Just days after Senator Tammy Baldwin introduced a bill to repeal Rule 10b-18, the Investors Exchange (known as the “IEX”) filed this rulemaking petition asking the SEC to “modernize” the rule. This all follows years of complaints about the rule (as reflected by this article).
IEX believes that the cost of buybacks is being artificially increased as a result of the current market structure which makes buyback orders seeking to comply with 10b-18’s safe harbor easily identifiable and a source of profits for short-term traders. IEX’s proposed solution is to amend the rule to add an exception that allows buybacks to be executed priced at the midpoint of the national best bid & offer. According to IEX, the exception would allow companies to execute buybacks under the protection of safe harbor at the best prevailing prices with minimal detection by front running short-term traders.
Rule 3-13 Relief from SEC’s Financials Requirements
Loving this EY memo about what the SEC considers when deciding to grant relief from Rule 3-13 of Regulation S-X. As we’ve blogged before, while the SEC Staff has long been able to modify – or – waive disclosure requirements in response to requests to modify what is required for the financials in a SEC filing, the Staff is now more amenable to grant Rule 3-13 requests than it was before. This is part of SEC Chair Clayton’s goal of removing unnecessary barriers to going public, etc.
Last Call for Early Bird Registration! Our “Pay Ratio & Proxy Disclosure Conference”
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
Early Bird Rates – Act by the End of This Friday, April 13th: 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 special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by April 13th to take advantage of the 20% discount.
In 2010, the SEC issued guidance about climate change disclosures. The GAO recently issued this report reviewing steps that the SEC has taken since then to clarify climate-related risk disclosure requirements, the SEC’s climate disclosure review process, & the constraints the SEC faces in that process. The report also assessed stakeholder views of climate-related risk disclosures.
The GAO says that the biggest constraint that the SEC faces in reviewing the adequacy of climate-related disclosure is its dependence on self-reporting. Here’s an excerpt:
SEC faces constraints in reviewing climate-related and other disclosures because it primarily relies on information that companies provide. SEC senior staff explained that SEC’s Division of Corporation Finance Staff assess filings for compliance with federal securities laws—which require companies to disclose material risks—but do not have the authority to subpoena additional information from companies. Additionally, companies may report similar climate-related disclosures in different sections of the filings, and climate-related disclosures in some filings contain disclosures using generic language, not tailored to the company, and do not include quantitative metrics.
When companies report climate-related disclosures in varying formats & specificity, Corp Fin reviewers and investors may find it difficult to compare & analyze related disclosures across companies’ filings. The SEC has tools, mechanisms and resources — including internal supervisory controls, regulations & guidance, a two-level filing review process, internal & external data, and staff training and experience — that help SEC staff consistently review filing disclosures, according to SEC documents and staff.
In fairness, the GAO was asked to look into the constraints on the SEC’s disclosure review by Congress – but this conclusion is still kind of goofy. The GAO is essentially saying that the SEC’s ability to review disclosures is constrained by the content of the disclosures that companies provide. Exactly! That’s how this works. . .
The GAO also found that, not surprisingly, companies think they’re doing enough in terms of climate-related risk disclosure. But while some investor groups push for more, the GAO says there’s not a clear consensus on how big a priority this should be.
Enforcement: The SEC Cyber Unit’s First 6 Months (And What’s Next)
Last September, the SEC highlighted its increasing enforcement emphasis on cyber-related threats by announcing the creation of a “Cyber Unit” within the Division of Enforcement. This Cleary memo reviews the Cyber Unit’s first six months of work & previews coming attractions. The memo notes that – so far – the unit’s attention has focused on allegedly improper trading involving hacking and cryptocurrency & ICO fraud claims. And it speculates that the next target may be cybersecurity lapses. Here’s an excerpt:
While it is safe to assume that the Cyber Unit will pursue trading, cryptocurrency, and disclosure cases in the months ahead, there are also signs that the SEC may seek to bring enforcement actions in an area that has been somewhat less publicized — alleged failures to maintain reasonable cybersecurity safeguards. In a October 2017 speech, Avakian identified safeguarding information and ensuring system integrity as another area of “enforcement interest” for the Cyber Unit.
The memo says that the speech pointed to SEC Regulations S-P, SCI and S-ID – which require that covered entities “understand the risks they face & take reasonable steps to address those risks” – including putting “reasonable safeguards in place to address cybersecurity threats.” While noting that no cases involving failure to maintain proper cybersecurity safeguards have been brought as yet, other enforcement proceedings under those rules may provide a roadmap for future actions.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Risk Reduction from Sustainability is a Myth?
– White Collar: DOJ Extends FCPA Declinations Policy
– Foreign Affiliates: BEA Survey Forms Issued
– Blockchain: “Read All About It!”
– How ISS Analyzes Proxy Fights
This MarketWatch article says that some companies have included the potential impact of a trade war in their Form 10-K “risk factors” disclosure. The article provides some examples of companies that have flagged the current unpleasantness between the U.S. & China as a potential risk – and suggests that more companies may opt to address the risks of a trade war in future filings.
This Form 10-K (pg. 26) from TravelCenters of America has the most extensive disclosure among the examples cited in the article. This excerpt provides a summary:
“Any changes in U.S. trade policy could trigger retaliatory actions by affected countries, resulting in ‘trade wars,’ in increased costs for goods imported into the United States, which may reduce customer demand for these products if the parties having to pay those tariffs increase their prices, or in trading partners limiting their trade with the United States,” according to TravelCenters’ filing. “If these consequences are realized, the volume of economic activity in the United States, including trucking freight volume, may be materially reduced. Such a reduction may materially and adversely affect our sales and our business.”
The article cites two other companies – Fossil Group (pg. 27) and Amphenol (pg. 13) – that disclosed the risk of a trade war in their 10-Ks. However, unlike TravelCenters, their disclosures were not broken out under a separate caption. Instead, they were included in a bullet point list of various risks associated with their operations.
Based on a recent Edgar search for 10-Ks referencing “trade war” or “trade wars,” it looks like the approach taken by Fossil Group and Amphenol is more typical – at least so far. I found a total of twelve 10-Ks that contained either of these terms. And only one company – G-III Apparel Group (pg. 30) – broke out the risk of a trade war separately in its 10-K.
While only a dozen companies referenced a trade war in their 10-Ks, there are a couple of things to keep in mind. First, it’s possible that others that others may have addressed the risk using other terminology – e.g. “retaliatory tariffs” – which wouldn’t have been caught by my search. Second, many larger companies would have made their filings before the President fired what may turn out to have been the trade war’s first volley on March 1st.
Enforcement: SEC Targets the Man Who Traded Gretzky
If you’re not a hockey fan, the name Peter Pocklington probably doesn’t mean much to you. But if you are, you’ll always remember him as the man who traded Wayne Gretzky to the Los Angeles Kings. That decision earned Pocklington the undying enmity of many Edmonton Oilers fans and – at least temporarily – the title of “the most hated man in Canada.”
Apparently, the SEC’s not too fond of him either. Last week, the agency announced an enforcement action alleging that Pocklington, a convicted felon, concealed his ownership & control of a company from investors in a private placement.
I’m not an Oilers fan, so I don’t have a dog in this fight – like any good citizen, I simply hope that justice prevails. On the other hand, if this was Art Modell. . .
Warm Remembrances: A Farewell to Fred Cook
Here’s a note from Broc: I’m sad to report that Fred Cook passed away last week. Widely considered “the Dean” of the compensation consulting world, Fred was much more than just a genius. Warm, kind – always with a sparkle in his eye. I was pretty new to the executive pay world when I launched CompensationStandards.com and our annual “Proxy Disclosure Conference” fifteen years ago – but Fred was more than willing to spend time with me and explain the basics. When I last saw him two years ago, he still seemed so young – so eager to share.
Fred always talked truth. And with his vast experience, he could give the proper perspective to what makes sense – and what doesn’t. Take some time to find out for yourself – this speech by Fred that we transcribed in 2005 still can provide numerous valuable learning lessons. We will miss you Fred!
Fred was married for 54 years and raised three daughters. Here’s an excerpt from Fred’s obituary in the NY Times:
Fred had a lifelong passion for the outdoors and physical fitness, completing many marathons without once training on a treadmill, and climbing the 46 High Peaks in New York State’s Adirondack Mountains. He climbed many of those peaks multiple times, in both summer and winter. He particularly loved introducing his family and friends to the Adirondacks he loved so much, with large family reunions, college reunions, hikes to swimming holes, outdoor hot tub soaks, and trips with his granddaughters up some of those same High Peaks. In life as in business, he loved to create traditions and share his passions.
There’s still room for improvement in the presentation of non-GAAP measures – and the “Center for Audit Quality” is here to help. The CAQ’s “roadmap” is intended to support audit committees’ oversight of non-GAAP reporting – specifically, to make sure that the company’s non-GAAP measures are a balanced representation of company performance. It identifies key discussion topics, clarifies the external auditor’s role, and suggests three best practices:
1. Disclosure Controls: Non-GAAP measures should be subject to robust disclosure controls. Establishing disclosure controls specific to non-GAAP measures could enable companies to mitigate risks and support sound decision making about their reporting. The disclosure controls should be documented and robust enough to facilitate testing of the controls. Roundtable participants emphasized that disclosure controls could drive more consistency and transparency into preparation and presentation of non-GAAP measures.
2. Non-GAAP Policies: Management representatives shared that they have established policies that provide a set of guidelines to follow when preparing and presenting non-GAAP measures. These policies can help in making decisions on the treatment of new transactions or events within non-GAAP measures that the company presents. Also, having policies in place can help promote consistency in the measures that are presented and the way they are calculated. While not all companies have the same policies, participants cited having non-GAAP policies as a valuable tool to ground discussions and decisions related to non-GAAP measures.
3. Audit Committee Disclosure: Few, if any, companies currently disclose their non-GAAP policies. There was no consensus regarding whether disclosure of the company’s non-GAAP policies – or simply disclosing that the company has a non-GAAP policy – would be a good practice. However, given the current regulatory environment and the fact that non-GAAP measures are important to investors and are central to their decision making, there could be benefits to an audit committee voluntarily disclosing that the company has non-GAAP policies (but not necessarily the relevant details of those policies). Such disclosure could demonstrate to investors the importance of this information to the audit committee and that policies are in place to support the metrics being consistent, transparent, and comparable.
The “roadmap” is just the latest resource the CAQ has published on this topic. To learn more about non-GAAP measures – and the audit committee’s role in overseeing them – visit our “Regulation G” Practice Area. Also check out this blog from Cooley’s Cydney Posner.
Meanwhile, check out this MarketWatch article about how PwC faces the largest-ever auditor malpractice damages verdict…
More on Fitbit’s “Unreal” Tender Offer
Last year, Broc blogged about someone filing a fake Schedule TO-C on Fitbit’s Edgar page. The SEC has now announced that the guy behind it was sentenced to two years in prison. Remember, this was for $3k in profit. Crime really doesn’t pay…
Pay Ratio: What the First 1000 Filings Show
Broc recently blogged this on CompensationStandards.com: ProxyInsight’s Seth Duppstadt reports that over 1000 proxies with pay ratios have been filed so far – the 4 highest ratios are 2818, 2526, 2483 and 2028. Wonder how those companies will fare with say-on-pay this year?
Not surprisingly, the highest average median pay, based on data collected thus far, is found within the utility sector at around $151K, with energy ($107K) and real estate ($104K) following a distant second and third. Industries at the lower end of averaged median employee pay are consumer discretionary ($42K), consumer staples ($44K) and industrials ($60K).
Surprisingly, the highest average median pay falls in a middle range of company size by revenue. It is larger for companies with revenues between $1B to $3B, ($82K), as compared to those companies with revenues smaller than $1B or larger than $3B.
Companies with fewer employees also had higher average median pay. Those with under 1,500 employees have an averaged median around $98K, compared to those with over 20,000 employees, where the average median is about $58K.
While CDI 101.01 helped address the recent spate of frivolous litigation claiming that projections disclosed to explain the assumptions underlying a financial advisor’s fairness analyses require GAAP reconciliation, plaintiffs’ lawyers subsequently seized on the fact that the CDI did not explicitly clarify whether the GAAP reconciliation requirements apply to projections shared with bidders or the board and opportunistically continued to pursue weak disclosure claims.
The underlying logic of the initial CDI plainly applies to these circumstances too: disclosure of internal forecasts to bidders or the board is not intended to communicate performance expectations to investors, and reconciling them to GAAP is neither useful nor required. Corp Fin has now helpfully confirmed that the same considerations animating the initial CDI extend to these additional factual circumstances.
SEC Impersonators: “This Is What Fraud Sounds Like”
Scammers impersonating the SEC aren’t something new (here’s a blog about one such scam). Yesterday, the SEC issued a warning – along with a one-minute audio recording – about SEC impersonators who are pretending to execute trades in an attempt to dupe people into giving them money or account info. Crazy stuff. Here’s an excerpt:
“The audio recording is what fraud sounds like,” said Lori Schock, Director of the SEC’s Office of Investor Education and Advocacy. “We included the recording in our Investor Alert so investors can hear the lies and high pressure tactics imposters use to cheat potential victims out of their money.”
Transcript: “Conduct of the Annual Meeting”
We’ve posted the transcript for our recent webcast: “Conduct of the Annual Meeting.”
Following up on Broc’s blog about the passing of Julie Yip-Williams, there will be a memorial service for Julie on Saturday, May 5th at 5:30 pm, at St. Ann & Holy Trinity Church (157 Montague St, Brooklyn). In lieu of flowers, her family requests that memorial contributions be made to the “Colorectal Cancer Alliance” in Julie’s name.
