I received a flurry of questions in reaction to my blog last week about how the two SEC Commissioner nominees faced trouble during the Senate Banking Committee approval process. I turned to Jack Katz – former long-time Secretary of the SEC – to help me sift through these questions:
1. In the recent past (meaning the last 40 years), have any SEC nominees failed to be confirmed?
I can’t remember any nominees who were not confirmed. The closest comparison to this situation was the joint nomination of Norm Johnson and Ike Hunt. They were tied up in holds. Commissioner Johnson was a close friend & former law partner of Senator Orrin Hatch. Hatch ultimately broke the hold on Norm’s nomination and he was confirmed. Commissioner Hunt was not. During the confirmation hearing, Johnson and Hunt had gotten to know each other well. When Johnson learned that Hunt’s nomination was still in limbo, Norm called Hatch and asked him to do what he could to clear Hunt. Hatch did so – and Hunt was confirmed shortly after Johnson.
2. With two Commissioners not sitting, does it take a majority of the three to get something passed?
The quorum rules provide that three Commissioners is a quorum – and a majority of a quorum is sufficient to act.
3. I blogged a while back about needing three Commissioners for a quorum – how did things get done when there were just two Commissioners – Chair Levitt & Commissioner Wallman – back in the ’90s?
Simon Lorne, the General Counsel at the time, anticipated that there was a good chance that we would be functioning with only two Commissioners before it happened. So before it happened, we amended the Commission’s Rules of Practice on quorum and duty officer to provide that if there were only two Commissioners, then two would be a quorum (Rule 200.41 establishes a quorum rule for meetings of the Commissioners). This was an aggressive position that was buttressed by the duty officer authority. Since one Commissioner can act when necessary on behalf of the Commissioner, we felt comfortable that two Commissioners could act when necessary.
The limitation in this position is that the duty officer can’t act on rulemakings – only the full Commission can. So we were very reluctant about a two-person Commission engaging in adoption or amendment of final rules. To the best of my memory, the “Levitt-Wallman Commission” didn’t adopt any final rules – but it did approve enforcement actions. The “two-person quorum rule” was challenged and upheld by the D.C. Circuit (see In Falcon Trading Group Ltd. v. SEC, No. 96-1052 (D.C.Cir.)).
By the way, the duty officer rule requires the full Commission to ratify all duty officer actions. For years, we used to wait for additional Commissioners to come on board to ratify actions for which a quorum didn’t exist at the time of the action – for example, if Commissioners were recused.
1. Companies now taking longer than ever to address issues identified by employees:
– 2015 companies took an average of 46 calendar days to close whistleblower cases, up from 39 in 2014, and 32 in 2011.
– Best practice case closure time is an average of 30 days.
– This trend is especially significant for organizations overseen by the SEC. They have limited time to complete internal investigations under that agency’s whistleblower provisions.
– Outside of this, the trend threatens to undermine employee confidence in their company.
2. Companies are not getting warnings of retaliation:
– Last year’s report found that the substantiation rate of retaliation reports more than doubled over the prior year.
– This higher rate was sustained in 2015 with 26 percent of all reports of retaliation substantiated.
– However, the total number of reports of retaliation that organizations are capturing is still very low – less than one percent of all reports.
– When we look at external whistleblowing – taking an issue to an outside entity – retaliation is still the Equal Employment Opportunity Commission’s most frequently filed charge of discrimination, making up 45 percent of all private sector charges filed.
3. More reports being substantiated:
– Overall 41 percent of all reports received were substantiated in 2015, up from 30 percent in 2010.
– The anonymous report substantiation rate remained at 36 percent in 2015, the same rate as in 2014 and 2013.
4. Report volume remains at an all-time high:
– Between 2010 and 2014 a significant rise in the reporting rate occurred, a 44 percent increase since 2010, where the median was 0.9 reports per 100 employees, to 1.3 reports per 100 employees.
– In 2015, the reporting rate remained at the elevated level of 1.3 reports per 100 employees.
