As noted in this press release, Lucas Moskowitz was named the SEC’s Chief of Staff yesterday. From the cover page of this Form F-1, it looks like new Corp Fin Director Bill Hinman worked with new SEC Chair Jay Clayton on Alibaba’s IPO. Yesterday was Bill’s first day on the job…
Former Corp Fin Accountant Busted for Ethics Violations
This SEC Enforcement announcement really caught my eye. I don’t recall a SEC Staffer ever being criminally charged over trades executed while they were working at the SEC. An accountant who worked in Corp Fin for 16 years – starting in ’98 – failed to accurately report trades he engaged in. And then lied about it when questioned. He also engaged in prohibited options trading. After rising to the level of branch chief, the dude was ultimately let go for other reasons – then this crazy situation was revealed. He disgorged $50k in profits – and paid another $50k in penalties. He also pled guilty to criminal charges brought by the DOJ.
As explained on the SEC’s complaint (pg. 3), the SEC has a host of ethics rules that require Staffers to pre-clear and report their trades – as well as hold any securities purchased for at least 6 months. In addition, certain types of trades are prohibited (eg. options & derivatives). When I was on the Staff, this was never an issue for me as I didn’t earn enough to be playing in the stock market…
Farewell to Rich Ferlauto: A Governance Pioneer
A sad farewell to Rich Ferlauto, a pioneer for shareholder rights – and someone who worked hard to better conditions for all investors. And all humans. I first met Rich when he launched the Office of Investments at the AFL-CIO. He then helped AFSCME become active in the area of corporate governance. Then he went to the SEC, where he served as Deputy Director of the Office of Investor Education.
Even when he became sick, Rich was very active, trying to save the planet despite his condition. He co-founded the 50/50 Climate Project. I met with Rich several times over the past year or so to discuss his latest endeavors. Always an optimist. Always looking to help others. He was a force – and will be missed.
Just coming back from a nice holiday in Japan & Hong Kong (see my pics on Instagram). Last Thursday marked my 15th anniversary – 15 years! – of my blither & bother on this blog (note the “DealLawyers.com Blog” is nearly 14 years old – not shabby!).
It’s the one time of year that I feel entitled to toot my own horn – as it takes stamina & boldness to blog for so long. A hearty “thanks” to all those that read this blog for putting up with my personality. As I was one of the first lawyers to blog, my track record is among the longest as a blogger – lawyer or otherwise…
Japan/Hong Kong: Crowdfunding & Fund Ads
When I travel overseas, I keep my eye out for unique things that pertain to our field. One of the wildest things that I saw was a Bridgewater Associates video on the plane as we were landing in Hong Kong. Unfortunately, I can’t find the video on the Internet – it shows a group of business people in a huge office realizing the value of crowdfunding – then, they all come together to push down the walls from the inside to collapse a huge Wall Street-looking building.
Even better was this poster ad that I saw in a Tokyo subway station. It promotes a Daiwa Securities fund – check out the dude’s face in the middle. A look of utter fear! And one of these persons is a famous Japanese actor (Ken Watanabe – Godzilla, Last Samurai). It’s like putting Tom Cruise’s face on a prospectus.
Cap’n Cashbags: 15 Years of Blogging
In this 20-second video, Cap’n Cashbags – a CEO – tries to convince his director friend that 15 years of blogging is worth celebrating…
Yesterday, the SEC announced that Bill Hinman will serve as Corp Fin’s next Director. Bill previously was a partner in Simpson Thacher’s Silicon Valley office, having recently retired. He’s probably best known for his work on some of the most prominent tech & e-commerce IPOs of all time – including Alibaba, Facebook, Google & eBay.
Not positive, but we think Bill is the first Director hailing from the Valley – we’ve updated our “List of Corp Fin Directors.” In fact, Broc can’t recall any Staffers in Corp Fin moving to DC from the Valley.
CAQ’s Updated “Auditor Assessment” Tool
The Center for Audit Quality recently published a new version of its “External Auditor Assessment Tool.” The tool – which was introduced in 2012 – is intended to provide a framework for audit committees to assess the performance of a company’s external auditor and to make retention recommendations to the board.
This excerpt from the intro reviews the audit committee’s oversight role with respect to the external auditor & identifies specific areas that should be addressed in the evaluation of the auditor’s performance:
Audit committees should regularly (at least annually) evaluate the external auditor in fulfilling their duty to make an informed recommendation to the board whether to retain the external auditor. Further,providing constructive feedback to the external auditor may improve audit quality and enhance the relationship between the audit committee and the external auditor. The evaluation should encompass an assessment of the qualifications and performance of the external auditor; the quality and candor of the external auditor’s communications with the audit committee and the company; and the external auditor’s independence, objectivity, and professional skepticism.
The tool includes sample question sets covering each of the areas upon which the auditor will be evaluated, as well as materials to be used in obtaining input from management and a summary of applicable standards.
Update – Here’s an interesting observation from one of our readers:
Don’t you think it’s a bit odd that the CAQ, the audit industry lobbying arm of the AICPA, a trade association, is putting out a guide for issuers on how to select and monitor auditors? Seems a bit self-serving, bordering on conflicted.
