I had a lot of fun taping this 36-minute podcast with Brink Dickerson of Troutman Sanders. I’m still chuckling over Brink’s response to my query about “least favorite tasks” (starting at the 23:45 mark). I highly encourage you to listen to these podcasts when you take a walk, commute to work, etc. Brink tackles:
1. Where did you grow up?
2. I understand that you may be the only securities lawyer without a customary qualification?
3. How did you end up going to law school?
4. Although you are in Atlanta now, you started practicing in Chicago. How did that come about?
5. What early experiences shaped how you practice law?
6. Were there any particular experiences that impacted how your practice evolved?
7. I understand that you considered joining the SEC at one point. Tell me about that.
8. How do you prepare for a speaking gig?
9. What types of work tasks are your favorite to work on?
10. Least favorite?
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…
Rebuttal: “How the SEC Enabled the Gross Under-Reporting of CEO Pay”
Here’s a rebuttal from a member to the blog that I excerpted from on Friday: About this new study about how to calculate “total compensation” for purposes of the Summary Compensation Table, not only are the authors misstating what goes into the SCT – but that even is of little consequence to their analysis. The grant date value of awards issued during the year (not vested) are reported in the Summary Compensation Table. What these these authors are saying is realized compensation (W-2 pay) is far more valuable than SCT pay:
– For example, they reference data from 2014, which indicated S&P 500 company CEOs’ SCT pay averaged $19.3 million, while average realized compensation was $34.3 million.
– The authors conclude that pay is seriously underreported – and the SEC is aiding and abetting this understatement.
The problem with the paper’s analysis is that realized equity gains are based on awards granted several years ago – and comparing gains realized in the current year to awards granted during the year is largely irrelevant & very misleading (to quote Mark Twain: “there are lies, damn lies and then there are statistics”):
– A careful statistician would have examined the grant date value of the specific awards from prior years and compared it to the actual value of the award; in that way, they would be truly matching grant date and realized values of the same award.
– A likely distortion in their analysis is gains realized in the current year might include several years of prior awards (for example 2-3 years of stock options exercised in a single year), thus one year’s pay reported in the SCT is being compared to multiple years’ awards reported in the gain realized table.
– Stock price performance could have soared since the awards were granted, thus realized values are far more valuable than anticipated ( as are shareholders’ gains); why do the authors believe this is a bad outcome?
– Executives who hold onto stock options until expiration (rather than exercise at vest) are likely to report the largest realized gains; arguably, the gains realized after vesting are investment rather than compensation decisions, and should not be included in the authors’ analysis of grant date versus realized pay.
The SEC’s proposing release on pay-for-performance includes a table that attempts to address the lack of disclosure of realized pay, as equity awards will be reported as they vest – but this wouldn’t completely address the authors’ concerns as they are using the value of options when exercised, not when vested.
As I blogged a few months ago, in the wake of Brexit, the new UK Prime Minister Theresa May is seeking a number of governance reforms – she recently promised that a corporate governance consultation would take place within the next few months. The Prime Minister has promised bold action including “cracking down on excessive corporate pay” and giving employees and customers representation on boards.
Meanwhile, the UK Parliament Business, Innovation & Skills Committee launched its own governance consultation last week. This is what Marty Lipton wrote about that:
In announcing the inquiry, the chairman of the committee stated that principle purposes were to determine whether under existing law, corporate governance encourages companies to achieve long-term prosperity and assures fair treatment of employees. That the inquiry is focused on a stakeholder approach to corporate governance is made clear by the first three questions it poses:
– Is company law sufficiently clear on the roles of directors and non-executive directors, and are those duties the right ones? If not, how should it be amended?
– Is the duty to promote the long-term success of the company clear and enforceable?
– How are the interests of shareholders, current and former employees best balanced?
In addition to combatting short-termism, promoting long-term investment and protecting employees, the inquiry is focusing on executive compensation and its relation to companies long-term performance. Lastly, the inquiry poses the following questions about the composition of boards:
– How should greater diversity of board membership be achieved? What should diversity include, e.g. gender, ethnicity, age sexuality, disability, experience, socio-economic background?
– Should there be worker representation on boards and/or remuneration committees? If so, what form should this take?
While the outcome of the inquiry is not certain, it is clear that corporate governance in the U.K., in the U.S., and in the EU has again become a serious political issue. If companies and investors do not find a mutual path to governance that promotes long-term investment and accommodates employee, customer, supplier and community interests, legislation will result. That legislation may not be to the liking of either companies or investors.
“Consultations” are the UK’s rulemaking process – and they typically involve multiple bodies to accomplish the feat. It’s confusing. For an example, look at this blog leading up to the UK adopting binding say-on-pay where I note dual consultation processes in the House of Commons/House of Lords and the Financial Reporting Council (which looks after the “UK Corporate Governance Code”)…
Yesterday, Corp Fin issued this new “CDI 139.33/126.41” under the Securities Act Section 5/Form S-8 areas – while withdrawing “CDI 239.16/226.15.”
The new CDI deals with whether a company-sponsored 401(k) plan that doesn’t have an employer securities fund alternative might still be deemed to be offering securities that require ’33 Act registration (when the plan permits contributions through a self-directed “brokerage window”). The CDI concludes that “it depends” – whether the securities need to be registered “depends on the extent of the employer company’s involvement.” And the CDI goes on to provide more gloss…
Through a peculiar quirk of Sarbanes-Oxley, OSHA administers Section 806, which provides whistleblower protection for certain parties who report (1) federal mail, wire, bank, or securities fraud, (2) federal law relating to fraud against shareholders, and (3) any rule or regulation of the SEC. The interim OSHA guidance lays out various confidentiality and related provisions in employee settlement agreements that OSHA deems problematic.
Many of the points are derived from the three SEC enforcement cases brought over the past year on this issue. But the OSHA guidance goes a step further and deems problematic any provision that requires a complainant to waive a government whistleblower award. There has been some uncertainty as to the enforceability of such waiver provisions, and the SEC enforcement cases to date do not address the issue directly. While the OSHA guidance is not binding on the SEC, it is still instructive to parties seeking to comply with the SEC whistleblower rules in the absence of any formal guidance from the agency or its staff. Of course, if parties find themselves in a situation in which OSHA has the responsibility to review a settlement agreement, as detailed in the OSHA guidance, we fully expect each of its criteria to apply.
“How the SEC Enabled the Gross Under-Reporting of CEO Pay”
Here’s the intro from this blog entitled “How the SEC Enabled the Gross Under-Reporting of CEO Pay” by “truthout”:
Think it’s scandalous that the average 2014 pay of the CEOs of the 500 biggest companies was 373 times that of the typical worker, as the AFL-CIO reported? You aren’t scandalized enough. Their take home pay, which is reported in the bowels of SEC filings, as opposed to the Summary Compensation Table that the AFL-CIO, along with most analysts and reporters rely on, was a stunning 949 times that of the average worker in 2014.
How did this massive disparity come about, and why is the SEC on the side of such gross understatement?
An important new paper by William Lazonick and Matt Hopkins, which is recapped in detail in The Atlantic, explains this gaping disparity. The culprit is the differences in the approach used to measure stock-related compensation, which is the bulk of top executive pay.
John & I had a lot of fun taping our first “news-like” podcast. This 9-minute podcast is about director compensation & Smithsonian museums – the new African-American museum is opening this weekend (it’s already “sold out” for a few months)! I highly encourage you to listen to these podcasts when you take a walk, commute to work, etc. And as we tape more of these, it’s inevitable we’ll figure out how to be more entertaining…
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…
Transcript: “After Brexit! Current Developments in Capital Raising”
We’ve posted the transcript for our recent webcast: “After Brexit! Current Developments in Capital Raising.”
