Given that its the 20th anniversary of when the SEC delivered this report to Congress about the impact of technology on the securities law, I thought it would be a good time to explain how I became the main “Internet” guru in Corp Fin back in late ’90s. The story involves reviewing the first CD-ROM prospectus as told in this 6-minute podcast.
If you search the term “script” in this amended registration statement for Ameritrade’s 1997 IPO, you will see video was included in a CD-ROM that was attached to the paper prospectus. The CD-ROM was considered part of the prospectus – and the script was appended at the end of the printed prospectus.
I have pictures of the print prospectus & CD-ROM on my fairly lame Pinterest page – and Ameritrade recently posted the video itself! The video features numerous members of senior managers and explains how the company operates. Love the use of the Netscape browser! [Here’s my blog about my video regarding “how to file video on Edgar.”]
As noted in this blog, you might recall David Westenberg telling us that the 1st multimedia prospectus was the 1985 IPO of Kurzweil Music Systems – the printed prospectus was polybagged with an audiocassette. This was before the SEC had guidance on what to do with multimedia, so there were no lessons learned…
1997 Congressional Report: Impact of the Internet on the Securities Laws
Let me briefly explain that report to Congress about the impact of technology on the securities law. It was mandated as part of NSMIA. With Meredith Cross & Mauri Osheroff reviewing my work, I wrote the section relating to the Internet and public companies.
At the time, I printed off hundreds of pages of screen shots involving the first time that a pioneering company did something online. The firsts! I literally knew everything going on with public companies online – because there wasn’t all that much happening. In 1997, even large major companies were building their own websites for the very first time.
The Internet was so new that when I eventually landed at RR Donnelley as a marketing & sales guy (after a stint in-house at Lockheed Martin) – and sold them a website called “RealCorporateLawyer.com.” My title had the term “Internet” in it because that was so novel!
Broc & John: Impact of Technology on Securities Laws
In this 6-minute podcast that John & I taped a while back, we discuss the impact of technology on the securities laws & old dogs.
This podcast is also posted as part of my “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…
I’m sad to note that Bill Carter passed away last week. Bill served in Corp Fin for 30 years, most of them in the Office of Chief Counsel. Perhaps most notable is that Bill was primarily responsible for hiring several generations of Corp Fin Staffers over many years – including me.
Along with Bill Morley, Bill conducted the first – and often only – interviews with possible candidates. I remember my interview – right out of law school – vividly. Those two were cool customers. I had no idea how I fared in the interview. Little did I know that having gone to the University of Maryland Law School made me a “shoo in.”
I was with a bunch of former Staffers last week when we found out about Bill. We all had our Bill stories. For example, Bill apparently wanted to be a veterinarian. Bill was a real class act. When he announced his retirement in the late ’90s, I was working in OCC with Bill – and I tried to set him up with my mom. Bill was precisely the kind of guy that you wanted as your stepfather. Here’s how you can made donations to the American Cancer Society on Bill’s behalf.
SEC Chair Lists His Agenda Priorities
Recently, SEC Chair Jay Clayton testified on the SEC’s fiscal 2018 budget before the Senate Appropriations Subcommittee and listed his priorities. Here’s an excerpt from this Weil Gotshal blog on the topic (also see this Bass Berry blog):
Chair Clayton’s testimony revealed three main concentration areas for fiscal 2018: facilitating capital formation with an emphasis on small business growth; protecting investors through enforcement; and leveraging technology to achieve the SEC’s goals. The Chair indicated the SEC would be improving efficiency through automation, streamlining internal processes and utilizing data throughout the agency. Improvements in efficiency will be necessary to do more with less because the budget calls for small reductions in full time equivalent headcount in most areas (e.g., Enforcement down from budgeted FTE in 2017 of 1362 to 1329; Corporation Finance from 465 to 453, and Office of Compliance Inspections and Examinations (OCIE) from 1083 to 1055).
Transcript: “Public Company Carve-Outs – The Nuggets”
We have posted the transcript of our recent DealLawyers.com webcast: “Public Company Carve-Outs – The Nuggets.”
On Friday, John blogged about Corp Fin’s big announcement that it would extend eligibility for confidential review of draft registration statements to all IPOs – not just emerging growth companies as permitted under the JOBS Act. Since then, Corp Fin has issued these 18 FAQs to flesh out its new position, which commences July 10th…
We have posted the July issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Dazzling Sights of a Conference
Taking my own advice about “how to maximize your conference experience,” here’s the 10 new people I met during this year’s ‘Society for Corporate Governance’ conference:
Yesterday, Corp Fin announced that it would extend eligibility for confidential review of draft registration statements to all IPO issuers – not just emerging growth companies as permitted under the JOBS Act. In addition to IPOs, the initial filing of a registration statement for follow-on offerings within 12 months after an IPO will also be eligible for confidential review. Companies registering securities for the first time under the Exchange Act will also have the ability to have their registration statements reviewed confidentially, such as spin transactions. This new position commences July 10th.
The press release accompanying the announcement notes that permitting all new issuers to do so “will provide companies with more flexibility to plan their offering.” Corp Fin says that this initiative is part of its “ongoing efforts to facilitate capital formation.” The position should create a significant movement towards more draft filings going into the SEC. We’ll see how many offerings make it to market this year – but this is a big change in the review process that should create some momentum. We understand more position changes can be expected as facilitating the offering process is a priority for Chair Jay Clayton and Corp Fin Director Bill Hinman.
Happy 241st Birthday, America! I hope everybody has a great holiday & celebrates in style – personally, I’m planning to follow the bird’s lead.
We romanticize our nation’s founding, but in doing so, we sometimes forget what a roll of the dice it was. During a time that’s high in partisan invective and low in common decency, that’s not a bad thing to keep in mind.
The 4th of July gives us a good reason to pause for a moment & remember that, in the end, we’re all in this thing together. As Ben Franklin put it when the Declaration of Independence was signed – “We must, indeed, all hang together, or most assuredly, we shall all hang separately.”
This Skadden memo discusses Stadnick v. Vivint Solar, a recent 2nd Circuit decision addressing when financial information about an incomplete quarter needs to be disclosed in a prospectus.
Most courts that have confronted this issue have followed the 1st Circuit’s 1996 decision in Shaw v. Digital Equipment, and require disclosure when the information suggests that the quarter will be an “extreme departure” from prior results. But as this excerpt notes, the 2nd Circuit took a different approach:
The Second Circuit declined to adopt Shaw’s “extreme departure” standard, adhering instead to the materiality test it articulated in DeMaria v. Andersen, 318 F.3d 170 (2d Cir. 2003). Under DeMaria, a duty to disclose interim financial information arises “if a reasonable investor would view the omission as ‘significantly alter[ing] the ‘total mix’ of information made available.’”
Instead, the Second Circuit analyzed the omissions holistically in light of the total mix of available information. The Second Circuit concluded that when viewed in the context of the registration statement’s extensive disclosures on Vivint’s six prior quarters and unique business, Vivint’s third quarter results were consistent with past performance and “the successful implementation of its business model.”
The 2nd Circuit also rejected plaintiff’s argument that the company’s failure to address certain regulatory risks in its MD&A violated Item 303’s “known trends” disclosure requirement. In doing so, it pointed to the company’s risk factor disclosure, which in the Court’s view provided investors with ample warning of the regulatory issues in question.
Securities Act Claims: Do States Still Have Jurisdiction?
I recently blogged about the growth in Section 11 lawsuits in state courts – with California, in particular, emerging as a favorite venue for these actions. Now this Shearman & Sterling blog reports that the Acting Solicitor General is asking the US Supreme Court to review whether state courts still have jurisdiction over these suits:
On May 23, 2017, the Acting Solicitor General filed a brief on behalf of the United States as amicus curiae urging the Supreme Court to grant the petition for a writ of certiorari in Cyan v. Beaver County Employees Retirement Fund, No. 15-1439, to resolve confusion in lower courts as to whether the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) divests state courts of jurisdiction over cases that allege only claims under the Securities Act of 1933.
The issue has been a significant one. California state courts in particular have become a forum of choice for plaintiffs asserting claims under the Securities Act, and procedural bars on interlocutory review of decisions denying motions to dismiss or remand have precluded significant appellate review.