More on our “Proxy Season Blog”
We continue to post new items regularly on our “Proxy Season 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:
– CalPERS & AFL-CIO Announce Proxy Season Priorities
– Proxy Access: Vanguard Reduces Preference to 3%
– Annual Meeting Preparation: Considerations & Tips
– Audit Committee Considerations for Enhanced Disclosure
– SEC Comment Letters: Trend Towards Reviews Resulting in No Comments
– Webcast Archive: “Challenges in Compliance & Corporate Governance”
As noted in this press release, the SEC has a new filing fee estimator for companies. This tool is designed to assist registrants in preparing filing fee-related information for EDGAR filings – it’s optional to use & isn’t a substitute for doing your own calculations (as noted in our “SEC Filings Handbook,” there can be some tricky scenarios). The SEC will be building it out to include more forms & scenarios over time…
XBRL: Watch The Errors
As a reminder that making mistakes in your XBRL filings can happen, see this blog. However, the blog incorrectly insinuates that Corp Fin issued a comment to Goldman Sachs that resulted in the company having to amend its Form 10-K. The reality is that the error was self-caught and a reported printer error – and while not material, the company told the SEC about it as a matter of course when correcting….
Understanding the SEC Research Industry
Check out this 40-minute podcast with Phil Brown, who is the Chief Strategy Officer of Intelligize – & the former Co-Founder & CEO of GSI Online. Phil addresses these topics:
– How did you get into this business?
– What were things like in the beginning for your business?
– What was Edgar like in the beginning?
– How did all this work out for you personally?
– How crazy was it to FOIA all those Corp Fin comment letters?
– Can you tell us about the “great water heater incident”?
– What is the “conflicts authority” failure?
– What is Intelligize?
Hi there! This is Julie Kim, the newest member of TheCorporateCounsel.net team. As noted in my bio, I spent 9 years in-house – and six years in a law firm – in NYC before relocating to sunny Southern California. Broc asked Susan & I to think of five reasons why we hate the proxy season to kick us off on this blog.
Now, you probably have one of three reactions:
– “Only 5 reasons? Are you kidding? I can think of 20!”
– “Thank goodness somebody else at my company/firm deals with the proxy statement. Those poor suckers.”
– “This looks like a Huffington Post article. Is this website now resorting to click bait?”
For those of you still reading – whether out of misery or schadenfreude – please know I don’t think my 5 reasons have caused me to feel an emotion as intense as hatred. They did, however, make me have some existential moments where I questioned the very meaning and value of my profession.
I don’t know. Maybe it was hatred after all.
1. Scheduling – and participating in – an endless number of meetings involving a cast of thousands (the company’s in-house working group, outside counsel, shareholder proponents, etc.) regarding various parts of the proxy statement during a very busy time for all.
2. Once December comes rolling around, not being able to attend weekday holiday parties because you have to make the board mailing deadline – or the courier delivery deadline for procedural deficiency letters. Essentially, you’re saying goodbye to your friends until March or April.
3. Those other companies with their beautifully designed proxy statements in eye-catching colors, making the rest of us look bad.
4. Surprise NEO perquisite issues, leading to stressful discussions about the SEC’s perks guidance and proxy disclosure rules.
5. Post-10-K fatigue so that everyone then forced to turn to the proxy statement – other lawyers, the controller’s group, outside auditors, etc. – are grumpy and impatient.
For those of you in the home stretch of proxy season, good luck and know that you are not alone!
And 5 More Reasons Why I Hate the Proxy Season
Hi everyone. Susan Reilly here, excited to start blogging after spending a year quietly lurking on the team! Here’s my bio – and here’s my list:
1. Clients who ask for hand-marked comments on a PDF version of the proxy statement. This was the bane of my existence when I was a junior lawyer.
2. Having to draft shareholder proposal statements in opposition before hearing from the Corp Fin Staff that you have to include the proposal. This is especially frustrating when you’re confident the proposal will be excluded – but you still have to send the statement in opposition to the proponent by the 30-day deadline.
3. Waiting until the last minute (compliance/rule check) to make outside counsel aware of related party transactions/independence issues. Since these relationships have a huge impact on ISS & Glass Lewis voting recommendations, knowing what to disclose and how to disclose it is critical – and it’s easy to miss some of the nuances.
4. Proxy statements that repeat the same information in multiple places. Of course, it makes sense to highlight certain important information in the executive summary and also later in the proxy statement, but nobody needs to read about the voting standard four times!
5. Five months of non-stop craziness. Moving straight from shareholder proposals, to preparing the 10-K, then the proxy statement and first quarter 10-Q . . . all without coming up for air in between.
Why Do You Hate the Proxy Season?
