As Broc blogged earlier this month, the DC District Court entered a final judgment in the conflict minerals case – which placed the rule’s future squarely in the SEC’s lap.
On Friday, Corp Fin issued a statement indicating that, pending further review, it would not pursue enforcement proceedings against companies that didn’t comply with the source and “chain of custody” due diligence requirements in Item 1.01(c) of Form SD. Here’s an excerpt from Corp Fin’s statement:
Although the district court set aside those portions of the rule that require companies to report to the Commission and state on their website that any of their products “have not been found to be ‘DRC conflict free,’” that court and the Court of Appeals left open the question of whether this description is required by the statute or, rather, is a product of the Commission’s rulemaking.
In addition, as a result of a request by the Acting Chairman, we have received several comments regarding the desirability of additional guidance or whether relief under the rule is appropriate. Those comments identified several areas for the Commission to consider.
The court’s remand has now presented significant issues for the Commission to address. At the direction of the Acting Chairman, we have considered those issues. In light of the uncertainty regarding how the Commission will resolve those issues and related issues raised by commenters, the Division of Corporation Finance has determined that it will not recommend enforcement action to the Commission if companies, including those that are subject to paragraph (c) of Item 1.01 of Form SD, only file disclosure under the provisions of paragraphs (a) and (b) of Item 1.01 of Form SD.
While the conflict minerals rule remains alive, the source & chain of custody due diligence requirements in Item 1.01(c) are widely regarded as its most burdensome aspects. In a separate statement, Acting Chair Mike Piwowar offered the SEC’s rationale for the decision to halt enforcement of this aspect of the rule:
The primary function of the extensive and costly requirements for due diligence on the source and chain of custody of conflict minerals set forth in paragraph (c) of Item 1.01 of Form SD is to enable companies to make the disclosure found to be unconstitutional.
Piwowar added that until the issues raised by the Court’s decision are resolved, “it is difficult to conceive of a circumstance that would counsel in favor of enforcing Item 1.01(c) of Form SD.”
So what are you supposed to do now with your Form SD? This Gibson Dunn blog – and this Steve Quinlivan blog – review the reporting obligations that remain in effect.
EU: Full Steam Ahead on Conflict Minerals
The future of conflict minerals disclosure may be uncertain in the US – but it’s full steam ahead in the EU. This recent blog from Cooley’s Cydney Posner reports that the European Parliament overwhelmingly approved new rules on conflict minerals. There are many similarities between the US & EU versions of the rules, but the blog highlights a number of important differences. Here’s an excerpt highlighting some of the differences in approach:
Unlike Dodd-Frank, which is primarily disclosure-based, EU Member State authorities will verify compliance by EU importers by examining documents and audit reports and, if necessary, carrying out on-the-spot inspections of an importer’s premises.
The EU rules are largely more prescriptive than the U.S. rules, even though both look to the OECD due diligence framework. Importers will be required to adopt and communicate a supply chain policy (including standards consistent with the OECD model), to incorporate the policy into supplier agreements, to structure their internal management systems to support supply chain due diligence and to establish grievance mechanisms.
The rules will also require EU importers to implement an elaborate supply chain traceability system that will require detailed information about the identity of the suppliers, the country of origin, the type & quantity of minerals and when they were mined. Even more information will be required for minerals originating in conflict-affected areas. The rules are scheduled to go into effect in 2021.
FCPA: DOJ Extends Pilot Program
As noted in these memos, the DOJ has announced that it will extend its pilot program on FCPA enforcement – the 1-year period would otherwise have expired in a few weeks. See this speech by Acting Assistant AG Ken Bianco about the program.
Earlier this week, the SEC announced that it had adopted amendments increasing the amount that companies can raise under Regulation Crowdfunding in order to adjust for inflation. Companies can now raise $1.07 million under Regulation Crowdfunding – up from the $1 million limit initially established by the JOBS Act. Corresponding changes were made to the income threshold ($100K to $107K) for determining investment limits and the maximum amount ($2K to $2.2K) that can be sold to an investor who doesn’t meet that income threshold.
Financial statement disclosure thresholds – which are based on offering size – were also adjusted upward to account for inflation (i.e., $100K to $107K, $500K to $535K, and $1 million to $1.07 million).
That same day, the Staff also issued these two new Regulation Crowdfunding CDIs:
The new CDIs address thresholds for disclosure of related party transactions under Rule 201(r) & eligibility to terminate ongoing reporting obligations under Rule 202(b)(2).
Regulation A+: 6 New CDIs
It’s been a busy week or so at the SEC for matters relating to small issuers. The JOBS Act amendments & new Regulation Crowdfunding CDIs followed on the heels of these 6 new Reg A+ CDIs that were issued last Friday:
Here’s an excerpt from this MoFo blog that provides a brief summary of the new CDIs:
These address an issuer’s ability to use Form 8-A to register securities under the Exchange Act concurrent with completion of a Tier 2 Regulation A offering; the suspension of Tier 2 reporting obligations in the case of a withdrawn offering; the age of required financial statements for a Tier 2 offering; the requirement to file a tax opinion as an exhibit to Form 1-A; the inclusion of an auditor’s consent to use an audit report included in a Form 1-K annual report as an exhibit to the Form 1-K; and the application of Item 19.D of Guide 5 to Regulation A offering sales materials.
Speaking of small issuers, what child of the 1970s & 1980s does not have a soft spot for Ronco? C’mon, think about how many of this company’s products have made the transition from cheap consumer crapola to genuine pieces of Americana – the “Vegematic” . . . “Popeil’s Pocket Fisherman”. . . the “Showtime Rotisserie” – I could go on & on.
I even bought my mom the “Ronco Buttoneer” for Christmas one year (cut me some slack – I was 11 years old & she’s forgiven me).
Anyway, the latest incarnation of this American corporate icon – Ronco Brands – recently filed for a Reg A+ IPO. Here’s the preliminary offering circular.
Just when the U.S. is looking at how to roll back its regulations on corporations (among others), the rest of the world seems to be headed in the opposite direction. On Tuesday, the EU Parliament approved a Shareholder Rights Directive, which introduces, among other things, the concept of binding say-on-pay votes for companies listed in EU markets (over 8,000 of them). The Directive also includes some interesting measures intended to impede short-termism.
According to the fact sheet issued by the European Commission, the Directive must still be adopted by the European Council (expected shortly) and, assuming adoption, will become effective two years thereafter.
To date, 1,972 Russell 3000 companies have held Say on Pay votes and 93% have passed with above 70% support. 31 companies (1.6%) have failed Say on Pay thus far in 2016; no additional companies have failed since our last report. Proxy advisory firm ISS has recommended ‘Against’ Say on Pay proposals at 12% of companies it has assessed thus far in 2016. Our special topic this week features a breakdown of Say on Pay results for S&P 500 companies compared against all other companies in the Russell 3000. So far in 2016, smaller companies are receiving higher average Say on Pay support compared to larger companies despite having a slightly higher failure rate. This development is a reversal from prior years when larger companies had noticeably stronger Say on Pay results.
Alex Lajoux: Evolving Corporate Governance
In this 34-minute podcast, Alex Lajoux, former Chief Knowledge Officer of the NACD, talks about her amazing career, including:
1. Where did you grow up?
2. How did you get into this field in the 1970s?
3. How has the NACD grown over the years?
4. How has governance changed during that time?
5. What are you doing now?
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…
Recently, I blogged about Brad Cook – who resigned as the SEC Chair when he got caught up in a securities fraud scandal & was temporarily disbarred in two states for lying to a grand jury in the case. Before becoming the SEC Chair in ’72, Cook was the SEC’s General Counsel and first Market Reg Director (serving as both at the same time). He was the youngest person ever to lead a federal agency. He was 35!!!
Like me, a lot of members responded that they had never heard of this fascinating story. And one member pointed out this transcript of an interview with Brad. It makes for fascinating reading. Also fascinating is this newspaper article from when he resigned. Wonder who has the movie rights…
If you read the transcript, bear in mind that all the names mentioned (Stans, Vesco, et al) were all players in the Watergate scandal. As apparently was Cook…
As noted in this WSJ article, the Senate Banking Committee approved Jay Clayton as SEC Chair by a vote of 15-to-8 yesterday, mostly along party lines. Three Democrats voted in favor of the nominee. All 12 Republicans on the panel supported him. Final Senate action is expected in late April or early May…
Poll: Do You Care About JOBS Act’s “5th Anniversary”?
Today is the 5th anniversary of the JOBS Act. Do you care? Express yourself in this anonymous poll:
Recently, the SEC adopted technical amendments for self-executing provisions of the JOBS Act – mostly relating to EGCs. This Davis Polk memo highlights that the EGC revenue cap has been raised for $1.07 billion – adjusted for inflation. And as noted in this blog by Steve Quinlivan, many of the ’33 Act and ’34 Act forms have been tweaked. Here’s an excerpt:
Broadly speaking the cover page has been revised to include a “check the box” item to indicate that the person filing the report is an “emerging growth company” and an additional box to check as follows: “If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.”
– There were 742 EGC filers (or 38%) that have common equity securities listed on a U.S. national securities exchange. These EGC filers represented 15% of the 4,797 exchange-listed companies – and approximately 1% of total market capitalization of exchange-listed companies.
– Many EGC filers that were not exchange-listed had limited operations. Approximately 50% of the non-listed EGC filers reported zero revenue in their
most recent filing with audited financial statements and 23% of non-listed EGCs that filed periodic reports disclosed that they were shell companies.
– Approximately 51% of EGC filers, including 74% of those that were not exchange-listed, received an explanatory paragraph in their most recent auditor’s
report expressing substantial doubt about the company’s ability to continue as a going concern.
– Among the 1,951 EGC filers, 1,262 provided a management report on internal control over financial reporting in their most recent annual filing. Of those 1,262
companies, approximately 47% reported material weaknesses.
– Approximately 96% of EGC filers were audited by accounting firms that also audited issuers that are not EGC filers, including 39% of EGC filers that were
audited by firms that provided audit reports for more than 100 issuers and were required to be inspected on an annual basis by the PCAOB.
Conflict Minerals: Final Judgment Entered
Here’s the intro from this Cooley blog by Cydney Posner:
Today, the D.C. District Court entered final judgment in National Association of Manufacturers v. SEC, holding that Section 1502 of Dodd-Frank and Rule 13p-1 and Form SD, Conflict Minerals, violate the First Amendment to the extent that the statute and the rule require regulated entities to report to the SEC and to state on their websites that any of their products “have not been found to be ‘DRC conflict free.’” In addition, pursuant to the APA, the Court held the rule unlawful and set it aside but only to the extent that it requires regulated entities to report to the SEC and to state on their websites that any of their products “have not been found to be ‘DRC conflict free.’”
It is now up to the SEC to determine whether and how to revise the existing rules or whether to let stand, at least for the meantime, the Corp Fin guidance that was issued in 2014 and is currently in effect. That guidance requires companies to make the mandated filing on a timely basis without including a statement as to the conflict-free status of the products that could be deemed to violate the First Amendment.
Try Our Quick Surveys!
We have these three new “Quick Surveys” for you to participate in – all responses are anonymous:
Recently, we had this query posted in our “Q&A Forum” (#8989): “I have heard that the SEC’s BlueLinx/Health Net orders in the context of protecting whistleblowers may lead to stockholder demand letters where companies have objectionable language in their filed severance and other agreements; anyone aware of whether this is the case, and if so, what companies are doing in response?”
John responded: “You heard right. Here’s a Jones Day memo discussing this. It looks like the plaintiffs’ bar is just getting started, and I haven’t seen anything as to how companies are responding.” Which leads us to tomorrow’s webcast…
Tomorrow’s Webcast: “Whistleblowers – What Companies Should Be Doing Now”
Tune in tomorrow for the webcast – “Whistleblowers: What Companies Should Be Doing Now” – to hear Margaret Cassidy of Cassidy Law, Sean McKessy of Phillips & Cohen (& former Chief, SEC’s Office of the Whistleblower, Division of Enforcement) and Baker & McKenzie’s Joan Meyer discuss what you need to be doing now in the wake of the latest SEC – and other regulator – actions in the whistleblower arena.
Our April Eminders is Posted!
We have posted the April issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Before the election, I received this note from a member in reaction to my blog about Senator Elizabeth Warren’s letter to President Obama about political contribution disclosure rulemaking:
I was surprised to read Senator Warren’s letter asking President Obama to exercise his authority under 17 CFR 200.10, because everything in the CFR was adopted by the Commission and how could the Commission give authority to someone outside the agency. It seemed odd to me. But lo and behold, I looked at the Exchange Act and there is no mention of the President’s authority to appoint the Chair, only the authority to appoint the Commissioners. I know you have written about Reorg Plan No 10 of 1950 in the past, which every SEC geek needs to know. As the litigators say, my memory is refreshed. And boy, that was some nasty letter. One needs skin like an alligator to survive inside the Beltway.
So the President’s authority to appoint a Chair among the SEC Commissioners is granted by Section 3 of the Reorganization Plan No. 10 (which itself was created pursuant to the Reorganization Act of 1949).
Think about that. Before 1950, the SEC Chair was selected by the other Commissioners! There must have been some serious campaigning among the Commissioners on occasion to be selected Chair. If that were still the rule today, they’d probably draw straws – and the one who picked the short one would be Chair. Who wants the constant criticism from Congress and the media?
It’s true that the SEC Chair’s authority is far greater than the other Commissioners (review the transcript of our webcast on this topic to learn more) – but they wouldn’t be doing it for the money. Last time I checked, the SEC Chair got paid only $5k more than the other Commissioners. Definitely not worth the added scrutiny & hassle!
The Battle to Become the First SEC Chair!
Thanks to Paul Dudek – now at Latham & Watkins – for help with the above. This also comes from Paul:
The biography of Ferdinand Pecora – known as “The Hellhound of Wall Street” – describes the contentious behind the scenes lobbying in connection with the selection of the first SEC Chair. Pecora was the Chief Counsel of the Senate Committee that investigated the 1929 Crash, while Kennedy was shenanigans that contributed to the Crash.
President Franklin Roosevelt had given instructions to the Commissioners that they select Joe Kennedy as Chair – but Pecora lobbied his fellow Commissioners to override the President’s decision for himself to serve in that role. James Landis, another initial Commissioner, engaged in shuttle diplomacy between Kennedy and Pecora as they sat in separate rooms during a delay in their swearing-in ceremony. And Landis eventually got Pecora to acquiesce to FDR’s choice.
SEC Chair Clayton? Senate Banking Committee to Act Next Week
This WSJ article notes that the Senate Banking Committee will meet on Tuesday to bless Jay Clayton’s nomination to be SEC Chair. Then a full Senate confirmation is the next step – which probably will happen in late April…
It’s all about the “index.” A few weeks ago, John blogged about the debate over the dual class voting structure of Snap. This Vox article is entitled “Snap offered shareholders a terrible deal. Lots of people signed up anyway.”
Some folks wrote to me in response, noting that many investors were not clambering to buy the IPO shares. As John noted in an update to his blog, the bigger issue for investors – particularly the heavily indexed managers – is that once these shares wind up in indexes, they will be forced to hold them whether they want to – or not.
This point is eloquently made in these remarks by CII Executive Director Ken Bertsch before a SEC Investor Advisory Committee recently – also see this letter from CII to Snap…
Podcast: Ken Bertsch on Dual Class Voting Structures
In this 13-minute podcast, Ken Bertsch – Executive Director of the Council of Institutional Investors – discusses Snap’s IPO & more, including:
– How – and why – has CII opposed Snap’s dual class voting structure?
– How has CII (& other investor groups) responded to calls for shareholder proposal reform?
– How has it been moving back to Washington DC?
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…
Bloomberg BNA is reporting that the State Department has launched a new review of “how best to support responsible sourcing of conflict minerals,” which will continue through April 28. Although it’s not known whether the SEC is involved in the State Department’s efforts, BNA suggests that the review “could help determine the next step in a potential rethink” of the SEC conflict minerals rule.
And here’s a Cooley blog about a group of Senate Democrats who sent a letter to the SEC’s Inspector General about whether Chair Piwowar had the authority to resolicit comment on the pay ratio and conflict minerals rulemakings…
Here’s the news from this WSJ article by Andrew Ackerman about the US Supreme Court granting certiorari to a case that might impact liability for “known trends and uncertainties” disclosure:
The U.S. Supreme Court on Monday agreed to consider whether publicly traded companies can be sued for securities fraud by third parties for omitting “known trends or uncertainties” in filings to shareholders. The announcement is likely welcome news for corporate defendants that have lamented a 2016 ruling by a federal appellate court in New York, which found that companies can be sued for fraud by third parties for such alleged disclosure shortcomings.
At issue are Securities and Exchange Commission antifraud rules, which allow investors and other private entities to sue public companies for statements or omissions that are “material” and “misleading.” Historically that right wasn’t extended to a management’s discussion of known trends and uncertainties until a ruling last year by the 2nd U.S. Circuit Court of Appeals in New York. That appellate court’s decision conflicts with precedents set by at least two additional circuit courts, which have held companies aren’t liable to private litigants for the contents of such “forward-looking statements.”
The high court said it would consider the matter in the fall of 2017, giving the justices a platform to potentially end or limit private lawsuits in these cases. The appeal was brought by a company called Leidos Holdings Inc., a Reston, Va.-based national security and engineering company formerly known as SAIC, which was sued by the Indiana Public Retirement System and two other state public pension funds. The funds allege SAIC in 2011 omitted material information about a kickback and overbilling scheme involving the firm’s former employees and New York City.
The U.S. Chamber of Commerce and the Securities Industry and Financial Markets Association, a Wall Street industry group, urged the high court to consider the case last year, saying the second circuit court’s ruling will extend “a state of confusion over how…companies disclose forward-looking information.” To avoid lawsuits, companies will err on the side of disclosing a flood of “essentially useless” information they might otherwise omit, the industry groups said in their filing, which sided with Leidos. A decision expected by the end of June 2018.
Here’s a blurb from Sullivan & Cromwell about the case:
Earlier today, the U.S. Supreme Court granted certiorari in Leidos, Inc. v. Indiana Public Retirement System, No. 16-581. This appeal, which likely will not be decided until the first half of 2018, at the earliest, presents the question of whether non-disclosure of “known trends or uncertainties” under Item 303 of Regulation S-K may give rise to private liability for securities fraud under Section 10(b) of the Securities Exchange Act of 1934. The U.S. Supreme Court will address a split between the Second Circuit, which has held that, under some circumstances, non-disclosure under Item 303 of Regulation S-K could give rise to private securities fraud liability, and the Third and Ninth Circuits, which held that such non-disclosure does not create a private securities fraud claim. Although the Supreme Court’s decision will not affect the obligation of registrants to comply with Item 303, it may have a significant impact on their potential exposure to securities fraud claims.
Texas: Proposed Bill Would Burden Proxy Advisors & Activists
Here’s the intro from this memo by Olshan’s Steve Wolosky, Andrew Freedman & Ron Berenblat:
The Legislature of the State of Texas has proposed a new bill that would require certain investors in publicly traded companies headquartered in Texas and proxy advisory firms making recommendations with respect to publicly traded Texas-based companies to comply with a set of austere disclosure requirements. The proposed “Bring Business to Texas and Fairness in Disclosure Act” (the “Texas Act”) is purportedly intended to “foster and promote the immediate and full disclosure of the individual ownership of persons who are activist investors” and “prohibit discrimination by a proxy advisory firm.”
The unduly burdensome, excessive and inequitable scope of the proposed disclosure requirements is like nothing we have ever seen proposed by any state. If the Texas Act is adopted, it could have a chilling effect on shareholder activism and proxy advisory work with respect to public companies that have a specified presence in Texas, which, in turn, would help entrench management and the Boards of underperforming Texas-based companies.
Conflict Minerals: Comments So Far
A few months ago, SEC Acting Chair Piwowar requested comment on reconsidering the SEC’s 2014 guidance on conflict minerals. The comment deadline is now passed – and here’s the comments received so far. Note that the Wildlife Conservation Society has gotten over 10,000 folks to submit a form letter supporting the rule…
Here’s some analysis of these comment letters from Elm Sustainability Partners’ Lawrence Heim – and here’s some more analysis, including this excerpt:
Just over 12,000 comments were submitted to the SEC in response to Acting Chairman Piwowar’s request for comments. More than 11,700 of those comments were form letters and just over half of the remaining 300 were submitted by concerned citizens. Approximately 130 comments were submitted by company representatives, industry groups, Congolese society, NGOs and investors. In our view, opinion reflected in the 130 was split relatively evenly for and against the rule. We noted that several of the comments against the rule cited erroneous and outdated information, specifically concerning costs of rule implementation.
Back in early February, the SEC’s Acting Chair – Mike Piwowar issued a statement directing the Corp Fin Staff to revisit the pay ratio rule & requested public comment about any challenges in complying with the rule. Comments were due within 45 days – so the deadline has now passed.
Here’s the list of comments received so far. Beyond a short form letter in favor of the rule (that was received over 3k times), there are several hundred comment letters. Most of these are short letters from individuals, also expressing an interest in keeping the rule. Overall, this new request for comment has resulted in a response that is a mere fraction of the 287k comment letters that the SEC received on it’s rule proposal.
Let’s dig down into these new comment letters. Only a handful of these letters are from companies explaining the challenges. But there are a few, like these:
Early Bird Rates – Act by This Friday, March 31st: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by March 31st to take advantage of the 30% discount.