The Supreme Court had invited the government to weigh-in last fall. The Acting Solicitor General’s brief urged the Supreme Court to hold that SLUSA doesn’t divests state courts of jurisdiction – but renders Securities Act cases removable to federal court.
The Supreme Court granted cert earlier this week. Check out this ‘D&O Diary’ blog for more details on the case.
The blog points out that there are some pretty interesting provisions in the legislation, including a section forbidding a federal court from certifiying a class action in which the named plaintiff is “a present or former client” of class counsel. As this excerpt notes, that’s pretty radical stuff:
As skeptical as we may be about some of the securities class action lawsuits brought against public companies, it’s very unusual to take the position that plaintiffs cannot choose counsel they’ve worked with in the past to represent them.
It’s particularly unusual given that institutional investors and others are not naïve entities unable to protect their own interests. Many of the plaintiffs being represented in securities class action litigation are large, sophisticated institutional investors.
This McGuire Woods blog says that this statute faces fairly long odds – it has a long list of opponents & PredictGov gives it only a 21% chance of passing. But the last time Republicans controlled the White House & both branches of Congress saw the most recent round of reforms enacted – so the time may be ripe for this kind of legislation.
Earlier this month, the SEC’s Division of Enforcement entered a cease & desist order against the former CEO & CFO of UTi Worldwide, a multinational freight forwarding company. The proceeding involved alleged failures to comply with S-K Item 303’s requirement to disclose in the MD&A section any “known trends and uncertainties” that are “reasonably likely” to impact a company’s liquidity.
UTi experienced delays in billing resulting from a new operating system. This resulted in a hit to cash flow, and came at a time when the company was also struggling to comply with its debt covenants. The 10-Q for the relevant period didn’t address the billing problems and their cash flow impact. When UTi subsequently disclosed that it blew its debt covenants due to liquidity issues resulting from the billing problems, its stock cratered – and Enforcement came knocking.
This Cleary Gottlieb blog reviews the proceeding & the “known trends” requirement. Here’s an excerpt discussing the SEC’s views about when known trends disclosure is required:
Regulation S-K Item 303 requires the “disclosure of a trend, demand, commitment, event or uncertainty…unless a company is able to conclude either that it is not reasonably likely that the trend, uncertainty or other event will occur or come to fruition, or that a material effect on the company’s liquidity, capital resources or results of operations is not reasonably likely to occur.” As the SEC noted in the Order, the “reasonably likely” standard is a lower standard than “more likely than not.”
What the SEC did not discuss, but what is equally important for companies that need to comply with the disclosure requirements to understand, is the probability floor for when this forward-looking disclosure is required. The good news is that the “reasonably likely” standard is a higher probability threshold than if a material effect is “reasonably possible” (which is the standard for the disclosure of contingent liabilities under ASC 450, Contingencies, and which would require disclosure in the event the likelihood of a “material effect is higher than remote”.
This Drinker Biddle blog notes that the case is the most recent example of the SEC’s increasing willingness to bring financial reporting & accounting actions that aren’t premised on financial statement materiality, and don’t involve fraud-based allegations.
Enforcement: SEC Stakes a Claim to Anti-Money Laundering Violations
This Ballard Spahr memo reviews recent cases where the SEC has used a new enforcement tool – the Bank Secrecy Act & its anti-money laundering (AML) regulations – against financial institutions. While violations of these actions has traditionally been addressed by other regulators, this excerpt says that the SEC appears ready to flex its muscle more frequently in this area:
This most recent complaint filed by the SEC is not an isolated event, but rather part of a trend. Earlier this year, another broker dealer was charged in a similar civil enforcement action with failing to file SARs. These enforcement actions – and others – are consistent with the public pronouncements of the former SEC Enforcement Director, who has stated that the SEC Broker Dealer Task Force must “pursue standalone BSA violations to send a clear message about the need for compliance.”
The memo compares the SEC’s decision to stake a claim in the AML arena to its decision to pursue FCPA cases – a statute that historically had been addressed by other agencies, but where the SEC now has an established role.