Who Needs an IPO? NYSE Proposes to Facilitate Direct Listing
Broc recently blogged about Spotify’s reported plans for a “direct listing” – which involves bypassing an IPO, and simply registering common stock under the Exchange Act & listing on an exchange. This MoFo blog reports that the NYSE has proposed a rule change to facilitate this kind of process (which is already possible under existing rules). While Spotify is the highest profile direct listing candidate, this excerpt notes that this alternative may appeal to a variety of companies:
This approach could be of significant interest for issuers that have completed 144A equity offerings, which are still popular among REITs, for issuers that have completed numerous private placements and have VC or PE investors that need liquidity, and for issuers, including foreign issuers, that are well-funded and do not need a capital raise through an IPO, but would still like to have their securities listed or quoted on a securities exchange.
This Protiviti article sets forth key considerations for directors to keep in mind in providing oversight for their company’s efforts to address cyber risk. One of those considerations is particularly scary – it is highly probable that the company is already breached and doesn’t know it:
The old thinking of “it’s not a matter of if a cyber risk event might occur, but more a matter of when” is dated. It’s happening — now. For most companies, cyber risk events have already happened and may still be underway. Yet many organizations do not have the advanced detection and response capabilities they need. The proliferation of data privacy regulations around the globe and the publicity about data breaches affecting politicians, governmental agencies, global financial institutions, major retailers and other high-profile companies, along with the growing presence of state-sponsored cyberterrorism and espionage, are leading directors and executives alike to recognize the need for “cyber resiliency” to preserve reputation and brand image.
Detection & monitoring controls are generally not well-developed, and that results in continuing failures to detect breaches on a timely basis. Boards should be concerned how long significant breaches have evaded detectionabout the duration of significant breaches before they are finally detected.
The article says that simulations of likely attacks should be performed periodically to ensure that they can be detected & responded to quickly. Boards should also focus on the adequacy of the company’s playbook for responding, recovering and resuming normal business operations after an incident has occurred.
Also, as noted in this CAQ alert, the AICPA recently released a voluntary cybersecurity reporting framework – see this overview and this description of criteria for a risk program.
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:
– Coca-Cola’s Usable Approach to the Annual Meeting
– 2016 Mini-Season Results
– More on “Shareholder Proposals – Do They Move the Market?”
– Shareholder Proposals: Do They Move the Market?
– Tax Disclosure: Investors Demand More
As noted in this article, the latest version of the omnibus spending bill from Congress would continue to prohibit the SEC from using funds on rulemaking for political contribution disclosure – recent spending bills have also contained this bar.
But that doesn’t mean that others aren’t pushing for more transparency in this area. The Center for Political Accountability has a new website – TrackYourCompany.org – containing a searchable database of information from the 305 S&P 500 companies that post information about some (or all) of their political spending on their corporate websites. While the site’s data includes only spending from each company’s treasury, the “individual company detail” pages link to OpenSecrets.org and FollowtheMoney.org, which provide information on PAC & individual contributions at the federal & state level.
Dividends: NYSE Wants Advance Notice of Announcements
This Davis Polk blog says that the NYSE filed a rule proposal with the SEC last month that would require companies to provide at least 10 minutes advance notice of a dividend announcement – not just during the period from 7:00 am until 4:00 pm when the exchange’s immediate release policy is in effect.
Conflict Minerals: GAO Says “Country of Origin” Still a Challenge
Recently, the GAO issued this 16-page annual report on its review of 2015 corporate disclosures under the SEC’s conflict minerals rule. The report says that although companies are more informed about their supply chains, they’re still struggling to identify the country of origin of their conflict minerals. Here’s an excerpt:
As in 2014, a majority of companies reported in 2015 that they were unable to determine the country of origin of the conflict minerals in their products and whether such minerals benefited or financed armed groups in the covered countries. However, companies reported a range of actions they had taken, or planned to take, to build on or improve their due diligence efforts, such as shifting operations or encouraging those in their supply chain to shift from current suppliers to suppliers who are certified as conflict free.
It’s been almost a full year since Corp Fin dropped its updated CDIs on the use of non-GAAP information – and this Sullivan & Cromwell memo reports on nearly 300 Staff comment letters issued since that time. Here’s an excerpt identifying the “hot button” issues:
Based on our analysis of these comment letters, we have identified a number of areas of SEC staff focus during this period, in descending order of frequency:
– Failure to present GAAP measure with equal or greater prominence (C&DI 102.10)
– Inadequate explanation of usefulness of non-GAAP measure
– Misleading adjustments, such as exclusion of normal, recurring cash expenses (C&DI 100.01)
– Inadequate presentation of income tax effects of non-GAAP measure (C&DI 102.11)
– Individually tailored revenue recognition or measurement methods (C&DI 100.04)
– Misleading title or description of non-GAAP measure
– Use of per share liquidity measures (C&DI 102.05)
Five of the areas of emphasis tie specifically to the issues raised in the May 2016 CDIs, while the other 2 (inadequate explanations of usefulness & misleading title or description) are issues that have traditionally drawn comments from Corp Fin.
By the way, it’s official – Jay Clayton was sworn in yesterday afternoon as the SEC’s 32nd Chair by Justice Kennedy. Here’s the SEC’s press release.
Blockchain: Broadridge & Banks Wrap Pilot Voting Project
Broadridge recently announced that it had completed a pilot project with J.P. