Yesterday, I blogged about “initial coin offerings” – or ICOs – over on “The Mentor Blog.” The ink on that blog was barely dry when the SEC weighed in with its own thoughts – in the form of a Section 21(a) Report addressing the status of “digital assets” under the Securities Act.
Guess what? Despite claims that “coins” aren’t securities, the SEC sure thinks they can be. Here’s an excerpt from the SEC’s press release on the Report:
The SEC’s Report of Investigation found that tokens offered and sold by a “virtual” organization known as “The DAO” were securities and therefore subject to the federal securities laws. The Report confirms that issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies. Those participating in unregistered offerings also may be liable for violations of the securities laws. Additionally, securities exchanges providing for trading in these securities must register unless they are exempt.”
Materiality: SEC’s Investor Advocate Tells FASB What It Thinks
I thought this recent letter from the SEC’s Office of the Investor Advocate on FASB’s proposal to change its definition of “materiality” was worth noting.
FASB proposes to conform its approach to financial statement materiality to the judicial definition of materiality that applies in other contexts. Right now, there’s a disconnect between the two standards. Instead of requiring that there be a “substantial likelihood” that information would be material, FASB’s Concept Statement No. 8 currently says information is material if “omitting it or misstating it could influence decisions” that users of financial statements make.
Business groups have applauded the proposed change, but many investor groups have panned it – and the Investor Advocate’s letter provides a fairly comprehensive overview of their objections. It also offers up a revised proposal that would have FASB return to its previous materiality definition – which was generally consistent with the legal concept of materiality – but heavily salt that definition with the “qualitative” considerations embodied in SAB 99.
Materiality: An Accounting Decision?
I can’t resist pointing to one section of the Investor Advocate’s letter to FASB that had me – and I think will have many other lawyers – rolling their eyes. Here’s one of the concerns investors have about the proposed change in FASB’s materiality standard:
The proposals would move decision-making on materiality from accountants to lawyers. The SEC’s Investor Advisory Committee, in a theme echoed by other investors, warned in its comment letter of the risk “that, by replacing the current, differentiated professional accounting standard with a case-law driven legal standard, close questions of judgment will ultimately devolve to lawyers rather than accountants.”
You’ve got to be kidding! If I had a dollar for every time an accountant said “well, it’s a materiality issue – and that’s a legal call,” I’d be sipping Margaritas on my private island beach. However, I do want to thank Investor Advocate for this comment – which I intend to laminate so I will be sure to have it to share with the next accountant who tries to artfully dodge the financial statement materiality bullet in this fashion.
Legislative efforts at governance & disclosure reform – such as the “Financial Choice Act” – have gotten a lot of attention this year. This Rivel Research study asked institutional investors what they thought of those efforts – and the short answer is “not much.”
North American & European institutional investors oppose major change in the US governance regulatory framework. Here are some of the study’s conclusions:
– Two-thirds (65%) believe a weakened SEC will have a negative effect on governance outcomes.
– A large plurality (43%) oppose efforts to pare back the Dodd-Frank Act. Only 18% support it. The rest are uncertain.
– There is widespread opposition (among two in three proxy voters) to rolling back the Act’s mandates for board diversity disclosure, political spending disclosure, & separation of Chair/CEO
– Even if Dodd-Frank is pared back, the vast majority of investors believe that companies should continue to honor/abide by the rules originally set forth within. In fact, many will be seeking expanded disclosure in many areas.
In the event that key governance & disclosure mandates are repealed, the study also says that companies should prepare for increased engagement – nearly half of the investors said they would ramp up their efforts to engage companies on governance matters. What’s more, 41% say they’ll be more inclined to support an activist if the rules are pared back.
Now that the House of Representatives has passed the Financial Choice Act, is Sarbanes-Oxley next on its “hit list”? This recent blog from Cooley’s Cydney Posner says a key part of it just might be. Here’s the intro:
What’s next for the House after taking on Dodd-Frank in the Financial CHOICE Act? Apparently, it’s time to revisit SOX. The Subcommittee on Capital Markets, Securities, and Investment of the House Financial Services Committee held a hearing earlier this week entitled “The Cost of Being a Public Company in Light of Sarbanes-Oxley and the Federalization of Corporate Governance.”