Send reasons why you hate the proxy season to Broc – and he’ll compile them anonymously and blog them. Tis the season to hate!
– FAQ #2: Which equity compensation proposals are evaluated under the EPSC policy?
– FAQ #17: If a company assumes an acquired company’s equity awards in connection with a merger, will ISS exclude these awards in the three-year average burn rate calculation?
– FAQ #28: How does ISS evaluate an equity plan proposal seeking approval of one or more plan amendments?
– FAQ #29: How are plan proposals that are only seeking approval in order to qualify grants as “performance-based” for purposes of IRC Section 162(m) treated?
– FAQ #30: How are proposals that include 162(m) reapproval along with additional amendments evaluated?
– FAQ #31: How does ISS evaluate amendments by companies listed in France that are made in response to that market’s adoption of the Loi Macron (Macron Law)?
– FAQ #47: How does ISS determine the treatment of performance-based awards that may vest upon a change in control?
Director Viewpoints: Desired Director Attributes & More
According to Corporate Board Member’s annual “What Directors Think” survey, directors continue to rank industry expertise as the most important new director attribute (83%), followed by financial experience (78%), gender diversity (59%), and CEO experience (55%) – other results include:
– Long-term strategic planning is the primary issue directors wish to spend more time on – followed by innovation/disruption and cyber risk.
– Most respondents say they are satisfied with the level of information and in-person reporting they receive from their CFO (94%), CEO (93%), GC (90%), internal audit (88%), CCO (84%), and CIO/CISO (65%).
– At least 1/3 of respondents believe information flow between their board and management could be improved through a higher frequency of updates (36%), more concise reporting (31%), or in the time allotted to review materials prior to a meeting (34%). Other communication components directors believe could be of benefit include additional onsite visits with managers (44%) and more time allotted to discussing critical agenda items (47%).
– Nearly 1/3 of respondents worry that direct shareholder engagement carries undue risk of board and individual director liability; 28% say it elevates the risk of violating Reg. FD; 21% think it creates a wedge between the CEO and the board: and 14% believe direct engagement creates undue influence on the board.
– While half of the directors believe the recent wave of hedge fund activism has created more awareness for the need for good governance, 62% believe it has reinforced and rewarded short-termism.
SEC Enforcement: Document Why Significant Deficiency Isn’t a Material Weakness
The SEC recently announced settled administrative proceedings against Magnum Hunter Resources Corporation (MHR), the former chief financial officer and chief accounting officer of MHR, the engagement partner on MHR’s external audit, and the lead consultant responsible for documenting and testing MHR’s internal control over financial reporting (ICFR). The SEC states in the five orders issued on March 10 that registrants must fully document why a significant deficiency in ICFR is not a material weakness. Adequate documentation to provide reasonable support for the assessment of the effectiveness of ICFR is required by Instruction 2 to Item 308 of Regulation S-K and the SEC’s guidance relating to management’s report on ICFR in Financial Reporting Release No. 77.
This blog was not hacked. I scrapped what I had planned to post so that I can try a little social experiment. Below is a poll about whether you only bothered to read this blog because it said “Trump & Sausages.” But don’t fear, this blog really is about those two topics – and in the context of our community!
Annual Meeting Disturbed By (Thrown) Sausages!
As noted in this article from “The Guardian,” a fight between shareholders over free sausages at Daimler’s annual meeting broke out. The company served 12,500 sausages to the 5500 shareholders who attended. That’s a lot of meat! Brings back memories of Animal House’s “food fight” scene. “That boy is a P-I-G, pig”…
A Real Trump Deal Cube!
If you’re relatively new to this blog, you missed my year of running a March Madness-style contest pitting the hundreds of toys in my “Deal Cube Museum.” I was showing off the museum to a friend recently & was reminded that it does indeed include a Trump deal cube!
Poll: How Often Do You Read This Blog?
Take this anonymous poll about how often you read this blog:
I don’t want the SEC to modernize Regulation S-K! That means I’ll have to update 1500 pages of our “Handbooks“! At least the SEC is not touching Item 402 – at least not yet.
Here’s an excerpt of this blog by Cooley’s Cydney Posner with notes from the open Commission meeting (also see this WSJ article):
Although the concept release has not yet been posted nor have any of the Commissioners’ remarks, the presentations and discussion at the meeting indicated that the release will address three basic topics: framework, line items and presentation and delivery.