This “Prosperity Report” from Allstate looks novel. It’s an 11-page document that is positioned before the proxy statement. The full document is: Prosperity Report, Letter from Independent Directors, Proxy Statement, Financial Report – the whole Allstate story under one hood. The “Prosperity Report” focuses on the company’s long-term goals, purpose & role in society.
The thing feels like “BlackRock Catnip.” It’s basically a human capital sustainability report (which is a priority for BlackRock, as noted in this blog) – and yes, BlackRock is the company’s largest holder. Another way to look at it perhaps is as an innovative expansion of the CEO’s “Letter to Shareholders” that typically kicks off the glossy annual report. Whatever your view, you have to admit that Allstate doesn’t slack on its proxy materials. You might recall Broc’s blog from last year, claiming that their proxy statement was one of the best…
Transcript: “The SEC’s New Cybersecurity Guidance”
We’ve posted the transcript for our recent popular webcast: “The SEC’s New Cybersecurity Guidance.”
Last Call for Early Bird Registration! Our “Pay Ratio & Proxy Disclosure Conference”
Early Bird Rates – Act by April 13th: 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 special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by April 13th to take advantage of the 20% discount.
– When are ISS’s proxy reports issued?
– How and when will ISS change a vote recommendation in a proxy alert?
– How can a company request engagement with the U.S. research analysts?
– When is the best time to request an engagement?
– What topics are generally discussed in engagements regarding non-contentious meetings?
– Is there a blackout period for engagement with research?
– What exceptions to the attendance policy apply in the case of a newly-appointed director?
– Proxy access proposals: How will ISS evaluate a Board’s implementation of proxy access in response to a majority-supported shareholder proposal?
– How will ISS apply the new 2018 policy whose previously-grandfathered poison pills will be expiring shortly?
– How do companies terminate poison pills prior to the expiration date?
– Does ISS still consider deadhand or slowhand provisions problematic?
– What if a company adopts a poison before the company goes public?
– Removal of Shareholder Discretion on Classified Boards
– Which types of charter/bylaw adoptions are likely to result in continued adverse voting recommendations?
– What is the purpose of the Governance Failures Policy?
Congress Boosts Edgar Funding – SEC May Move HQ
Over the past year, Broc has blogged repeatedly about the importance of Edgar – and its ongoing problems. So we had our fingers crossed when the SEC’s proposed budget for fiscal 2019 included requests for technology modernization & cybersecurity.
And now, the omnibus spending bill that’s supposed to fund the government for the balance of fiscal 2018 increases the SEC’s funding for IT initiatives by a cool $45 million (see pg. 231). There’s also $244 million available to relocate the SEC’s headquarters – a notion that has been floating around for a few years (see this blog) and that the GSA started more seriously pursuing last year.
What’s not in the budget? Well, page 240 says the SEC is prohibited from using funds to finalize, issue or implement any corporate political contributions disclosure requirement (something that’s been stipulated in the past few budget bills). And as far as I can tell, the budget doesn’t permanently rescind the SEC’s Dodd-Frank reserve fund – an idea that was discussed last year. Overall, the SEC’s $1.6 billion budget has remained essentially flat since 2016.
Dodd-Frank Reform: Hensarling Pressures Senate to Negotiate
Here’s an excerpt of this blog by Steve Quinlivan about the “Crapo bill” that the Senate has already passed:
The future of the bill in the House is uncertain. House Financial Services Committee Chairman Jeb Hensarling (R-TX) is seeking to include a “bucket of bipartisan bills” in the legislation which previously passed the House. In a TV interview, Representative Hensarling said: “We have called on the Senate to negotiate. Otherwise, the bill that the Senate passed – which is sitting on the Speaker’s desk – is going to remain on the Speaker’s desk until and unless the Senate negotiates. We are trying to negotiate in good faith. They have to give us some reason –you know, Maxine Waters voted for roughly half the bills we’re trying to negotiate with the Senate….so somebody needs to explain to me why they can’t accept this legislation.”
Some of the provisions Representative Hensarling is seeking to include are discussed in this Forbes article.
Over the years, Broc has blogged about mistakes made in filings (here is one such blog). Members are kind enough to send us good stories about mistakes they’ve seen in SEC filings. Here are a few new ones (please send your own stories – we’ll keep them confidential unless you tell us otherwise):
I live in fear of internal notes making it into filings – always do a “ctrl+F” search for brackets, all team member names and NSFW words before giving the go-ahead!