During the hearing, all subcommittee members continued bemoaning the decline in IPOs and in public companies, with the majority of the subcommittee attributing the decline largely to regulatory overload. A number of the witnesses trained their sights on, among other things, the internal control auditor attestation requirement of SOX 404(b). Is auditor attestation, for all but the very largest companies, about to hit the dust?
Whistleblowers: $61 Million Reasons to Drop a Dime!
Holy Cow! I guess this isn’t signed, sealed & delivered just yet, but the SEC Staff is apparently recommending a $61 million award to 2 whistleblowers who played a role in a $267 million settlement with J.P. Morgan. Here’s an excerpt from an AdvisorHub article:
Two whistleblowers whose outing of JPMorgan Chase’s bias toward selling wealth customers in-house funds led to the bank’s $267 million settlement with the government will receive payments equal to 23% of the award, according to a “preliminary determination” letter by SEC claim-review staffers.
The letter, a copy of which whistleblower Johnny Burris provided to AdvisorHub and other publications, recommends that the regulator pay one whistleblower 18% of the award, or $48.1 million, while a second receive 5%, or $13.1 million. The SEC by policy does not name whistleblower award recipients, and Burris would not confirm whether he was one of the successful claimants.
The requests of four other claimants for an award were denied because their information did not contribute to the SEC’s examinations, corollary investigations or significantly affect its enforcement action against JPMorgan, according to the letter. The award would far top the previous record of $30 million, which the SEC announced in September 2014.
Normally – as I have blogged many times (here’s one) – the SEC’s Reg Flex Agendas tend to be “aspirational.” But perhaps this time is different.
As part of a federal agency-wide reveal of the new Administration’s plans for rulemaking, the SEC posted the latest version of its Reg Flex Agenda last week. This agency coordination is the Administration’s “unified agency regulatory agenda.”
This Reg Flex Agenda is notable for what it omits – get a load of what’s not on the list:
– Pay-for-performance
– Clawbacks
– Hedging
– Universal proxy
– Clawbacks of incentive compensation at financial institutions
Does this mean that the SEC doesn’t intend to ever proceed with adopting any of the outstanding Dodd-Frank rules that are still in the proposal stage? We don’t know. As this Cooley blog notes, the Preamble indicates that it reflects “only the priorities of the Acting Chairman [Michael Piwowar], and [does] not necessarily reflect the view and priorities of any individual Commissioner.” Since the information in the Reg Flex Agenda was accurate as of March 29th – and SEC Chair Jay Clayton wasn’t confirmed until May – it’s unknown how Chair Clayton feels about all this.
But it might be a sign – because as noted in this article from “The Hill”: “OMB said agencies for the first time will post a list of “inactive” rules to notify the public of regulations that are still being reviewed or considered.” Hat tip to Scott Kimpel of Hunton & Williams for the heads up!
This all doesn’t impact the implementation of the pay ratio rule – because that rule was already adopted a few years ago. It just had a delayed effectiveness date. So it would never show up on a Reg Flex Agenda unless there was rulemaking to delay or repeal it…which there is not…
Pay Ratio Conference: Discounted Rate Ends This Friday
Last chance to register at a reduced rate for our comprehensive “Pay Ratio & Proxy Disclosure Conference.” The discount expires this Friday, July 28th. New Corp Fin Deputy Director Rob Evans will open the event.
It doesn’t matter whether you can make it to DC – because the October 17-18th Conference is available to watch online by video webcast, live on those specific days or by video archive at your convenience. And in addition to the October Conference, you gain access to three pre-conference webcasts. And a set of “Model Pay Ratio Disclosures” in both PDF & Word format.
The first webcast was last week & that 75-minute audio archive is available now – a transcript of that program is coming soon. The second webcast is on August 15th; the third webcast is September 27th.