Corp Fin Updates Small Business Guide for Resource Extraction
In two orders made public today, the SEC announced settled charges against EY and individual EY auditors with regard to alleged violations of the auditor independence rules as a result of “close personal relationships” with officers at audit clients. According to the press release, these “are the first SEC enforcement actions for auditor independence failures due to close personal relationships between auditors and client personnel.”
EY and the other auditors charged consented to the SEC’s order without admitting or denying the findings and paid penalties. EY was also censured,and the individuals were suspended from practice before the SEC. These cases are of interest to issuers as well as auditors because the auditors’ violations caused the companies involved to violate Section 13(a) of the Exchange Act and Rule 13a-1, which require public companies to file Forms 10-K with financial statements that have been audited by independent accountants.
Cybersecurity: New York Proposes 1st State Legal Framework
The New York Department of Financial Services (NYDFS) has proposed cybersecurity rules that would require banks, insurers, and other NYDFS-regulated financial services companies to adhere to stringent cybersecurity requirements mandating firms to test their systems, establish plans to respond to cybersecurity events, and annually certify compliance with the cybersecurity requirements, among other mandates. Comments on the proposed rules are due in 45 days.
Political Spending Disclosure: Fight Within Congress Continues
A political fight over whether to require companies to disclose their political spending activities is complicating congressional efforts to hammer out a stopgap spending measure by the end of the month, Republican and Democratic aides say. Senate Democrats are asking their Republican counterparts to drop language from a short-term spending measure to keep the government operating through the fall. The GOP provision would prevent the Securities and Exchange Commission from working on a rule that would require publicly traded companies to disclose political contributions.
The government’s current funding, which expires next week, already bars the SEC from using its funding to “finalize, issue or implement” a political-spending disclosure rule. And Democrats face a high hurdle in getting that provision eliminated, since language from existing funding plans typically carry over into any new short-term spending bills.
As I have blogged many times (here’s one), the SEC’s Reg Flex Agendas tend to be “aspirational” – and experience bears that out as the SEC often misses its “target” deadlines. I actually loathe blogging when a new Reg Flex Agenda comes out – because some folks read too much into it. In fact, I’m only blogging about it now to try to stave off more misinformation (until just the last few years, the Reg Flex Agenda was completely ignored by everyone)!
Last week, the SEC issued this Reg Flex Agenda, which is a different type of one than the ones that folks normally pay attention to – the new one is under Section 610 of the Regulatory Flexibility Act & requires federal agencies “to review its rules that have a significant economic impact upon a substantial number of small entities within ten years of the publication of such rules as final rules.” The other type of Reg Flex Agenda is like this one that foretells possible new rulemaking. One is forward-looking/future action; the other is to review old rules already on the books to see if they are still “state of the art.”
Anyway, in tandem with this new Reg Flex Agenda, SEC Commissioner Piwowar issued this statement – begging people to comment on the newly posted Reg Flex Agenda (particularly Reg NMS). As Piwowar notes in his statement: “the annual Rule List has prompted, on average, only one comment.” It’s likely that Piwowar asked that Reg NMS be included in the list – the inclusion of that item doesn’t necessarily mean that Chair White thinks it should be. Because the list has little meaning – because it’s aspirational…
I’ll leave you with three thoughts:
1. The SEC Chair primarily sets the agenda for the agency’s rulemaking (see the transcript from our webcast: “How the SEC Really Works”). For the most part, it doesn’t matter how many people seek a rulemaking change. Remember that the political contribution rulemaking petition has garnered over 1 million comments in support – and the SEC hasn’t proposed anything there.
2. This year’s Reg Flex Agenda is even more aspirational than normal – because there is a high likelihood that the SEC Chair (and some of the Division Directors) will be gone soon after the upcoming Presidential election. A new SEC Chair will then eventually be appointed – and that Chair will be driving the bus in 2017.
3. Our community has more than enough things to comment on these days. The pace of change is breathtaking. We don’t need to be commenting on topics that aren’t even proposed yet…
The “Lookback” Reg Flex Agenda: What’s On The List?
According to Audit Analytics’ research published in a recent WSJ article, however, there is some evidence of a changing tide; in the most recent quarterly reports, more than 80% of the SP500 companies reported GAAP results first, compared to 52% in the prior quarter.
Nevertheless, only a handful of companies have so far stated their intent to drop non-GAAP numbers completely. The vast majority of companies will still present non-GAAP results, albeit presented after comparable GAAP numbers, with better labeling and clearer descriptions.
But let’s take this line of thought a bit further. If custom metrics are so important to investors, then, analogous to GAAP results, it should be important to investors when non-GAAP metrics turn out to be misstated. What would happen if non-GAAP numbers were to be revised – for example, to correct an error?
We have seen a few instances where this question would be very relevant. In a handful of cases where non-GAAP numbers were intentionally manipulated, we’ve seen an array of related negative events (including management turnover and SEC investigation), which makes these cases hard to overlook. So if errors are found in non-GAAP metrics, how should investors be notified? Non-GAAP numbers are not audited, there is no Item 4.02 requirement for them, and there are rarely any SOX 302 or 404 implications.
A few recent examples, provided below, provide some insight into how companies may disclose error corrections that affected only the non-GAAP presentation (i.e., comparable GAAP results were not revised). In both cases, the correction was discussed in a footnote to the non-GAAP reconciling tables.
Also check out this MarketWatch article which notes that the SEC’s Enforcement Division & DOJ brought a parallel case against a financial professional at a REIT for using non-GAAP metrics fraudulently…
Edgar Filings: 9 FAQs
Recently, the SEC’s Edgar Filer Support posted these 9 FAQs about common issues that folks have when filing…
Overall, the percentage of adverse 404 auditor opinions has seen a steady decrease, from 15.7% in 2004, the first year the requirements went into effect, to 5.3% in 2015. However, a less encouraging trend – depending on one’s perspective – is hidden in that overall view; the percentage actually hit its lowest point in 2010, at 3.4%. Since, we have seen an increase in the percentage of adverse 404(b) audit opinions.
Beginning in 2010, the PCAOB began to place a strong emphasis on whether the auditor obtained adequate evidence to substantiate its attestation of the effectiveness of ICFRs. This focus on the part of the PCAOB appears to have had an impact.
Turning our attention to smaller companies, we see a very different picture. One interesting aspect of our report highlights the difficulties faced by non-accelerated filers in achieving an effective level of internal controls over financial reporting. While larger companies rarely (5.3% in 2015) have material weaknesses in their ICFRs, smaller companies are much more often to be found in the weeds.
Spanking brand new. By popular demand, this comprehensive “Director Independence Handbook” covers the entire terrain, from determinations to handling under proxy advisor definitions. This one is a real gem – 94 pages of practical guidance – and its posted in our “Director Independence” Practice Area.
Piwowar Seeks More Disclosure From Banks In Lieu of Other Regulation
In this WSJ piece, Andrew Ackerman describes this speech by SEC Commissioner Michael Piwowar:
Policy makers at the Federal Reserve and their counterparts at the Securities and Exchange Commission have fundamentally different approaches to regulation: The Fed focuses mainly on assessing how safe banks are, the SEC primarily on what companies disclose to markets. Given the two camps don’t always see eye to eye , it’s no surprise SEC officials have often chafed over efforts by the Fed to apply its prudential approach to the capital markets, particularly for asset-management firms. Now a top SEC official, Michael Piwowar, is pushing back — and, in a twist, pressing for more SEC-like regulation of banks.
Mr. Piwowar’s argument, fleshed out in a speech this summer in London, boils down to this: After a plethora of new and costly banking regulations since the financial crisis, regulators still have done very little to remedy the dearth of public information about the banking sector. Many investors see big banks as black boxes. Public mistrust of banks remains high. The solution, according to Mr. Piwowar, is for the SEC to use its authority over publicly traded firms to pull back more of the curtain on banks’ inner workings, just as it forces the companies it oversees to inform investors about factors that could hurt profits.
“Rather than imposing prudential regulation on markets, requiring banks to comply with the disclosure-oriented focus of market-based regulation would provide better protection to the financial system,” he said.
Mr. Piwowar outlined a handful of areas ripe for improved disclosures. They include more details about the loans banks make and the securities they hold as investments, as well as results of the Fed’s big-banks stress tests and granular details of their “living wills,” or plans to go through bankruptcy without needing taxpayer money. A fifth area involves greater disclosure of “material” regulatory costs, in terms of direct expenses as well as “opportunity costs” resulting from new regulatory requirements.
Cap’n Cashbags: Nepotism Reigns
In this 45-second video, Cap’n Cashbags – a CEO – hires three sons who probably aren’t qualified:
It seems that ever since Congress passed Dodd-Frank, the House GOP has been trying to repeal major chunks of it. This year is no exception. As noted in this Reuters article, the House Financial Services Committee has passed the “Financial CHOICE Act of 2016” (which I’ve blogged about several times before – remember my reference to choking a horse; see this MarketWatch article). Here’s a new letter from CII opposing the bill…
Do CEOs Sway Political Choices of Their Employees?
Given the season we are in – and the heated debate over whether companies should disclose their political contributions – I was struck by this study entitled “Do CEOs Affect Employee Political Choices?” – here’s the abstract ( & here’s a MarketWatch piece):
We analyze how political preferences of CEOs affect their employees’ campaign contributions and electoral choices. Employees donate almost three times more money to CEO-supported political candidates than to candidates not supported by the CEO. This relation also holds around CEO departures, including plausibly exogenous departures due to death or retirement. CEO influence is strongest in firms that explicitly advocate for political candidates and firms with politically connected CEOs. Finally, employees are more likely to vote in elections in those congressional districts in which CEOs are more politically active. Our results suggest that CEOs are a political force.
My own personal experience has been mixed. In a modestly-sized law firm, the managing partner strongly encouraged us to donate money to a particular candidate in another state (I declined). At a Fortune 50 company, we were encouraged to register & vote – but we were never influenced about which party or candidate to vote for. My wife worked for a small business where all employees were strongly encouraged to donate to a candidate – with the subtle promise that a bonus would be forthcoming in about the same amount at the end of the year…
Poll: Have You Ever Been Swayed About How You Vote or Donate?
Please take a moment to participate in this anonymous poll:
The SEC has adopted an interim final rule to adjust for inflation the maximum civil money penalties payable for violations of the federal securities laws. The adjustments were mandated by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015.
The adjustments most pertinent to Section 16(a) compliance are those made to the monetary penalties the SEC may impose in cease and desist proceedings brought under Section 20C of the Exchange Act, since most enforcement actions that are based solely on Section 16(a) violations are brought under Section 20C. Section 21B(a) of the Exchange Act permits the SEC to impose a civil money penalty in a cease and desist proceeding brought under Section 20C if the SEC finds that the respondent is violating or has violated a provision of the Exchange Act (including Section 16(a)) or is or was a cause of such a violation. Section 21B(b) prescribes three tiers of penalties, depending on the nature of the violation, and establishes a maximum penalty for each tier. Each maximum penalty is subject to adjustment upward for inflation.
Here are the three tiers and the new maximum penalty amounts. The maximum penalties prior to the recent adjustments are set forth in parentheses:
– First tier is available for any type of violation, and permits a fine of up to$8,908 ($7,500) per violation for a natural person and $89,078 ($80,000) per violation for any other person.
– Second tier is available only for violations involving fraud, deceit, manipulation, or deliberate disregard of a regulatory requirement, and permits a fine of up to $89,078 ($80,000) per violation for a natural person and $445,390 ($400,000) per violation for any other person.
– Third tier is available only if the requirements for the second tier are met and the violation resulted in substantial losses or a significant risk of substantial losses to other persons. Fines for third tier violations can range up to $178,156 ($160,000) per violation for a natural person and $890,780 ($775,000) per violation for any other person.
More on “Armageddon for ADRs”
Last month, I blogged about the SEC’s Enforcement Division having issued wide-ranging subpoenas to the four largest ADR banks. I don’t know if its directly related – but yesterday, the SEC announced that a Portuguese-based telecommunications company has agreed to pay a $1.25 million penalty for its failure to properly disclose the nature & extent of credit risk involved in an ADR offering (technically it was an ADS offering – “American Depository Shares”)…
FYI: Conference Hotel Nearly Sold Out
As always happens this time of year, our Conference Hotel – the Hilton Americas – Houston – is nearly sold out. Our block of rooms is indeed sold out – but there are still rooms outside our block available at essentially the same rate. Reserve your room online or by calling 713.739.8000. If you have any difficulty securing a room, please contact us at 925.685.9271.
And if you haven’t registered for the October 24-25th conference, register now. If you really want to go, but you’re having budget issues – drop me a line…
While I was on vaca, the SEC issued this fee advisory that sets the filing fee rates for registration statements for 2017. Right now, the filing fee rate for Securities Act registration statements is $100.70 per million (the same rate applies under Sections 13(e) and 14(g)). Under the SEC’s new order, this rate will go up to $115.90 per million, a 15% hike. This offsets last year’s 13% drop.
As noted in the SEC’s order, the new fees will go into effect on October 1st like the last four years (as mandated by Dodd-Frank) – which is a departure from years before that when the new rate didn’t become effective until five days after the date of enactment of the SEC’s appropriation for the new year – which often was delayed well beyond the October 1st start of the government’s fiscal year as Congress & the President battled over the government’s budget.
The New “Investor Forum”
This blog by Francis Byrd described the essence of the new “Investors’ Exchange”:
An anticipated autumn announcement, reported in today’s FT, by a coalition of forty institutional investors – including BlackRock, the Wellcome Trust and Allianz Global Investors – amongst others may create a powerful opportunity for these top investors to manage their individual clout in a collective manner on ESG issues.
What makes this collaborative so different, you might say, from ICGN (or CII in the United States) or other regional groups of investors in Europe or Asia with ESG concerns? The primary difference, according the FT story, is that this collective will be exempt from restrictions limiting groupings of large investors from taking or indicating that they might take certain and specific actions in concert. For example, one could envision these 40 institutional investors issuing a statement of concern regarding executive compensation or perhaps on a proposed transaction, at a portfolio company, standing against the board’s recommendation, without running afoul of UK market rules designed to limit stock manipulation and insider trading by large shareholders working in concert.
While the FT story does not delineate the specific issues that the group of 40 would be able to act in concert on, it is likely to mirror the issues listed in the UK Investor Forum’s Collective Engagement Framework (ESG issues such as CEO compensation, CEO and independent director succession, strategy and performance, capital management, reporting and communications). The UK Investor Forum’s collective action plan would also allow for the participation of U.S. and foreign institutional investors. It must be noted that the Investor Forum’s Collective Engagement Framework was informed by consultation and collaboration between the largest UK corporate issuers, the biggest UK institutional investors and leading UK corporate lawyers.
Looks like Ralph Nadar is putting on a conference here in DC about giving power to the people. It includes some shareholder & whistleblower stuff – with Bob Monks & Jack Bogle, etc. speaking…
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:
– Issuing Shares Via Blockchain: Delaware Poised to Act
– Describing an Officer’s Duties 101
– Data Privacy: More Federal Agencies Join Enforcement Bandwagon
– Stats: Controlled Companies
– How Law Firms Should Strengthen Their Cybersecurity