FCPA: Many Derivative Actions Filed, But Few Make the Cut
Over on the ‘D&O Diary,’ Kevin LaCroix recently blogged about the fate of many derivative actions that follow on the heels of the announcement of an FCPA violation. Qualcomm announced a high-profile FCPA settlement with the SEC in March 2016, and a derivative action was filed shortly thereafter in Delaware Chancery Court. This case, like most other FCPA-based derivative claims, didn’t make the cut:
As I have observed in the past (for example), while plaintiffs’ lawyers frequently are quick to file follow-on civil suits in the wake of an FCPA investigation or enforcement action, in many instances these suits are unsuccessful as the suits often fail to clear the initial pleading hurdles. As was the case here, a frequent basis on which these suits are dismissed is the failure to establish demand futility. To be sure, there are FCPA follow-on actions that survive motions to dismiss (as discussed for example), but in many other instances the cases do not survive.
The blog notes that despite their poor track record, plaintiffs keep trying – which since the underlying FCPA cases are often based on significant misconduct, isn’t really surprising.
Twitter is so 2016. At our recent “Women’s 100 Conference,” one forward-thinking company said their IR team prefers live Q&A via “Sli.do” – an audience interaction platform that lets you crowd-source & filter questions in real time. Some companies are also considering holding live meetings on Facebook & Periscope – if they can get comfortable with Reg FD. Learn more about social media & Reg FD in our newly updated “Regulation FD Handbook“…
Risk Oversight: Social Media & Your Brand
One challenge of a social media crisis is that everyone – customers, shareholders, employees, directors – sees & reacts to it simultaneously. This Deloitte memo outlines how boards can be more nimble by preparing in advance for this risk. Here’s an excerpt:
Board members who understand the brand and reputational risks posed by social media and make an effort to understand how brands are positioning themselves can better help their organizations prepare and respond to brand-threatening incidents. Board members can ask questions like these to help senior executives clarify brand positioning and mitigate potential damage on social media:
1. Is our messaging on social media platforms consistent with our core values?
2. Do we have the data and analytics to show that our actions on social media live up to our brand promise?
3. Which tools are we using to monitor our social media channels and conversations about the brand? How are we using the insights to inform our strategy and mitigate risk?
4. Is there a crisis management plan or playbook for a social media incident?
5. Have we developed and communicated the appropriate social media policies to our employees and if so, how are they monitored and reinforced?
SCOTUS: Whistleblower Case Is a “Go”!
Yesterday, the US Supreme Court agreed to review a Ninth Circuit opinion – Somers v. Digital Realty Trust – to consider whether employees who report misconduct internally within their companies (and not to the SEC) are entitled to anti-retaliation protections as “whistleblowers.” Here’s the news from this WSJ article by Andrew Ackerman:
The announcement is welcome news for corporate defendants that have lamented the broad way in which the SEC and some federal courts have interpreted the 2010 Dodd-Frank financial-overhaul law, which is ambiguous about whether employees who make only internal corporate reports of securities fraud are protected under federal law.
The Dodd-Frank law included a number of provisions aimed at encouraging people to speak out about alleged wrongdoing at their employers. Those included new incentives, such as giving tipsters a portion of the penalties imposed on firms if they report misconduct to the SEC. It also included new penalties for employers seen as discouraging the reporting of misconduct—so-called anti-retaliation provisions.
Monday’s case narrowly focuses on whether such anti-retaliation provisions apply to people who report misconduct to their employers, but not to the SEC. The high court will consider the matter in the fall of 2017 when it meets for its next term, giving the justices a platform to potentially narrow the scope of protection in this area.
Two circuit courts have held internal reporting is protected under the Dodd-Frank Act, and one circuit court has found the protections apply only when misconduct is reported to the SEC.
The SCOTUS decision is expected by the end of next June.
We’ve blogged a few times about Vanguard’s updated proxy voting guidelines and the impact they might be having on recent climate change proposals. We shouldn’t overlook that Fidelity’s also joined the party. Here’s an excerpt from its updated “Proxy Voting Guidelines,” which were previously silent on environmental & social issues:
FMR generally will vote in a manner consistent with management’s recommendation on shareholder proposals concerning environmental or social issues, as it generally believes that management and the board are in the best position to determine how to address these matters. In certain cases, however, Fidelity may support shareholder proposals that request additional disclosures from companies regarding environmental or social issues, where it believes that the proposed disclosures could provide meaningful information to the investment management process without unduly burdening the company.