Register Now – Discount Ends This Friday: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days. Register by July 28th to take advantage of the 10% discount.
Exchange Act Filing Status: It’s That Time Again. . .
This Bass Berry blog reminds everybody that it’s time to check your filing status for 2018 Exchange Act reports:
While the determination of whether a company will qualify as an “accelerated filer” or “large accelerated filer” for 2018 will not take effect until the date your Form 10-K is filed for fiscal 2017 (or, if earlier, your 10-K due date), the determination of your public float is calculated as of the last business day of the most recently completed second fiscal quarter, or June 30 for companies with a calendar fiscal year.
It looks like investors used their votes to send a message to some directors during this year’s proxy season – and it wasn’t “keep up the good work.” This excerpt from a recent Bloomberg article explains:
Shareholders have withheld 20 percent or more of their votes for 102 directors at S&P 500 companies so far this year, the most in seven years, according to ISS Corporate Solutions, a consulting firm specializing in corporate governance. While largely symbolic, the votes at companies such as Wells Fargo and Exxon Mobil are recognized as signals of displeasure and put pressure on boards to engage.
“Institutional investors are becoming more actively involved in communicating displeasure through their votes,”said Peter Kimball, head of advisory and client services at the consulting firm, a unit of Institutional Shareholder Services. “Voting against directors at large-cap S&P 500 companies is a way for an institution to send a signal to other, smaller companies about the actions that they don’t like. That feedback trickles down.”
We’ve previously blogged about Blackrock & State Street’s increasing assertiveness when it comes to pushing for board action on their priorities – and their greater willingness to use their voting clout to send a message to boards that aren’t responsive. The results from this proxy season suggest that other institutions may be taking the same approach.
Boards: What Do Proxy Advisors Want in a New Director?
I’m trying not to take this personally, but according to this recent “Directors & Boards” article, I’m everything that proxy advisors don’t want when it comes to new director candidates – “male, pale & stale.” So who do proxy advisors want instead of me? Here’s the article’s answer:
If proxy advisors – the firms that provide public company research and guidance to large investors – were writing a personal ad for the perfect board director it would probably go a bit like this:
Looking for diverse director with integrity who enjoys face-to-face communication with investors.
That profile is based on new report from “The Conference Board” called “Just What is a Director’s Job?” The report was the product of a roundtable of more than 50 proxy advisors, including ISS & Glass Lewis. The description of the proxy advisors’ “dream date” highlights not merely the growing importance of board diversity, but also the central position that shareholder engagement plays in their views about what makes a good corporate director.
Secret Societies: The Illuminati, Knights Templar & “The Big Four”?
Pretty interesting stuff in this European Parliament group study on the “opacity” of the organizational structure of the Big Four accounting firms. According to the study, nobody knows how many offices the Big Four have, exactly where they’re located, how many people work for them, or how their ownership is structured. Why so secretive? The study says that the Big Four have their reasons:
We suggest that the structure adopted by the Big Four firms of accountants, which at one level suggests the existence of a globally integrated firm and at another suggests that they are actually made up of numerous separate legal entities that are not under common ownership but which are only bound by contractual arrangements to operate common standards under a common name, has been adopted because it:
– Reduces their regulatory cost and risk;
– Ring-fences their legal risk;
– Protects their clients from regulatory enquiries;
– Delivers opacity on the actual scale of their operations and the rewards flowing from them.
The study was released by a left-leaning group of members who serve on the European Parliament’s Panama Papers inquiry committee. Anyway, who knew that your mild-mannered independent registered public accounting firm was playing such an integral role in bringing about the “New World Order”?
Speaking at the Heritage Foundation earlier this week, SEC Commissioner Mike Piwowar said that the SEC might be receptive to requests by IPO companies to include mandatory arbitration clauses in their charters. Here’s an excerpt from this Reuters article:
A key U.S. securities regulator on Monday voiced support for possibly allowing companies to tuck language into their initial public offering paperwork that would force shareholders to resolve claims through arbitration rather than in court. “For shareholder lawsuits, companies can come to us to ask for relief to put in mandatory arbitration into their charters,” said Michael Piwowar, a Republican member of the U.S. Securities and Exchange Commission. “I would encourage companies to come and talk to us about that.”
