answer is usually easy – since your S-3 won’t automatically go effective, you can’t be sure that you won’t be delayed when you need it unless you get it on file & effective now.
The answer for a WKSI issuer is a little more complicated – and the blog lays out the pros & cons. Here’s an excerpt addressing one of the big reasons that even a WKSI might want to get a registration statement on file before a deal is imminent:
Given the fact that filing a registration statement has the potential to trigger financial statement filing requirements (such as the potential need to file retrospectively revised financials in connection with a change in business segments, the occurrence of discontinued operations, or probable or completed significant acquisitions or dispositions), filing a registration statement on a clear day at a time when such filing does not trigger financial statement filing requirements may prove beneficial in comparison to waiting to file a registration statement at the time of a future public offering when such financial statement filing requirements could be triggered.
Cons include the need to incur the costs associated with registration and the potential adverse effect on the stock price due to the perception that the company is signaling the market that a deal is coming.
Our June Eminders is Posted!
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While accounting departments throughout the nation may be pulling their hair out in an effort to get ready for FASB’s new lease accounting standard, this FEI article says that Wall Street analysts don’t seem to care very much about the new standard. Here’s an excerpt:
Despite the increasing drumbeat of concern regarding implementation of new lease accounting rules from financial preparers, there is palpable ambivalence from at least one major consumer of the new disclosures: Wall Street research analysts. Few, if any, analysts have questioned financial executives about their lease plans during the Q&A sessions of recent earning calls, where a majority of the accounting discussions revolved around revenue recognition issues.
And even once implementation begins in earnest as the 2019 deadline grows nearer, equity analysts admit they see fewer ramifications on their buy/sell decisions and models. “Revenue recognition affects all companies, while with leasing you may have some very specific industries and companies that are impacted significantly. From an equity analysis perspective we expect the lease accounting changes to be less complex,” says Zhen Deng, a senior analyst with CFR.”
This must be very encouraging news for those of you who just spent part of your holiday weekend dealing with some aspect of preparing for the new standard. As a colleague once said to me when a merger agreement I worked all weekend on got tossed into the garbage because the seller decided not to move forward, “Hey, at least it’s appreciated.”
Sell-Side Analysts: Still “Lake Wobegon U” Grads?
Speaking of securities analysts, remember former SEC Chair Arthur Levitt’s famous crack about them? “I worry that investors are being influenced too much by analysts whose evaluations read like they graduated from the Lake Woebegon [sic] School of Securities Analysis – the one that boasts that all its securities are above average.”
Levitt made those comments in a 1999 speech – and despite all of the water that’s gone under the bridge since then, this Marketwatch article says that Lake Wobegon U is still cranking out securities analysts:
There are no companies in the benchmark S&P 500 with majority “sell,” or equivalent, ratings among analysts. For the S&P 500, there are actually 505 stocks because five of the companies in the index have two classes of common stocks. Among the 505 stocks, analysts have majority buy ratings on 266.
For example, there are still 47 analysts who cover Amazon.com Inc. AMZN, -0.12% and 45 rate the stock “buy.”
There’s exactly one S&P 500 stock for which 50% of analysts rate the shares a sell: News Corp.’s class B shares NWS, +0.00% But it turns out that only two analysts cover the class B shares, while 13 analysts cover the class A shares NWSA, -0.06% For class A, four of the analysts rate the shares a buy, with eight neutral ratings and one sell rating.
The article says the same thing that many were saying back in the ’90s – read these reports for the valuable information they provide on companies & industries, but don’t rely on them for recommendations.
A member points out that it should be “Lake Wobegon,” and not – as Arthur Levitt & I originally spelled it – “Lake Woebegon.” I’ve learned my lesson, and that’s the last time I’ll ever rely on a former SEC Chair for spelling advice!
Analysts: From Russia with Guts
So is there any place where analysts call ’em as they see ’em? It turns out that the answer is yes, and it’s in the unlikeliest of places – Vladimir Putin’s Russia. This “FT Alphaville” blog tells the story of a brave man named Alex Fak, who until recently served as the head of research at Russia’s Sberbank. Here’s an excerpt:
Fak – who worked at the FT on a three-month fellowship in 2004 – was asked to resign after publishing a report that opined state gas monopoly Gazprom was ignoring its bottom line and benefiting its top contractors, including companies owned by Putin’s friends.
“Gazprom’s investment program,” which is seeing it spend $93.4bn on mega-projects like the Power of Siberia gas pipeline to China, Nord Stream-2 to Germany, and Turkish Stream, Fak and Anna Kotelkina wrote, “can best be understood as a way to employ the company’s entrenched contractors at the expense of shareholders.”
