A long, long while back, I blogged about the creation of the SEC’s new “Division of Risk, Strategy and Financial Innovation” and noted that the nickname may be an acronym (which wound up as “RiskFin”). Some members back then took the ball and ran with it – one member voted for a nickname of “RSFE” pronounced “ris-fee” or “riskfee.” Another wanted a name change to “Division of Risk, Innovation (Financial) and Strategy,” aka Division of RIFs. One said it sounds eerily close to Riski.org, cool new open-source platform. As I blogged six years ago, that Division has now changed its name to the “Division of Economic & Risk Analysis,” with a nickname of “DERA.”
In that blog, I answered a bonus question of when was the Division of Corporation Finance formed. In response to that, some members noted that there were several divisions before the 1942 birth of Corp Fin, in which Staffers reviewed registration statements – including the “Division of Registration” which was formed in 1935. Old-timers out there, keep ’em coming…
A member reported this a while back: “Thought you’d be amused that when I imported your old podcast regarding the impact of FASB codification on SEC filings into iTunes, Apple classified it as “Blues” music! Such is the life of a corporate lawyer.”
Online Legal Training for New Lawyers: Compare the Pricing…
This blog about a new site offering legal training cracked me up in a few ways. First of all, this type of training is exactly what we’ve been doing both on TheCorporateCounsel.net – and DealLawyers.com – now for some time. And I haven’t sampled the stuff from the new site, but I’m willing to wager without seeing it that our stuff is much more practical.
And secondly, check out the new site’s pricing! Here’s an excerpt from the blog about that:
For a 1000-lawyer law firm, the first topic is $14,000 with the price dropping to $9,000 per topic if the firm subscribes to all six ($45,000). For a 500-lawyer firm, the all-in price is $27,000. For a 100-lawyer firm, the price is $9,000. On a per lawyer basis, this provides larger firms with a slight pricing discount ($45/lwyr for 1000-lawyer firm, $90/lwyr for 100-lawyer firm, $500 for solo practitioners or a 1-person legal department).
Wow! Compare that to the pricing for our popular “In-House Accelerator” Training on this site. That’s free for members of TheCorporateCounsel.net (and it’s popular not just with folks that are in-house, but also with those in firms that want to learn how to think like they’re in-house). And our “Deal U. Workshop” over on DealLawyers.com isn’t free for members of that site – but ours is much cheaper (and includes copies of the “Deal Tales” Paperbacks – a three volume set)…
California Dreaming…
Saw this picture that Jim McRitchie posted of a California license plate:
The SEC has cancelled tomorrow’s open Commission meeting about proposing changes to its whistleblower office. I think this is the third cancelled open meeting in as many months. Does it matter? Not really. Is it worth blogging about? Probably not. Did I blog about it anyway? Yes.
Here’s a few thoughts:
1. Are You Sure It Doesn’t Matter?– For starters, when the SEC has cancelled other open meetings in recent months, it still took action through the seriatim process. So in terms of taking action, the net result was the same. But even if the SEC hadn’t taken action, I don’t think cancelling open meetings by itself is a big deal. Over the decades since the SEC was born, I doubt a Commissioner has ever been persuaded by arguments made at an open meeting to change the way they intended to vote.
In rare cases, a SEC Chair will calendar an open meeting to force an issue to a vote. Then, as the meeting date gets closer, there may be some accommodation that allows the Commission to act by seriatim to get something done.
In the old days, some would travel to DC to attend open meetings – so cancellation would have disappointed those with flights scheduled. But that no longer is an issue because the meetings are webcast and very few people attend in person these days. Plus, I think some people have realized that there simply isn’t much value in “reading the tea leaves” by watching an open meeting in the first place. I haven’t watched one since Bill Donaldson was SEC Chair – that’s 15 years ago.
2. How Many SEC Staffers Attend Open Meetings? – Not many more than those required to go. I do remember attending my first open meeting when I was a Staffer in the late ’80s – the proposal of Regulation S. It was crowded. I got a glimpse of how the SEC operated at the highest level. But my mere attendance as a lowly Staffer was a bit of a novelty – in fact, if my boss knew I snuck down to the open meeting room, I might have been in trouble.
I would wager that well over 90% of the people who work at the SEC have never attended an open meeting (back then and now). There’s no reason for them to see one unless they happen to be curious about what it’s like…
3. Is the SEC Required to Hold Open Meetings? – I blogged about this topic a while back. The upshot is that it’s conceivable that the SEC could take various actions for years without an holding an open Commission meeting. But it doesn’t do so because of the interest in holding the meetings, both within the SEC and outside.