Framework. The staff observed that, although there are some prescriptive and structured elements, the current requirements are largely principles-based, with disclosure determined on the basis of “materiality” as defined in TSC Industries, Inc. v. Northway, Inc., specifically, whether there is a substantial likelihood that a reasonable investor would consider the information important in decision-making and whether a reasonable investor would view the information to significantly alter the “total mix” of information available. However, Chair White also recognized the importance of not burying material information in an avalanche of trivia. Considering the costs and benefits, including the expressed interests of shareholders in receiving more information and the expressed interests of companies in efficiencies, how should the disclosure requirements be structured? Should some level of investor sophistication be assumed? As Commissioner Stein suggested, should the system be re-imagined? for example, she questioned why the release did not address concepts as basic as the form-based system.
Line items. The discussion indicated that the release addresses six items: core company disclosure, company performance (primarily financial), risk, securities, industry guides and exhibits. The release also considers whether the categories for scaled disclosure are appropriate and whether recent topics of interest and shareholder engagement should be added to the requirements, for example, stock buybacks and sustainability. In addition, the release hints at the prospect of semi-annual, instead of quarterly, reporting.
Presentation and delivery. Here, the release will consider various approaches to presenting and accessing the disclosure and ways to reduce repetition, including cross-references, incorporation by reference, hyperlinks, company websites and standardization versus flexibility. Stein expressed the concern that, in considering whether the quantity of information is excessive, the SEC needs to balance that with concerns about the quality of information. In addition, she observed that a re-imagined delivery system should take into account that different generations may prefer to have their information delivered in different ways, for example, a younger audience may prefer to receive information through tweets.
Technical question: So why is this a “concept release” – but the S-X counterpart was just a “request for comment”? Maybe to satisfy the FAST Act’s requirement for an S-K study? No idea. Here’s the opening statements from the various Commissioners about the concept release…
Deferred Prosecution Agreements: DC Circuit Limits District Court Review
In a case with significant implications for the power of district judges to review the terms of deferred prosecution agreements (“DPAs”) between the Department of Justice (“DOJ”) and corporations to resolve criminal investigations, on April 5, 2016, the United States Court of Appeals for the District of Columbia Circuit took the extraordinary step of granting a writ of mandamus and vacated a lower court decision that had the practical effect of rejecting a DPA between the DOJ and an aerospace services company, Fokker Services, B.V. The case has significant implications in light of a judiciary that has been increasingly questioning the terms (and in some instances, the wisdom) of the DOJ’s decisions to enter into DPAs.
Anti-Bribery Study: 600 CCOs Weigh In
I couldn’t resist blogging about this new Hogan Lovells’ study on anti-bribery & corruption because I just love the microsite that the firm created to house the thing. The microsite not only houses the study, but it has a self-assessment compliance quiz & more. The study is based on interviews with 604 chief compliance officers (CCOs) and equivalent roles in more than 600 of the world’s largest organizations in Europe, U.S. and Asia. The study’s findings include:
– Commercial priorities push anti-bribery and corruption down the agenda
– 57% of chief compliance officers say sales culture is a major threat
– 28% of companies fail to tailor global anti-bribery programs to local markets
– 53% of companies train half their staff or less in anti-corruption
– Significant business operations “hidden” from chief compliance officers
I think this will be a trend going forward where firms work harder on their marketing to showcase the hard work that they’ve done…
A while back, we blogged about a study showing a five-year decline in the number of Form 10-K & 10-Q comment letters issued by Corp Fin. We ran a poll as to why the number of comment letters has declined – and most folks thought it was due to companies doing a better job with their disclosures (34%); followed by Corp Fin being too busy reviewing deals (31%) and the fact that there are fewer public companies these days (9%; there’s been a 30% reduction in the number of public companies since 2000).
But here’s a response from Reid Hooper of Covington & Burling about a possible reason that we didn’t poll on:
The reason why the number of Form 10-K/10-Q comment letters has been falling for the past few years is relatively straight-forward. The Corp Fin Staff has a much higher materiality threshold. One reason could be a shift in Staff focus from commenting on ’34 Act reports to a “fuller” review of repeat issuer registration statements. Another reason for the possible change in the staff’s materiality threshold could be due to the change from a rules-based exam report to a more principles-based approach when reviewing Form 10-K/10-Qs.