Mandatory arbitration bylaws got a lot of attention a few years back when Carlyle Group tried to install one in its IPO – although it ultimately backed off. The SEC Staff has historically said that these clauses were contrary to public policy & potentially inconsistent with the anti-waiver provisions of Section 14 of the Securities Act & Section 29(a) of the Exchange Act – so a shift in policy here would be big news.
IPOs: GOP Wants a Smoother Ride
Efforts to encourage IPOs are a big part of the SEC’s agenda. According to this MarketWatch report, Congressional Republicans are on-board as well – they believe that current rules discourage IPOs & deprive retail investors of a chance at the “lottery tickets” those deals represent.
SEC Commissioner Nominee: Hester Peirce to Get Another At-Bat
This WSJ article reports that President Trump plans to nominate former Senate aide Hester Peirce to fill the vacant Republican slot on the SEC (here’s a White House press release – this press release indicates the nomination was sent to the Senate yesterday).
If that name sounds familiar, it’s because President Obama nominated her to serve as a Commissioner in 2015 – but the full Senate never acted on her nomination, as we blogged about numerous times (here’s one of those blogs).
– Mark Borges, Principal, Compensia
– Mike Kesner, Principal-in-Charge, Human Capital Advisory Services, Deloitte Consulting LLP
– Dave Lynn, Editor, CompensationStandards.com and Partner, Jenner & Block LLP
– Maia Gez, Of Counsel, Gibson Dunn & Crutcher LLP
Register Now – Discount Ends July 28th: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days. Register by July 28th to take advantage of the 10% discount.
Our “Annotated Model Pay Ratio Disclosures”: Now Posted
Oodles of Pay Ratio Panels: Comprehensive Coverage
It doesn’t matter whether you can make it to DC – because the October 17-18th Conference is available to watch online by video webcast, live on those specific days or by video archive at your convenience. We’ve clarified that in the box at the top of our Conference FAQs.
Among the panels for the October 17-18th Conference are:
1. Corp Fin Speaks (speaker from the Staff to be announced)
2. The SEC All-Stars: A Frank Pay Ratio Conversation
3. Parsing Pay Ratio Disclosures: US-Only Workforces
4. Parsing Pay Ratio Disclosures: Global Workforces
5. Pay Ratio: Sampling & Other Data Issues
6. Pay Ratio: The In-House Perspective
7. Pay Ratio: How to Handle PR & Employee Fallout
8. The SEC All-Stars: The Bleeding Edge
9. The Investors Speak
10. Navigating ISS & Glass Lewis
11. Keynote: A Conversation with Nell Minow
12. Proxy Access: Tackling the Challenges
13. Clawbacks: What to Do Now
14. Dealing with the Complexities of Perks
15. The Big Kahuna: Your Burning Questions Answered
16. Hot Topics: 50 Practical Nuggets in 60 Minutes
Register Now – Discount Ends July 28th: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days. Register by July 28th to take advantage of the 10% discount.
Yesterday, the SEC posted its updated “Edgar Filer Manual” – Broc blogged about it coming last week. The updated version of the Manual includes instructions on how to comply with the new requirement to link to exhibits (see Section 5.4.2. on pages 5-50 – 5-52) – which will go into effect on September 1st for the larger companies (non-accelerated filers & smaller reporting companies that submit filings in ASCII don’t need to comply until a year later).
Let’s just say the instructions are a wee bit on the technical side. For instance, here’s the summary on “using HTML styles to indicate the location of exhibit links and the summary section”:
To indicate where in the document an exhibit hyperlink is located, in your HTML document enter the text “<a style=”-sec-extract:exhibit” ” before the web address and the text “</a>” after the exhibit name. See Section 5.4.2.2 for instructions on creating hyperlinks to exhibits in HTML documents.
To indicate where in the document the Summary is located, in your HTML document enter the text “<p style=”-sec-extract:summary”>” before the Summary and enter the text “</p>” after the Summary.
This is followed by a discussion of the “detailed steps” required to accomplish whatever the task I just described is – but trust me, you do NOT want to read the detailed steps. Send this one right to the HTML wizards.
At some point, Corp Fin will likely issue a set of FAQs – or some other form of guidance – as we hear there are a lot of open questions that folks are wondering about. For example, how does one link to an exhibit in a 30-year old registration statement that was filed as one gigantic ASCII file? The only available “link” would be to the filing as a whole.
New Accounting Standards: CAQ’s Tips on SAB 74 Disclosure
Several new accounting standards are being rolled out over the next few years – so this recent “Center for Audit Quality” alert reviewing disclosure obligations about new accounting standards under SAB 74 seems pretty timely.
The CAQ alert points out that even in situations where a new accounting standard is not expected to significantly impact the face of the financial statements, new footnote disclosures may still represent a significant change that companies need to address.
Along the same lines, it’s worth noting that this MarketWatch article cites recent comments from an SEC accounting fellow to the effect that even though a new accounting standard may not have a material effect on a company’s financial statements, that doesn’t mean that disclosures about that new standard won’t be material.
Transcript: “Flash Numbers in Offerings”
We have posted the transcript for our popular webcast: “Flash Numbers in Offerings.”
SEC Chair Jay Clayton’s recent speech at the “Economic Club of New York” has received a lot of attention – it was his first as Chair – but this remark seems to have been overlooked:
My last point on capital formation is a reminder. There are circumstances in which the Commission’s reporting rules may require publicly traded companies to make disclosures that are burdensome to generate, but may not be material to the total mix of information available to investors. Under Rule 3-13 of Regulation S-X, issuers can request modifications to their financial reporting requirements in these situations. I want to encourage companies to consider whether such modifications may be helpful in connection with their capital raising activities and assure you that SEC staff is placing a high priority on responding with timely guidance.
I don’t want to read too much into this – but it’s the third time in the past month or so that Rule 3-13 waiver requests have been mentioned in Corp Fin guidance or in comments by senior SEC Staffers.
In addition to Jay’s remarks, this Deloitte memo notes that Corp Fin’s Chief Accountant – Mark Kronforst – discussed waiver requests at a recent conference, and “urged companies to discuss their facts and circumstances” with the Staff. The Staff’s willingness to consider these waiver requests was also recently noted in Corp Fin’s announcement that all IPO filers would be permitted to submit confidential draft registration statements.
There’s no suggestion in any of these comments that it’s somehow “open season” on Reg S-X’s requirements. Still, I think it’s fair to say that the SEC Chair is sending a message that Corp Fin is more open to dialogue about Rule 3-13 waivers than some might assume.
Revenue Recognition: FASB’s “Gift” to Retailers
Over at “MarketWatch,” Francine McKenna recently pointed out that implementation of FASB’s new revenue recognition standard could turn out to be a big gift to the bottom lines of some major retailers. That’s because the new standard would change the way retailers recognize revenue from the unredeemed portion of company-issued gift cards.
This is known as “breakage revenue” – and companies have been recognizing it under various scenarios based on their own redemption experience. Under the new rule, companies will be required to spread breakage revenue over a gift card’s expected redemption period. That’s good news for many retailers:
Most companies will be able to accelerate breakage revenue rather than holding on to it until the likelihood anyone cashes in the balance becomes remote or until the card expires. The accounting change will affect everyone who issues gift cards, from classic bricks-and-mortar grocery and fashion retailers to restaurants to Amazon and other online stores.
Tomorrow’s Webcast: “FCPA Considerations in M&A”
Tune in tomorrow for the DealLawyers.com webcast – “FCPA Considerations in M&A” – to hear Richards Kibbes’ Audrey Ingram, K&L Gates’ Vince Martinez and Schulte Roth’s Gary Stein discuss how to take the FCPA and other anti-corruption laws into account during M&A activities.