4. Why Does the SEC Keep Calendaring & Then Cancelling Open Meetings?– I have no idea. But it seems a little strange. I’ve never seen so many meetings cancelled in such a short period of time.
Typically, a meeting is cancelled because at least one Commissioner suddenly is unavailable. Particularly if the agenda items are not the “hottest” around, action is then just taken in seriatim. Note that the SEC can take action in seriatim without first announcing (and cancelling) an open meeting.
5. Why Was This Particular Meeting Cancelled?– I doubt that Commissioner unavailability is the reason why this whistleblower meeting was cancelled – the SEC’s cancellation notice indicates that the meeting may be rescheduled for November. So it’s unlikely we shall see action taken in seriatim for this one. My guess is that the SEC needs more time to formulate its proposal.
Audit Committees Must Enforce Auditor Independence Rules? What Gives?
Here’s a note from Lynn Turner: Have you looked at this guidance from the PCAOB Staff? It essentially “guts” the auditor independence rules. It states that if an auditor has violated the independence rules:
1. It must communicate that to the audit committee. No communication of that is required to be made to investors who believe the auditor has complied with such rules.
2. The auditor must have fixed the violation, or alternatively, even thought the violation still exists, must put a plan in place to fix it.
3. The PCAOB Staff still permits an auditor to say in their report they were – and are – independent during the audit engagement time period, even though in fact they are not. This is, at best, misleading to investors. Some might say it’s lying.
This is particularly troublesome because the process relies on an audit committee. Nearly all the audit committees that I have known have scant expertise when it comes to the auditor independence rules. In fact, I can say I have never known an audit committee member who was truly knowledgeable in this area. Even most auditors are not well-versed on the independence rules, although they should be. That is why the SEC required audit firms – back in 2000 – to establish internal quality controls.
However, recent enforcement cases illustrate how these controls are not effectively working inside the big audit firms, as the firms continue to do whatever is necessary to hang onto their audit clients. It is my understanding that auditors do not have to rotate off – or inform any of the investors in – the companies for which their audit independence has been compromised as noted in these enforcement actions.
Today, an auditor can operate under the policy of “It is better to beg forgiveness than to ask for permission.” Investors should be asking if there really are any independence rules.
Meanwhile, two Senators have sent this letter to SEC Chair Clayton asking what is going on with the PCAOB, including why Commissioner Peirce received such a new prominent role overseeing the PCAOB and why the PCAOB’s General Counsel and Enforcement Director positions have been vacant for so long…
SEC Seeking Ideas So Small-Caps Not So Thinly Traded…
Last week, the SEC issued this statement asking for ideas how to boost the liquidity of stocks that currently are thinly traded. See this Mayer Brown memo – and this background paper from the SEC…
There’s nothing I like more than an annual meeting web page that is “usable.” I think that Southern Company’s annual meeting page is one of the best in the US (European companies have been ahead of the game in this area for years). Among the cool features:
– One-stop-shop for proxy & other materials (annual/sustainability reports, etc.)
– Simple presentation of voting items and a link to the voting page have reduced broker non-votes – so the page provides tangible ROI
– HTML is SEO-friendly & easy to read
– Static PDF spreads can be brought to life like this one, making it easy to see who serves on which board committee, etc.
– Graphics & other features can be “reactive”
DOJ’s New “Inability to Pay” Guidance
As noted in these memos posted in our “White Collar Crime” Practice Area, the DOJ recently issued new guidance on how prosecutors should evaluate requests by corporate defendants for a reduction in fines and penalties based on an inability to pay – and announced a restructuring of its “Securities & Financial Fraud Unit” as the “Market Integrity & Major Frauds Unit”…
Tomorrow’s Webcast: “M&A in Aerospace, Defense & Government Services”
Tune in tomorrow for the DealLawyers.com webcast – “M&A in Aerospace, Defense & Government Services” – to hear Hogan Lovells’ Carine Stoick, Michael Vernick, & Brian Curran address some of the unique issues faced by companies doing deals that implicate the government in some way.
Section 404 of the Sarbanes-Oxley Act requires companies to review their internal control over financial reporting and report whether or not it is effective. Non-accelerated filers are required to provide management’s assessment of the effectiveness of their ICFR, while larger companies are required to accompany that assessment with an attestation from their outside auditors.