Comment letters on a Form 10-K are now just 1-2 comments (depending on the reviewer & group) – and the comments will now almost always be “futures” comments. In those instances where the Staff may seek an amendment to a Form 10-K/10-Q, the comments generally relate to a material disclosure matter rather than a mere matter of technical compliance.
After hearing Corp Fin Director Keith Higgins this weekend at the ABA conference, it appears that Reid is indeed correct. Keith talked about how Corp Fin has raised its materiality threshold in issuing comments – and how the Office of Disclosure Standards has assisted the Division in being more consistent about the type of comments issued. Corp Fin’s comments are more likely to impact the significance of disclosure these days – rather than ensure mere compliance with a regulation that doesn’t necessarily elicit disclosure that has real meaning.
Keith also noted that the Staff tends to issue more industry-specific comments these days. And he felt we were doing a better job in drafting – so that we can take some credit for the reduction in comments…
Here’s Congressional testimony about the SEC’s budget from Chair White yesterday. It looks like Corp Fin won’t be increasing its head count. And that Corp Fin reviews the filings of 9100 companies. And today is a big day – the SEC Commissioners meet on a Reg S-K concept release!
PCAOB: “Auditor Supervision of Other Auditors” Proposal
Yesterday, the PCAOB proposed changes to a slew of existing auditing standards that would strengthen existing requirements and impose a more uniform approach to a lead auditor’s supervision of other auditors. Here’s the proposing release.
Auditors that Prepare the Corporate Tax Return Tend to Do So Cautiously
Here’s a nugget from Baker & McKenzie’s Dan Goelzer: An academic study finds that the corporate tax returns of companies that retain their financial statement auditor to prepare the return take less aggressive tax positions than do returns prepared by either the company itself or by other kinds of external advisers. The study, “Auditors, Non-Auditors, and Internal Tax Departments in Corporate Tax Aggressiveness,” was conducted by Kenneth J. Klassen, University of Waterloo, Petro Lisowsky, University of Illinois at Urbana–Champaign Norwegian Center for Taxation, and Devan Mescall, University of Saskatchewan. It is based on a review of uncertain tax positions reported under FASB Financial Interpretation No. 48 (FIN 48) by companies in the S&P 1500 during 2008-2009, coupled with information obtained from the IRS regarding the signer of the corporate return.
The full text of the study appears in the January-February 2016 issue of the American Accounting Association’s publication, The Accounting Review (available for purchase). The study’s abstract states:
“Using confidential data from the Internal Revenue Service on who signs a corporation’s tax return, we investigate whether the party primarily responsible for the tax compliance function of the firm—the auditor, an external non-auditor, or the internal tax department—is related to the corporation’s tax aggressiveness. We report three key findings: (1) firms preparing their own tax returns or hiring a non-auditor claim more aggressive tax positions than firms using their auditor as the tax preparer; (2) auditor-provided tax services are related to tax aggressiveness even after considering tax preparer identity, which supports and extends prior research using tax fees as a proxy for tax planning; and (3) Big 4 tax preparers, in particular, are linked to less tax aggressiveness when they are the auditor than when they are not the auditor.”
The authors explanation of their findings is that the auditor has more downside risk if tax positions underlying the return are rejected by the IRS than do other tax preparers, including the company’s tax staff. The auditor’s higher risk exposure stems from two sources: “(1) financial reporting restatement risk due to an audit failure related to the tax accounts; and (2) reputation risk, in that the auditor-preparer’s work is more visible and sensitive to the firm’s leadership.”
As to the later point, the authors argue that audit committee pre-approval of auditor tax services, required under the Sarbanes-Oxley Act, exposes the board to potential embarrassment if the company’s tax positions are rejected and that this risk incentivizes the auditor to be more cautious. “[I]f the firm employs its auditor for tax services, then its audit committee has explicitly sanctioned this relationship under the requirements of the Sarbanes-Oxley Act of 2002 (SOX). Therefore, the board of directors, as well as managers, may bear additional costs if negative tax outcomes result * * *, relative to the case if the tax work was conducted separately from the audit.” The authors also note that the PCAOB’s rules prevent the financial statement auditor from advising the company to use tax strategies that have tax avoidance as a significant purpose and do not meet the standard of “at least more likely than not to be allowable.” Other return preparers are not subject to this limitation.