As part of the mad rush to register for our comprehensive “Pay Ratio & Proxy Disclosure Conference”, we’ve fielded questions from a number of members who want to attend next Thursday’s webcast – but who can’t make it to Washington DC for the October 17-18th Conference. It doesn’t matter whether you can make it to DC – because the October 17-18th Conference is available to watch online by video webcast, live on those specific days or at your convenience by video archive. We’ve clarified that in our Conference FAQs.
As Steve Quinlivan has blogged, the NYSE recently proposed that listed companies provide notice to the Exchange at least 10 minutes before making any public announcement for a dividend or stock distribution – in all cases. This mean that notice would be required outside of the hours in which the Exchange’s “immediate release” policy is in operation, which goes beyond the current rule.
NYSE Refiles Proposal to Facilitate Direct Listing
A few months ago, John blogged about the NYSE’s proposal to facilitate “direct listings” – which which involves bypassing an IPO, and simply registering common stock under the Exchange Act & listing on an exchange. Then, David Feldman blogged that the NYSE had withdrawn its proposal. Now the NYSE’s proposal has been refiled as SR-NYSE-2017-30 (the withdrawn proposal and amendments 1, 2 and 3 were all related to SR-NYSE-2017-12).
We’re excited to announce three new resources for those grappling with Section 16:
1. “Section 16 Tales” – A Section 16 Beginner’s Manual – a 200-page paperback – filled with practical stories from in-house practitioners. Includes the “soft stuff” – practical guidance not found in the rules. Here’s a list of the 16 chapters in this paperback.
2. “Section 16 Bootcamp” – A combination of three resources for Section 16 beginners, including 13 online videos, copy of the “Section 16 Tales” paperback & the ability to attend a Section 16 Forum.
3. “Section 16 Forums” – A one-day event for all Section 16 practitioners – not just beginners – facilitating education & networking among your peers – one will be held on each coast, each year.
Cross-Border Conflict Over Analyst Research
Here’s the intro from this WSJ article by Dave Michaels:
The SEC is weighing how to alleviate the harshest side effects of a European Union law that could have U.S. repercussions for banks trying to comply with it. The EU law, which goes into effect in January, will require investors to pay directly for investment research provided by banks’ brokerage arms. The EU measure aims to make research costs more transparent for end investors by breaking them out separately from the trading commissions that investment firms pay.
Yet U.S. law discourages paying for research directly by imposing stricter legal obligations on brokers that accept separate payment for research. U.S. rules have for many years accommodated the current arrangement, which dates to an era when commissions were fixed by exchange rules and brokers competed by offering extra services such as research reports. The extra responsibilities would entail higher legal costs and complicate brokers’ roles as sellers of stocks and bonds, according to industry officials. Wall Street wants to avoid that outcome, and two Republican lawmakers took up their cause on Tuesday at a Senate budget hearing by urging SEC Chairman Jay Clayton to find a solution.
Cryptocurrency: What’s a “Security”?
Not sure I fully understand this article on “tokens” and other emerging digital currencies (think “blockchain” & “bitcoin”) – but reading #6 & 7 in the piece seems to indicate that the securities law might not apply to them. Here’s ten cents about this from John:
I think the author is saying that as conceived, these tokens/API keys aren’t securities. Since that’s the case, they qualify for application of the “Tulip Test,” which I learned from an analyst back in the ’90s. It says that whenever you don’t understand a technobabble sales pitch for a world-changing, non-traditional investment, try substituting the word “tulip” or “beanie baby” for the magic word in the article (i.e. “token” and “API Key”) and see how it reads:
“Tokens Tulips aren’t equity, because they have intrinsic use and because they are non-dilutive to the company’s capitalization table. A token tulip sale is more similar to a Kickstarter sale of paid API keys beanie babies than equity crowdfunding.”