As it does every year, Audit Analytics took a look at the most recent round of negative auditor attestations & management-only assessments of ICFR. This recent blog reviews the results of the past 15 years of experience under SOX 404, and makes several interesting observations:
– Negative auditor attestations bottomed out in 2010 at 3.5% of filings. They rose fairly steadily and peaked at 6.7% in 2016. After declining to 5.2% in 2017, they rose again last year to 6.0% of filings.
– Negative management-only assessments peaked at a whopping 40.9% of filings in 2014, and have remained at or slightly below the 40% level since that time. In 2018, they declined slightly to 39.6% of filings.
The top reasons for negative audit attestations in 2018 were material or numerous year-end adjustments, shortcomings in accounting personnel, IT & security issues, inadequate segregation of duties and inadequate disclosure controls. Many of these same issues resulted in negative management-only assessments, although accounting personnel issues topped the list here. One item that made the top five reasons for negative management-only assessments that didn’t make the audit attestation list was an ineffective, understaffed, or non-existent audit committee.
Canada Heading for Mandatory “Say-on-Pay-Eh”?
Okay, that title is a very lame Canadian joke, but if you were made to look like a fool on a hockey rink by your Canadian pals as frequently as I am, you’d be looking for a little payback too. Anyway, according to this Blakes memo, recent amendments to the Canada Business Corporation Act may result in a mandatory “say-on-pay” regime for federally chartered Canadian public companies.
Details are in the memo, but what’s more interesting to me is that the memo points out that say-on-pay has already become pretty widespread in Canada among larger cap companies on a purely voluntary basis:
Shareholder Say-on-Pay advisory votes on the compensation practices of public companies in Canada started in 2010 when the major Canadian banks gave their shareholders an advisory Say-on-Pay vote. By 2011, 71 reporting issuers in Canada had adopted Say-on-Pay advisory votes, representing approximately 7% of Canadian listed issuers by number, excluding structured-product issuers and non-listed issuers.
That number has steadily grown each year, such that a total of 220 companies in Canada have now adopted an annual Say-on-Pay advisory vote, including more than 71% of companies in the TSX Composite Index and 52 of the TSX60 Index companies. The adoption of this practice has been completely voluntary thus far, in many cases in response to pressure from institutional investor groups, such as the Canadian Coalition for Good Governance (CCGG), or non-binding votes on shareholder proposals.
Board Elections Less Cozy? Yeah, But Let’s Not Get Carried Away . . .
A recent WSJ headline breathlessly announced that 478 directors failed to get a majority vote this year – and that’s up 39% since 2015. Okay, fair enough – but this Hunton Andrews Kurth memo analyzing the study upon which the WSJ article was based notes that it’s still exceedingly rare for a director to get less than a majority of the votes cast:
How often do directors fail to receive majority support when they stand for reelection? The answer is not often. According to a recent report, however, director “against/withhold” votes are on the rise even though they remain rare. In 2019, 478 directors failed to receive majority support—a small number, but up 38% from 2015. Likewise, the number of directors failing to receive at least 70% support for reelection increased 45% from 2015 to 2019. Overall average shareholder support for directors last year was 95% (votes cast).
The memo breaks down some of the study’s data, and notes that it’s rare for directors to receive less than 70% support – but that data indicates that institutional investors have become more willing to withhold votes from directors in uncontested elections.
– Rule 14a-8(i)(7)’s “ordinary business” exclusion, the role that the board’s analyses of why the policy issues involved in a proposal are not significant plays in the Staff’s consideration of a no-action request, and the board analyses that the Staff has found – and not found – to be persuasive.
– The factors considered in determining whether a proposal may be excluded under Rule 14a-8(i)(7) on the basis that it would involve “micromanagement” of the company, including circumstances that may result in even precatory proposals being deemed to raise micromanagement issues.
In addition, the SLB sets forth the Staff’s view that companies should refrain from an “overly technical” reading of proof of ownership letters in a effort to avoid including a proposal. In particular, the SLB points out that the Staff has not required proponents to adhere strictly to the suggested format for those letters contained in Staff Legal Bulletin 14F in order to avoid having their proposals excluded under Rule 14a-8(b).
Hey, remember those whistleblower proposals I blogged about yesterday? The SEC also announced that it has scheduled an open meeting on October 23rd to consider adopting the proposed amendments. Based on the SEC’s recent track record when it comes to cancelling open meetings, I sure wouldn’t recommend buying non-refundable tickets if you’re planning to head in to DC to attend.
Naming Audit Partners: No Audit Quality Impact?
Several years ago, the PCAOB adopted a rule requiring the public identification of the audit firm’s engagement partner on each public company audit. This rule went into effect for audit reports issued after January 31, 2017. It was intended to promote improved audit quality by enhancing auditor accountability. But according to this MarketWatch.com article, so far, there’s no evidence that it’s moved the needle on that front, but there’s at least some evidence that investors are using the information as a screening tool. Here’s an excerpt:
One of those new studies found that despite slightly positive trends in audit quality, the improvement is not yet convincingly attributable to the adoption of the audit partner-naming rule. That research, entitled “What’s in a Name? Initial Evidence of U.S. Audit Partner Identification Using Difference-in-Differences Analyses,” by Lauren M. Cunningham of the University of Tennessee, Chan Li of the University of Kansas, Sarah E. Stein of Virginia Tech, and Nicole S. Wright of James Madison University, is in the current issue of The Accounting Review, a peer-reviewed journal of the American Accounting Association.
The study by Cunningham and her colleagues also cites another ongoing study that finds investors are less likely to invest in a company when the partner is linked to another client with a restatement. Another working paper finds no evidence of significant trading activity in the days surrounding PCAOB Form AP disclosure, even in cases of a change in audit partner in the second year of mandatory disclosure.
Director Onboarding: Board Governance Guidebook
Clients frequently ask for resources to help new directors get up to speed on governance during the onboarding process – and this 12-page “Guidebook to Boardroom Governance Issues” that Wilson Sonsini has put together seems to fit the bill nicely. It covers a lot of ground in a concise & informative way. Check it out!
If you’re a public company director looking to put a real crimp in your future career prospects, it looks like adopting a poison pill is a pretty good way to do it. In a recent Business Law Prof blog, Akron U’s Stefan Padfield flagged a new study that says directors who vote to adopt a poison pill pay a significant price. Here’s the abstract:
We examine the labor market consequences for directors who adopt poison pills. Directors who become associated with pill adoption experience significant decreases in vote margins and increases in termination rates across all their directorships. They also experience a decrease in the likelihood of new board appointments. Firms have positive abnormal stock price reactions when pill-associated directors die or depart their boards, compared to zero abnormal returns for other directors.
Further tests indicate that these adverse consequences accrue primarily to directors involved in the adoption of pills at seasoned firms and not at young firms. We conclude that directors who become associated with poison pill adoption suffer a decrease in the value of their services, and that the director labor market thus plays an important role in firms’ governance.
The study suggests that the absence of any adverse effect on directors who put pills in place at emerging companies may reflect the market’s perception that takeover defenses are positive for young firms and negative for more seasoned ones.
PCAOB: Board Seat Drama Culminates in SEC Shake-Up
Last month, Broc blogged about the controversy over Kathleen Hamm’s seat on the board of the PCAOB. To make a long story short, Hamm wanted to be reappointed to the Board, but according to this article by MarketWatch.com’s Francine McKenna, the SEC seemed to have other ideas. Last week, the CII sent a letter to the SEC citing Francine’s article & endorsing Hamm’s reappointment.
The plot thickened late Friday afternoon when the SEC issued a press release announcing that Hamm would leave the PCAOB board when her current term expires. That was followed by another release announcing that White House staffer Rebekah Goshorn Jurata would take Hamm’s place on the board.
If the replacement of the reportedly “Democrat-aligned” Hamm with a Trump Administration insider wasn’t enough to raise eyebrows, the SEC’s second press release went on to announce that Commissioner Hester Peirce – who is, to say the least, not a fan of Section 404 of the Sarbanes-Oxley Act – would “lead the Commission’s coordination efforts with the Board of the PCAOB.”
Any hopes that releasing the news about the shake-up late on the Friday before a holiday weekend would limit media attention on the PCAOB were likely dashed yesterday when the WSJ published an article detailing a whistleblower’s allegations that the PCAOB’s work has been slowed by “board infighting, multiple senior staff departures, and allegations that the chairman has created a “’sense of fear.'”
Whistleblowers: Big Changes in SEC’s Program On the Way?
According to this recent AP report, the SEC is quietly moving toward adopting some potentially significant changes in its whistleblower program. Here’s an excerpt:
The proposal would give the SEC discretion to set the smallest and largest cash awards to whistleblowers, among other changes. Critics say that change would likely discourage employees from reporting major frauds by lowering the chances of a huge payout. The payment for successful cases is now 10% to 30% of fines or restitution collected by the agency — which means the bigger the fraud, the larger the bounty.
The SEC also wants to impose new requirements for filing a whistleblower complaint. To receive legal protection from the SEC against retaliation — a core concern for people risking their careers and livelihoods — a whistleblower would have to report violations in writing, rather than the oral disclosures now permitted at the SEC and other federal agencies.
Liz blogged about the proposal to amend the whistleblower rules when the SEC initially made it in June 2018, but now that it appears to be close to adoption, it has prompted the usual reaction from the usual suspects. Whistleblower advocates contend the changes would have calamitous results, while the AP story quotes the U.S. Chamber of Commerce as saying that the proposal is a “small but nonetheless important step” toward improvement.
Last week, NYC Comptroller Scott Stringer announced an initiative calling for companies to adopt a corporate version of the NFL’s “Rooney Rule” in order to promote gender & ethnic diversity in the boardroom. Here’s an excerpt from the Comptroller’s press release:
At the annual Bureau of Asset Management (BAM) “Emerging and MWBE Manager” conference, New York City Comptroller Scott M. Stringer today launched the third stage of the groundbreaking Boardroom Accountability Project with a new first-in-the-nation initiative calling on companies to adopt a policy requiring the consideration of both women and people of color for every open board seat and for CEO appointments, a version of the “Rooney Rule” pioneered by the National Football League (NFL). The new initiative is the cornerstone of the Comptroller’s Boardroom Accountability Project, a campaign launched in 2014 which seeks to make boards more diverse, independent, and climate competent.
The Comptroller launched this initiative by sending a letter to 56 S&P 500 companies that do not currently have a Rooney Rule policy requesting them to implement one. The press release indicates that the Comptroller will file shareholder proposals at companies “with lack of apparent racial diversity at the highest levels.”
Since the Comptroller is pressing for a corporate Rooney Rule, I wondered if there was data on how the NFL’s Rooney Rule has played out in terms of promoting diversity. I came across this recent article from “TheUndefeated.com” which says that the results are a mixed bag. Minority candidates are getting more shots at head coaching positions, but the results suggest that they’re put in a position to succeed less frequently than white coaches, and that teams give them the axe more quickly. It’s also worth noting that, despite the Rooney Rule, 7 of the 8 head coaching vacancies in the NFL during the past offseason were filled by white dudes.
I have a problem with the methodology that the article applies to its Rooney Rule analysis. The Cleveland Browns’ hiring & firing of Romeo Crennel & Hue Jackson during the period were included in the sample, which I really think should’ve been limited to professional football teams. Besides, as we Cleveland fans are in the process of finding out once again this season, nobody can question the fact that the Browns are an equal opportunity pit of despair.
Conflict Minerals: GAO Says 2018 Reports Were More of the Same
The GAO recently completed its annual conflict minerals review as required by Dodd Frank. Here’s an excerpt from this GAO report highlighting its results:
Companies’ conflict minerals disclosures filed with the U.S. Securities and Exchange Commission (SEC) in 2018 were, in general, similar in number and content to disclosures filed in the prior 2 years. In 2018, 1,117 companies filed conflict minerals disclosures—about the same number as in 2017 and 2016. The percentage of companies that reported on their efforts to determine the source of minerals in their products through supply chain data collection (country-of-origin inquiries) was also similar to percentages in those 2 prior years.
As a result of the inquiries they conducted, an estimated 56 percent of the companies reported whether the conflict minerals in their products came from the Democratic Republic of the Congo (DRC) or any of the countries adjoining it—similar to the estimated 53 and 49 percent in the prior 2 years. The percentage of companies able to make such a determination significantly increased between 2014 and 2015, and has since leveled off.
Tomorrow’s Webcast: “Sustainability Reporting – Small & Mid-Cap Perspectives”
Tune in tomorrow for the webcast – “Sustainability Reporting: Small & Mid-Cap Perspectives” – to hear White & Case’s Maia Gez, Elm Sustainability Partners’ Lawrence Heim, Ballard Spahr’s Katayun Jaffari and Toro’s Angie Snavely discuss sustainability trends among small & mid-caps – and how companies with limited resources can get a sustainability initiative off the ground.
Here’s the latest “list” installment from Nina Flax of Mayer Brown (here’s the last one):
I believe none of us, regardless of the stage of our careers, should feel bad, shame or any other negative if we are unable to remain completely unemotional at work. We are human – and emotions make us human! There have been many times throughout my career, and of course in the past few years, that I have cried – including somewhere at work. How I know that I need that outlet as well as support from others in order to remain [more] composed in the inducing situation and after. I need it like the air I breathe.
This got me thinking about crying, how and when I cry, and how some people I work with (internally and externally) do not seem to think of me as being vulnerable for I am sure a plethora of reasons. So, here is a more vulnerable list… a list of Things That Make Me Cry.
1. My Son’s Love. It is a fact that I am a working mom. In fact, I do not think I would be a good mom if I did not work – I am just not cut from that cloth. However, I am in a service profession, which means I have to be available and can have intense hours. Which also means that I have to travel. When my son grabs on to my leg and starts crying hysterically, whether on a “normal” morning when I am going in to work or as I have a suitcase in hand waiting for a car to take me to the airport, I keep it together. Momentarily. The second I walk out of the house and he can no longer see me, remembering his dragon tears and “No, mommy, don’t go! Don’t go [to work] [to the airport]! Stay here! I want you to stay here with me!” – I cry.
2. My Son’s Rejection. See first three sentences above. Which also leads to my husband being the more stable figure who is always able to be there in the morning (no calls in the office from 6am), at night (no working until 3am) and on weekends (for all, no work travel). Which leads to my son at times (sometimes it feels like the vast majority of times) preferring my husband. Which leads to my son, sometimes, yelling “Go away!” or “I don’t want you” or “NO! Only Papa!”, etc. I know this is not atypical. And I know that in the next breath, I get an “I love you” or a hug or a kiss or a head leaning on my shoulder, or, as above, a “Mommy, no, don’t go to work!” These things don’t make the hurt go away. My son’s rejection cuts me to the core, including the guilt I feel that I have to prioritize work sometimes, and I always sneak away to cry by myself. I am saving for another day tag lines that really make me angry – like work-life balance, or lean in. Finally, before I move off of this point, I LOVE the relationship my son and husband have, and would not want their relationship to be any other way. Other than tempering the tone and words of my rejection. If my son said, “Mama, can you please have Papa come in?” or “Mama, I would prefer if Papa tucked me in.” in those moments, I swear I would not cry – I would not feel rejected. Thankfully, he has started heading in this direction.
3. Being Frustrated When I’m Tired. Not kidding. If I am tired and something occurs that I find particularly frustrating, I cry. It is truly a reflex for me. Any frustration.
4. Witnessing Artistic Accomplishments. When I see an amazing ballet, or even watch a moving piece on So They Think They Can Dance (when I watched this show before child), or someone sing beautifully a beautiful song, or someone receiving an award for a fantastic performance, I cry. When people perfect their craft, share it and exude peace and joy at the same time, I am moved. I must admit I am more emotional around the arts, but any deep recognition of achievement, scientific, professional or other non-arts focused, usually makes my eyes at least water.
5. Reading The News. I know I should not admit this in public, but I extremely dislike reading or staying up-to-date on the news. Because inevitably, there is a piece on conflict I seek out, a story about a crime or horrific accident involving a child, or a moving, random act of kindness. The majority of the time I read the news I read something that makes me cry.
6. Feeling Grateful. I have referenced this a bit in my other posts, but I try to remind myself of all that I have to be grateful for. And when I do I realize how much I am grateful for, how trivial some of the things that upset me are, and how there are so many with less. Including children who are hungry, without a roof over their heads, without feeling safe, without feeling loved and/or without books. And I cry.
This makes it seem like I always cry. Those who are closest to me are not at all surprised by my delicate flower status. Those that are not as close to me are probably floored by this post. But I felt compelled to be honest – I am not ashamed of crying, and have learned to temper my feeling of being “less” than anyone in a professional situation who comes across as perfectly composed. Because I love emotions, but maybe a little less than I love books.
Fake SEC Filings: Edgar Fights Back
I really can’t overstate how much we love “fake SEC filings” around here. So it’s with mixed feelings that I report on changes to Edgar that might make these an even rarer occurrence. Specifically, filers now need a longer & more complex password – this Gibson Dunn blog has more detail:
Filers, including Section 16 filers, will now be requested to provide twelve character passwords instead of eight character passwords when logging into both the EDGAR Filing Website and the EDGAR Online Forms Management Website. Current filers who do not update their password to twelve characters will be prompted to update it each time they log in. We have confirmed with the staff of EDGAR Filer Support that current filers who do not update their password when prompted will not be prevented from logging in successfully. However, EDGAR passwords expire annually and should be changed before the expiration date. Any filers who have not already updated their password by the time they otherwise expire will be required to create a password that satisfies the new requirements before being permitted to log in to EDGAR.
Even more interesting from a security perspective is that a “Last Account Activity” tab is being added to the filing & forms websites – so you can see a 30-day history of login attempts and spot any aspiring fakers. And on a more vanilla note, the changes also allow companies to include 150 characters in cover page tags for classes of registered securities (up from 100 characters), since some companies were having trouble fitting it all in.
New Podcast Series! “Women Governance Gurus” With Courtney Kamlet & Liz
Check out the new podcast series – “Women Governance Gurus” – that I’ve been co-hosting with Courtney Kamlet of Syneos Health. So far, these illustrious guests have joined us to talk about their careers in the corporate governance field – and what they see on the horizon:
– Stacey Geer – EVP, Chief Governance Officer, Deputy GC and Corporate Secretary at Primerica
– Kellie Huennekens – Head of Americas, Nasdaq Center for Corporate Governance
– Anne Chapman – Managing Director, Joele Frank
– Hope Mehlman – EVP, Chief Governance Officer at Regions Bank
Stacey’s President & GC even presented her with a new nameplate in honor of the occasion!
When Delaware Chief Justice Leo Strine announced that he’d be leaving the bench this fall, Broc speculated that grander things were yet to come. Now, the influential judge is kicking off his “retirement” with a bang – by publishing this proposal that would recommit to “New Deal” concepts. In particular, the proposal focuses on workers’ rights and a reformed shareholder voting/proposal process (e.g. requiring a “say-on-pay” vote only once every 4 years and changing shareholder proposal thresholds).
This isn’t a big surprise given some of Chief Justice Strine’s prior comments. But it’s more comprehensive. And while he doesn’t go as far as Senator Warren’s “Accountable Capitalism Act,” he does comment that companies are “societally chartered institutions” – notable for a Delaware judge! – and proposes requiring “workforce committees” for boards of all large companies (whether public or private). Here’s an excerpt on that point (and also see this Cooley blog):
To make sure that companies give careful consideration to worker concerns at the board level, the Proposal requires the Securities and Exchange Commission, the Department of Labor, and the National Labor Relations Board to jointly develop rules that would require the boards of companies with more than $1 billion in annual sales to create and maintain a committee focused on workforce concerns. By requiring these committees at all large corporations, not just public corporations, more accountability would be imposed on large private companies, such as those owned by private equity firms, to treat their workforce fairly.
These workforce committees would be focused on addressing fair gain sharing between workers and investors, the workers’ interest in training that assures continued employment, and the workers’ interest in a safe and tolerant workplace. These workforce committees would also consider whether the company uses substitute forms of labor—such as contractors—to fulfill important corporate needs, and whether those contractors pay their workers fairly, provide safe working conditions, and are operating in an ethical way, and are not simply being used to inflate corporate profits at the expense of continuing employment and fair compensation for direct company employees.
Offering a middle-ground between the current system and “codetermination”-style worker representation, the committees would be required to develop and disclose a plan for consulting directly with the company’s workers about important worker matters such as compensation and benefits, opportunities for advancement, and training. Finally, the National Labor Relations Act would be amended to ensure that companies can use dedicated committees to consult with their workers without running afoul of the Act’s prohibition on “dominating” labor organizations, provided that the company doesn’t interfere with, restrain, or coerce employees in the exercise of their rights to collective bargaining and self-organization. In essence, this would allow for European-style “works councils” without impeding union formation and representation.
Should the SEC Get Out of the “Stakeholder Disclosure” Business?
I think most securities practitioners can agree that it’s exhausting to shoehorn certain Congressional mandates for broader ’33 & ’34 Act reporting into the SEC’s mission to protect investors – and when these types of mandates come around, they also seem to be at odds with the Commission’s mission to facilitate capital formation. At the same time, a variety of stakeholders are clamoring for information, and the SEC runs the main disclosure game in town.
This paper by Tulane law prof Ann Lipton plays some of the same notes as Chief Justice Strine’s proposal (and it was actually published before his). For example, that it’s outdated to make disclosure requirements dependent on a company’s capital raising strategy. Here’s part of the abstract:
This Article recommends that we explicitly acknowledge the importance of disclosure for noninvestor audiences, and discuss the feasibility of designing a disclosure system geared to their interests. In so doing, this Article excavates the historical pedigree of proposals for stakeholder-oriented disclosure. Both in the Progressive Era, and again during the 1970s, efforts to create generalized corporate disclosure obligations were commonplace. In each era, however, they were redirected towards investor audiences, in the expectation that investors would serve as a proxy for the broader society. As this Article establishes, that compromise is no longer tenable.