Comment: Traditionally (i.e., since the early 2000s), non-audit services, including tax preparation, have been regarded as potential threats to auditor independence and therefore to audit quality. The theory behind this view is that the greater the aggregate fees the auditor is generating from the client, the less inclined the firm’s personnel will be to risk the relationship by challenging management’s views on financial reporting issues. This study looks at the issue from another perspective – promoting tax compliance – and suggests that, when viewed through that lens, auditor return preparation creates positive incentives. Of course, an audit committee considering whether to approve return preparation as a non-audit service would need to weigh a variety of factors, in addition to the auditor’s potential tax conservatism, including (1) cost of the service, relative to other options; (2) the level of in-house tax expertise; (3) the value, in the company’s circumstances, of having more than one perspective on the tax reserve; and (4) the risk of disagreements between the preparer and the auditor resulting in additional FIN 48 disclosures.
Spanking brand new. By popular demand, this comprehensive “Non-GAAP Financial Measures Handbook” covers a challenging topic, from the basics to everything you want to know about Regulation G, Item 10(e) of Regulation S-K & Form 8-K’s Item 2.02. This one is a real gem – 89 pages of practical guidance – and its posted in our “Non-GAAP Disclosures” Practice Area. Big HUGE hat tip to Joe Alley of Arnall Golden Gregory for authoring this beast! This is a hot topic, as noted in my blog last week entitled “Non-GAAP Financial Measures: Will the SEC Curb Their Use?“…
On my “wish list” from the SEC, I’ve had a wish that the SEC would inform us when EDGAR is experiencing problems – or problems are resolved – through a blog or other sort of channel. Good news! The SEC’s Filer Support team recently implemented an “announcement” functionality on the “Information for Filers” page. It’s a RSS news/announcement feed that folks can sign-up to receive an email every time that Filer Support has something important to note (i.e. EDGAR closings, change in support hours, etc.).
Each announcement will be posted on both the “Information for Filers” page – and this “Announcements” page. I’m not certain whether the announcements will include information about outages & other problems – but fingers crossed…
Board Diversity: Shareholder Nominees Come Under Fire
A few months ago, I blogged about an interview with SEC Chair White about board diversity & activism – but that interview tackled the two topics separately. This recent Bloomberg article has raised eyebrows as it shows that – since 2011 – only 7 of the 174 people nominated to boards by five of the largest US activist funds have been women. Here’s an excerpt from this Davis Polk memo about this news:
This is not a surprise given that shareholder activist funds often nominate their employees, and to date their senior employees remain predominantly men. (A “pipeline” problem does not, of course, fully explain the numbers since shareholder activist funds also nominate independent directors who are not employees.) These news reports echo Andrew Ross Sorkin who raised the question last year of whether shareholder activists target women CEOs, noting that although only 23 women lead companies in the S&P 500, nearly a quarter of them have been in the crosshairs of shareholder activists. We recognize that shareholder activists are not alone in having room for improvement when it comes to diversity – most of the companies they target and the professional services firms that advise on these matters could improve in this area as well.
Last Thursday, the Senate Banking Committee met to approve the two SEC Commissioner nominees – but rather than going through the motions of a routine approval, a group of Democrats essentially forced a postponement after demanding that the SEC propose rules requiring political contributions disclosure. Here’s an excerpt from this WSJ article by Andrew Ackerman:
A revolt by Democratic lawmakers is jeopardizing the nominations of two White House picks for the Securities and Exchange Commission, threatening to further hamper the short-handed agency struggling to complete key rules. During what was expected to be a routine vote Thursday, a group of Democratic senators drew a line in the sand, demanding that the markets regulator adopt new rules forcing companies to disclose spending on political activities—an issue on which the commission’s current chairman, along with the nominees, have been noncommittal.
Four Democrats on the Senate Banking Committee, including Sens. Charles Schumer of New York and Robert Menendez of New Jersey, said they would oppose the SEC picks, after which the panel postponed the vote. The battle reflects growing desires by Democratic lawmakers and their allies to expand the SEC’s work beyond typical investor-protection issues. It also shows intensifying divisions within the party over the proper qualifications and policies for financial nominees. “The SEC needs commissioners who believe in and support campaign spending transparency, and unfortunately these nominees have yet to answer that call,” Mr. Schumer said in a written statement, adding the two nominees were “fence-sitting” on the issue.