Fak went on to argue that Gazprom had abandoned other, cheaper capex projects that would have limited contractors’ ability to profit. If Gazprom were to be reformed after a recent government reshuffle and broken up into its components, Fak estimated, it would be worth $185bn – three times its current share price.
The blog says that Fak’s not the first analyst to be punished by a Russian bank for calling out inefficient state companies whose CEOs are “well connected.” Would a U.S. bank do the same? With all the Lake Wobegon U grads out there, it seems unlikely that we’ll ever know.
Broc recently blogged about the rough sledding that GE experienced when it went to shareholders for ratification of its appointment of KPMG – “no” votes represented more than 35% of the votes cast on the proposal at this year’s annual meeting. However, this “Audit Analytics” blog says that the GE result didn’t even manage to crack the ‘Top 3’ no-vote getters for the three years ended December 31, 2017.
For the record, the blog says that the biggest (almost) losers were:
In 2017, 15 companies received more than 20% of votes against ratification. In addition to Planet Fitness, Consolidated-Tomoka Land and Kulicke & Soffa Industries, each received more than 36% of votes against auditor ratification.
Auditor Ratification: So What Happened Next?
I’m sure you’re curious about what our biggest (almost) losers did in response to their high percentage of ‘no’ votes on auditor ratification proposals. I checked the SEC’s Edgar, and the short answer is – nothing. There were no changes in audit firms in response to the votes. In fact, neither of the other two companies referenced by Audit Analytics as having received more than 36% ‘no’ votes in 2017 changed audit firms either.
Of course, these are non-binding votes, because otherwise they’d violate Sarbanes-Oxley’s requirement that the audit committee call the shots on independent auditors. Still, a big no vote sends a pretty strong message – but I guess the bottom line is that “a win’s a win.”
UK shareholders don’t appear as reluctant to pull the plug on auditors as their counterparts here in the US. In fact, this article says nearly 80% of the shareholders of SIG plc, a British construction supplier & FTSE 250 component, voted against the ratification of its auditor – and the firm was fired that same day.
Fake SEC Filings: Rockwell Medical’s Alternative Realities
Last week, Liz sent an email to Broc & me asking if we’d been following the “dueling 8-Ks” from Rockwell Medical. I’d glanced at Matt Levine’s column about it, but it was when she characterized the situation as a “fake filing, but from the inside” that I realized we needed to say something about it here.
If there’s one thing we love on this blog, it’s “fake SEC filings.” But as Liz pointed out, this fake filing is a little different. This excerpt from Matt Levine’s second column about this company’s competing realities summarizes the situation:
We talked yesterday about the mysterious doings at Rockwell Medical Inc., where the universe has split into two alternate realities, in one of which (which I called RMTI-A) the board of directors has fired the chief executive officer, and in the other one (which I called RMTI-B) it absolutely has not, and in fact the directors are themselves in trouble for doing some unspecified bad things. Both sides raced to file dueling 8-Ks explaining their side of the story, leaving investors to try to figure out who is really in charge, the CEO or the board.
Here’s RMTI-A’s Form 8-K – and here’s the RMTI-B’s Form 8-K. This is a strange brew even in a “post-truth” era – but believe it or not, the plot got even thicker. That’s because the company’s largest shareholder amended its 13D to disclose a letter supporting the board’s decision to fire the CEO – and calling for the scalp of the CFO, who the letter claims helped the CEO make his 8-K filing.
The board of RMTI-A then formally terminated the CFO and issued a press release updating shareholders about the week’s festivities. The whole mess has apparently ended up in the lap of some poor state judge in Michigan – who promptly sent both sides to their respective corners & gave them 21 days to try to work things out.
Most of the attention on the Dodd-Frank reform bill that President Trump signed last Friday has focused on the law’s impact on financial institutions – but this Duane Morris blog points out that there’s something in the new law for other companies as well. In particular, the legislation expands the class of companies that are eligible to use Reg A+ to include already public companies. This excerpt explains:
The President today signed the “Economic Growth, Regulatory Relief and Consumer Protection Act.” Most of the bill is centered around easing some Dodd-Frank restrictions as they apply to smaller banks. But buried in Section 508, called “Improving Access to Capital,” Congress adopted a major change to Regulation A+.