Best Pay Ratio Disclosure to Date!
Hilarious item on the NASPP blog yesterday from McLagan’s Ryan Gildner – here’s an excerpt:
The newly formed Data on Ratio Comparison Society (D.O.R.C.S) is pleased to announce preliminary results from a groundbreaking ongoing study of CEO pay ratio disclosures. According to Ryan Gildner, president of the Society, “This is the first study of its kind and uses an unprecedented innovative approach to evaluate the content of CEO pay ratio disclosures. We hope our data will provide a new perspective on this controversial disclosure and lead to a more complete understanding of its value.”
Using a proprietary 16-point qualitative analysis, the Society has identified the following disclosure to be the best disclosure to date:
As required by Item 402(fu) of Regulation S-K, we are providing the following information:
For fiscal 2017, our last completed fiscal year:
– The number of words comprising the CEO Pay Ratio Regulation (Item 402(u) of Regulation S-K) is 2,933.
– The number of words comprising the Compensation Discussion and Analysis Regulation (Item 402(b) of Regulation S-K) is 1,282.
Our April Eminders is Posted!
We have posted the April issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
We’ve all heard the mantra that blockchain is a disruptive technology that will turn entire industries upside down, including legal services and public accounting. Well, according to this Bloomberg blog, the big winners of disruption in the accounting industry will be – wait for it – the Big 4!
Wait – what? Yup, that’s what it says. This excerpt notes that the Big 4’s key advantage is their technology infrastructure:
As a result of technology transforming the accounting profession, “If you look at the breakdown of the profession over the next five to eight years you are going to see much more consolidation than we have seen in the past. The top four are going to be acquiring some of those in the next twenty firms. Auditing is going to be done by firms with far more technical ability than we have seen in the past. I think a large number of firms are going to disband,” said Richardson.
Translation? Regardless of your firm’s aggregate technical knowledge in auditing procedures and regulatory guidance, if you don’t have the technology systems in place, or are shortly behind in development, you simply won’t be able to keep pace with those who do.
As the accounting profession migrated from a paper and pen to fingers and spreadsheets, there was a element of instability that rocked the industry. The transition to nodes and blocks will be even more uncomfortable, but the ultimate beneficiaries will remain the same. Expect another generational wave of “Big Four” dominance in the accounting sector, even in a blockchain disrupted universe. If anything, it is another layer of concrete on top of a foundation that never seems to crack.
So, in the accounting profession, the results of this revolution may end up looking a lot like many others before it – “Meet the new boss. Same as the old boss.”
Big Data: Facebook Sells User Data – But Edgar Gives it Away!
Facebook’s in the hot seat these days for its practices regarding user data – but move over Mark & Sheryl, because it turns out that Edgar just might be a gold mine for data harvesters too. According to this Matt Levine column, a new study reveals that not only can you review a company’s SEC filings, but you can often find out who else has taken a peek. Here’s an excerpt:
But here’s another wild thing about this paper: You can go find out which hedge funds accessed which documents on Edgar! I mean, that seems wild to me, but the authors’ literature summary mentions several other papers that use the same technique. In each case researchers use public records to figure out which hedge funds own which IP addresses, and then match the IP addresses to Edgar traffic logs that the SEC makes available.
The Edgar logs are posted quarterly with a six-month lag, and you can’t necessarily match up every hedge fund with an IP address, so you can’t find out, say, what companies Dan Loeb or Bill Ackman are looking at today. But you can at least find out what companies some hedge funds were looking at a year ago, and what sort of research they did. It might tell you interesting things about their investing processes.
I had no idea that you could do that, and I doubt many other people did either. But whether the info is dated or not, in an era where everyone’s an activist target and hedge funds rely so much on stealth, is there any reason that companies shouldn’t put their big data folks to work crunching those traffic logs?
ESG: 85% of S&P 500 Issue Sustainability Reports
According to this new report from the Governance & Accountability Institute, 85% of the S&P 500 published sustainability or corporate responsibility reports in 2017. As this excerpt illustrates, that percentage has risen dramatically since 2011:
During the year 2011, just under 20% of S&P 500 companies reported on their sustainability, corporate social responsibility, ESG performance and related topics and issues;
– In 2012, 53% of S&P 500 companies were reporting — for the first time a majority;
– By 2013, 72% were reporting — that is 7-out-of-10 of all companies in the popular benchmark;
– In 2014, 75% of the S&P 500 were publishing reports;
– In 2015, 81% of the total companies were reporting;
– In 2016, 82% signaled a steady embrace by large-cap companies of sustainability reporting;
– And in 2017, the total rose to 85% of companies reporting on ESG performance.