The concerns cast a cloud over the ability of both SEC nominees—Lisa Fairfax, a Democrat, and Hester Peirce, a Republican—to win Senate confirmation, according to Senate aides. The SEC is now down to just three members, two less than its full complement, after two left the agency late last year. If the SEC remains with only three members for a prolonged period, it could be difficult for Chairman Mary Jo White to advance her agenda in what is likely her final year at the markets regulator.
The strength of the opposition is surprising, as the banking panel has easily advanced “paired” Democratic and Republican nominees in the past. That some Democrats are refusing to back Ms. Fairfax is also surprising because she was seen as a compromise pick after the White House’s favored selection for the SEC slot, a well-known corporate securities lawyer, ran into Democratic opposition last summer over his ties to industry. White House nominees for financial positions have faced increasing resistance from Democrats as the party is torn by internal debate over the proper qualifications and policies for such officials, an argument that has also spilled into the Democratic presidential contest.
Conflict Minerals: SEC Not Appealing to SCOTUS
As noted in this letter from Attorney General Loretta Lynch to House Speaker Paul Ryan, the SEC has decided not to appeal the result in SEC v. NAM to the US Supreme Court. As noted in this alert, this doesn’t impact the Form SDs being prepared now and Corp Fin’s April ’14 guidance remains as the last word…
PCAOB: Updated Standard-Setting Agenda
Last week, the PCAOB posted an updated standard-setting agenda that outlines milestones on various standard-setting projects…
A few days ago, the PCAOB issued this 9-page “Staff Observations Report” describing inspection observations related to auditor communications with audit committees, finding that 93% of the audits inspected in 2014 passed muster. Here’s an excerpt from the related press release:
Inspections staff identified deficiencies in complying with the new standard in 7 percent of the relevant audits inspected. Those deficiencies did not by themselves result in an insufficiently supported audit opinion, but nevertheless constituted departures from the requirements of the standard and indicated a potential defect in firms’ systems of quality control. Inspections staff also identified deficiencies related to other PCAOB rules and standards requiring communications with audit committees, such as communications concerning independence.
During interviews with inspections staff, audit committee chairs generally indicated that effective two-way communication with their auditors had occurred. Some audit committee chairs noted that after the effective date of the standard, there had been improvements in the robustness and formality of communications with their auditors, including more in-depth discussions with the auditor about audit progress, significant risk areas, and audit findings. Other audit committee chairs noted that their auditors had been communicating the matters required under the standard even before the standard came into effect and, accordingly, they had not observed a significant change in their communications with their auditors in 2013.
Auditor Engagement: PCAOB Requests Comment on How AS #7 Is Faring
A few days ago, the PCAOB issued this “request for comment” to check how the implementation of AS #7, “Engagement Quality Review” has been faring since it’s adoption in 2009…
Non-GAAP Financial Measures: Will the SEC Curb Their Use?
As noted in this Bob Lamm blog & Cooley blog, this WSJ article reports that SEC Chair White said that the SEC is considering whether to restrict the use of non-GAAP financial measures. In remarks, Chair White said: “[y]our investor relations folks, your CFO, they love the non-GAAP measures because they tell a better story….We have urged for some time that companies take a very hard look at what you are doing with your non-GAAP measures. We have a lot of concern in that space.” These comments from Chair White follow similar ones that she made back in January.
Then a week or so later, SEC Chief Accountant Jim Schnurr delivered this speech, in which he said companies should expect the SEC Staff to remain vigilant in its review of non-GAAP measures and their compliance with existing rules Here’s an excerpt from that: “The proliferation of non-GAAP reporting measures among registrants, and reliance and reporting by analysts, should warrant increased focus by management and the audit committee,” he said. “I believe the focus should go beyond determinations that the measures comply with the Commission’s rules and include probing questions on why, in contrast to the GAAP measure, the non-GAAP measure is an appropriate way to measure the company’s performance and is useful to investors.”
More on our “Proxy Season Blog”
We continue to post new items regularly on our “Proxy Season 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:
– Stats: How Retail Holders Vote
– Proxy Access: T. Rowe Price’s Updated Policy
– Proxy Access: The Latest Stats
– Mobile Proxy Statements: Remember the “Tracking Cookie” Prohibition
– A Closer Look at Buffett’s Annual Shareholders Letter
– ESG: Glass Lewis to Include Ratings in Reports