Previously, the Reg A+ rules required, in Section 251(b)(2), that a company cannot use Reg A+ if it is subject to the SEC reporting requirements under Section 13 or 15(d) of the Securities Exchange Act immediately prior to the offering. This includes, for example, every company listed on a national exchange such as Nasdaq or the NYSE and many companies that trade over-the-counter. The new law reverses that and orders the SEC to change the rules to permit reporting companies to utilize Reg A+.
Along the same lines, the new statute also provides that companies can satisfy their Reg A+ periodic reporting obligations through the filing of the Exchange Act reports mandated for other reporting companies.
Stinson Leonard Street’s Steve Qunilivan also points out that there’s good news for private companies too – the new law relaxes some of the requirements under Rule 701:
Section 507 of the bill directs the SEC to increase Rule 701’s threshold for providing additional disclosures to employees from aggregate sales of $5,000,000 during any 12-month period to $10,000,000. In addition, the threshold is to be inflation adjusted every five years.
Reg A+’s expansion may turn out to be bigger news than you might think. A lot of questions have been raised about the efficacy of the JOBS Act’s efforts to rejuvenate Reg A – but this recent study reviews experience under the new regime & suggests that those efforts appear to be working. Here’s an except:
Not only has the use of Regulation A grown exponentially, but the exemption may now rival or even surpass its previously more popular predecessor, Regulation D’s Rule 506. Regulation A+ is an example of Congress using its legislative powers to take something that was structurally flawed and problematic and making it into a regulation that, while still having some flaws, now appears to be more appealing to emerging growth and start-up companies.
But the study also says that success has brought its own problems:
By the same token, Regulation A+ is not an unqualified success. The considerable increase in the use of Regulation A has surfaced potential problems such as the increased exposure of this option to “lay” investors; i.e. investors with modest income, modest net worth, and little to no financial sophistication. While these are the investors that Regulation A actively seeks, there are concerns about how issuers, regulators and the market as a whole will react if/when these investors suffer significant losses in this private equity startup company space.
SEC Commissioner Nominees: Another Senate Banking Staffer?
Want to become an SEC Commissioner? You’d better have the Senate Banking Committee on your resume. According to this WSJ article, the Committee’s chief counsel, Elad Roisman, may be the choice to fill the slot of departing Commissioner Mike Piwowar:
The White House is considering nominating a top aide to the Senate Banking Committee chairman for a GOP opening on the Securities and Exchange Commission, according to people familiar with the matter. Elad Roisman, the chief counsel to the banking panel led by Mike Crapo (R., Idaho), is a top contender to succeed Michael Piwowar at the top U.S. markets regulator, these people said. Mr. Piwowar plans to leave the SEC by July.
The article points out that Roisman – who’s only 37 years old – would join a long list of former Banking Committee staffers who have gone on to serve as SEC Commissioners – including Piwowar and current SEC commissioners Kara Stein & Hester Peirce. The logic being – if you work for the Senate Banking Committee, your Senate confirmation hearings are likely to be smooth…
Here’s something that I blogged yesterday on our “Proxy Season Blog”: The National Association of Manufacturers (NAM) and other conservative-leaning organizations have launched a new campaign, the “Main Street Investors Coalition” – with a multi-million dollar budget – to limit the influence of large asset managers that they feel wield too much power on ESG initiatives. As we’ve previously blogged, more support from Vanguard is one factor that has led to higher approval rates for ESG proposals – and, as noted in this blog, BlackRock has also urged companies to develop a long-term strategy that accounts for their societal impact.
This Axios article says that the group’s first focus will be writing studies & op-eds backing up their positions – which is interesting in light of recent DOL guidance that restricts ERISA fiduciaries from pursuing ESG initiatives in the absence of data showing that the initiatives will lead to higher returns. It’s not clear yet whether this group will also pursue the tactic of submitting its own shareholder proposals, in order to beat ESG activists to the punch.
The Axios article notes that this campaign comes at a time when “shareholder advocacy” has been producing more social change among companies than legislation. And here’s an excerpt from an op-ed by Bloomberg’s Matt Levine:
The interesting development will be if this (pro-corporate, anti-environmentalist, etc.) group makes common cause with the more left-ish critics of institutional investors who worry that they create antitrust problems. Having most of corporate America controlled by a handful of giant institutions: It makes a lot of people nervous.
Deloitte Fined $500k for Faulty Audit
Yesterday, as noted in this article, the PCAOB levied a hefty $500k upon Deloitte for missing material accounting errors in three consecutive audits of a client…
Memorial Day Weekend
In addition to thanking my friends & family in the armed forces, I’ll be watching this 30-second video from “Kida The Great” (past winner of “So You Think You Can Dance: The Next Generation”) and hoping for a visit from the ice cream truck…