Who would regulate this brave new world? Personally, I think that if the SEC’s mission was expanded, it would be well-suited to take on the challenge – but I’m not sure they’d want the job. Here’s what Ann suggests:
There is currently no federal agency with the skills to manage the system contemplated here. The SEC is not equipped to manage disclosures intended for noninvestors (which is another reason the securities laws should not be used for that purpose). The Federal Trade Commission has broad experience studying business activity, but has fewer disclosure mandates. That said, the SEC and the FTC both have skills and experience that would be useful in developing a new system: both study a wide range of industries, and the SEC in particular has expertise in developing standardized reporting for public audiences, balanced against the costs to businesses of complying with disclosure demands.
Therefore, it might be appropriate to create a joint initiative that draws on the resources and knowledge of both agencies. The initiative could begin its work by studying how public information about corporations is used by noninvestor audiences, including surveying local regulators, as well as advocacy and trade groups, for their input as to how existing disclosures are used and the weaknesses in the current system. Based on the results of this survey, the initiative could develop a standardized framework that would permit meaningful comparisons across reporting companies.
New! Quick Survey on Hedging Policy Disclosure
At our conference a few weeks ago a few weeks ago (which you can still register & watch via video archive), there were a lot of questions about how companies will handle the newly required hedging policy disclosure. Take a moment to participate in our 3-question “Quick Survey on Hedging Policy Disclosure” and see what others are planning to do.
Here’s something I recently blogged on CompensationStandards.com: As you can see from the studies posted in our “Director Pay” Practice Area, it’s become a pretty rare thing for public companies to pay director meeting fees. In fact, this Pearl Meyer blog reports that fewer than 25% of companies are doing it (though it’s still a majority practice at private companies). The blog gives these recommendations if your directors insist on being paid for attendance:
1. If your number of board or committee meetings is consistently above your peer group meeting, revisit whether your retainers account for that workload
2. If there’s a non-recurring situation, consider an ad-hoc retainer for affected directors
3. If directors are uncertain about their workload, consider conditional meeting fees if the number of meetings exceeds a pre-established threshold
SEC Enforcement: Check Your “Loss Contingency” Disclosure!
Ah, autumn. A time to relish the changing leaves, cooler temps and of course the deluge of press releases from the SEC’s Enforcement Division that drop before the end of the Commission’s September 30th fiscal year. Here’s an announcement about charges against the pharma company Mylan, which was the subject of a two-year DOJ probe and didn’t disclose any loss contingencies or accrue any estimated losses prior to announcing a $465 million settlement.
The SEC’s complaint also took issue with the company’s “hypothetical” risk factor disclosures about government authorities taking contrary positions to its Medicaid submissions, when CMS had already informed Mylan that a product was misclassified. Mylan agreed to settle the SEC matter for $30 million.
Things like this tend to seem pretty clear in hindsight – especially if you’re reading about them in an SEC announcement. But it really requires a thorough understanding of the rules and a lot of judgment. Don’t forget that we have handbooks to help you sort through it all. Here’s the one on “Legal Proceedings Disclosures” – and here’s the one on “Risk Factors.”
SEC Enforcement: Actually, Just Check All Your Disclosures
Here’s another recent settlement between the SEC’s Enforcement Division and a company that disclosed allegedly misleading customer metrics (the CEO was also charged). This one’s scary because it delves into the type of non-financial stuff that gets added to earnings releases (and occasionally periodic reports) without a lot of lawyerly checking. This Stinson blog explains the allegations:
In 2014 and 2015, Comscore disclosed its total number of customers and net new customers added in quarterly earnings calls. Comscore also disclosed its customer total in periodic filings with the Commission. According to the SEC the number of net new customers added per quarter was an important performance indicator for Comscore that analysts tracked and reported on. During this time, in an effort to conceal the fact that quarterly growth in Comscore’s customer total had slowed or was declining, a Comcast employee allegedly approved and implemented multiple changes to the methodology by which the quarterly customer count was calculated. These changes were neither applied retroactively nor disclosed to the public per the SEC order.
Coincidentally, a recent Corp Fin comment letter raised similar issues for a different company. Comments might be down overall, but don’t let anyone tell you that Corp Fin is “calling it in” for their reviews. They took issue with the number of customers disclosed by a gym in its annual report and – of all the things! – the viewership stats that the company cited for “Dick Clark’s Rockin’ Eve” (see this Bass Berry blog).
For those of us who want to save companies from fines & embarrassment, the question is how to vet non-financial metrics efficiently and without losing all your friends & clients. Some members have suggested putting a “stake in the ground” that describes how customer metrics are calculated – whether that’s a widely-available internal thing or actually in the 10-K would be up for debate (both shareholders & competitors would prefer the latter). Shoot me an email if you have other ideas…