For example, Fidelity may support shareholder proposals calling for reports on sustainability, renewable energy, and environmental impact issues. Fidelity also may support proposals on issues such as equal employment, and board and workforce diversity
I blogged a few weeks ago about the historic climate change proposal at ExxonMobil – it passed with 62% support. BlackRock voted in favor of the proposal, and this vote bulletin explains why. Here’s a teaser:
The BlackRock Investment Stewardship team has identified climate risk disclosure, in line with the Task Force on Climate-related Financial Disclosures (TCFD), as one of our five engagement priorities for 2017-18.
In the past year, we’ve engaged more directly on Exxon’s reporting of climate-related risks. We have also engaged with the shareholder proponents to better understand their views. We believe it is in long-term shareholders’ best economic interests for Exxon to enhance its disclosures. We therefore voted in favor of the shareholder proposal focused on the 2-degree Celsius warming target (the “2-degree scenario”) as outlined in the Paris Agreement under the United Nations Framework Convention on Climate Change.
In addition, we have repeatedly requested to meet with independent board directors over the past two years to better understand the board’s oversight of the company’s long-term strategy and capital allocation priorities amidst major strategic challenges and regulatory inquiry (including but not be limited to oversight of climate risk). The company declined to make directors available, citing a non-engagement policy between independent board members and shareholders.
So a couple takeaways here are – first, to understand your shareholders’ priorities – and second, if a key shareholder asks to meet with directors…make it happen. Last week’s blog has some tips on both of these topics.
Sustainability Reports: Published by 82% of the S&P 500
This recent Governance & Accountability Institute study found that 82% of the S&P 500 are publishing a sustainability or corporate responsibility report. Up from 20% just 5 years ago! Here’s a chart that shows the declining number of non-reporters by industry:
At our “Women’s 100” Conferences, we heard from some institutional investors who look at sustainability as a risk issue – and not one that applies just to extractive industries. They want to understand what the company’s doing to stay competitive for years to come. You can share this info in your proxy statement in the absence of a full-blown sustainability report, but still check out Clorox’s “Integrated Report” – it’s a cool example & shows what types of topics to cover. We have even more resources in our “ESG” Practice Area. And tune in for our October 10 webcast – “E&S Disclosures: The In-House Perspective” – featuring experts from the Coca-Cola Company, Bristol-Myers Squibb, Apple & Clorox.
Last week, John blogged about evolving MD&A disclosures under the new revenue recognition standard. Check out this SEC Institute blog for more examples of early adopters – Alphabet, Ford, Raytheon & others. Here’s an excerpt from First Solar’s Form 10-Q:
We adopted ASU 2014-09 in the first quarter of 2017 using the full retrospective method. This adoption primarily affected our systems business sales arrangements previously accounted for under ASC 360-20, which had required us to evaluate whether such arrangements had any forms of continuing involvement that may have affected the revenue or profit recognition of the transactions, including arrangements with prohibited forms of continuing involvement. When such forms of continuing involvement were present, we reduced the potential profit on the applicable project sale by our maximum exposure to loss.
With 6 months till the new revenue recognition standard is required, only about 20 companies in the Russell 3000 have adopted it. This blog from Audit Analytics shows as-reported progress towards adoption & provides industry-specific examples of revenue streams that are likely to be materially affected. It also cautions that the SEC is commenting on transition disclosure that’s too generic. Here’s an excerpt from a recent letter:
You state that you are in the process of evaluating the impact that the amended revenue recognition guidance in Topic 606 will have on your consolidated financial statements. Please revise to provide qualitative financial statement disclosures of the potential impact that this standard will have on your financial statements when adopted. In this regard in your next filing, include a description of the effects of the accounting policies that you expect to apply, if determined, and a comparison to your current revenue recognition policies. Describe the status of your process to implement the new standard and the significant implementation matters yet to be addressed. In addition, to the extent that you determine the quantitative impact that adoption of Topic 606 is expected to have on your financial statements, please also disclose such amounts. Please refer to ASC 250-10-S99-6 and SAB Topic 11.M.
Canada Tries for Single-Regulator Framework: Now Doomed?
This Blakes memo notes that the Quebec Court of Appeal ruled against Canada’s proposed nationwide framework for securities regulation – finding part of it unconstitutional because it infringes on provincial sovereignty. This ruling might delay implementation, which was planned for next June. Here’s some thoughts on next steps:
One option is to push ahead with implementing the Cooperative System in a form modified to address the Council’s powers that the Court of Appeal identified as incompatible with parliamentary sovereignty and the division of powers between the federal and provincial governments.
Another, and more likely, option is for the federal government to seek the Supreme Court of Canada’s (SCC) opinion on the Cooperative System. If it chooses this option, the federal government could either appeal the Quebec Court of Appeal’s decision to the SCC or direct a separate reference to the SCC. The SCC’s decision would take precedence over that of the Quebec Court of Appeal.
At the risk of depressing our resident “Annual Meeting Fanboy” – this Joe Nocera article is notable just because the mainstream media doesn’t report much on the state of annual meetings. Joe attended four meetings – in a single day! – as background for his piece.
He suggests annual shareholder meetings aren’t what they used to be (and perhaps they never really did have much value). No more free coffee! No more swag! Here’s an excerpt:
Look, I get why good-governance types want to prevent companies from holding online-only meetings. As my old friend Nell Minow, a long-time corporate governance expert, put it in an email, “I think the threat of looking unhappy investors in the eye and having to answer questions in person still makes a difference.” My Bloomberg View colleagues made a similar argument, among others, in an April 12 editorial.
But from what I can see, this reasoning, though sensible in theory, doesn’t reflect reality. None of the shareholders I’ve seen are likely to strike fear in a chief executive or board member. And shareholders who do have the clout to shake up a company, like Carl Icahn, hardly wait around for the annual meeting. They own enough stock to command private meetings with management.
Virtual-Only Meetings: CII Weighs In
Recently, Broadridge reconvened its “Committee for Best Practices for Annual Shareholder Meetings” in an effort to update its guidelines for virtual annual meetings since they’re five years old. Earlier this month, CII sent this letter to the Committee to reaffirm its opposition to virtual-only meetings.
New Lease Accounting: Parsing an Example
Beginning in 2019, under the FASB’s ASU 2016-02, companies will need to recognize assets & liabilities for operating leases (see these memos in our “Lease Accounting” Practice Area). This blog by Steve Quinlivan gives the following example:
Lessee enters into a 10-year lease of an asset, with an option to extend for an additional 5 years. Lease payments are $50,000 per year during the initial term and $55,000 per year during the optional period, all payable at the beginning of each year. Lessee incurs initial direct costs of $15,000.
At the commencement date, Lessee concludes that it is not reasonably certain to exercise the option to extend the lease and, therefore, determines the lease term to be 10 years. Lessee also determines the lease is an operating lease.
The rate implicit in the lease is not readily determinable. Lessee’s incremental borrowing rate is 5.87 percent, which reflects the fixed rate at which Lessee could borrow a similar amount in the same currency, for the same term, and with similar collateral as in the lease at the commencement date.
At the commencement date, Lessee makes the lease payment for the first year, incurs initial direct costs, and measures the lease liability at the present value of the remaining 9 payments of $50,000, discounted at the rate of 5.87 percent, which is $342,017. Lessee also measures a right-of-use asset of $407,017 (the initial measurement of the lease liability plus the initial direct costs and the lease payment for the first year).
Lessee determines the cost of the lease to be $515,000 (sum of the lease payments for the lease term and initial direct costs incurred by Lessee). The annual lease expense to be recognized is therefore $51,500 ($515,000 ÷ 10 years).
At the end of the first year of the lease, the carrying amount of Lessee’s lease liability is $362,093 ($342,017 + $20,076; the $20,076 represents accrued interest on the lease liability), and the carrying amount of the right-of-use asset is $375,593 (the carrying amount of the lease liability plus the remaining initial direct costs, which equal $13,500).
As John blogged last week, Microsoft is voluntarily adopting the new lease standard on July 1st – you may be able to glean some pointers from their disclosure.
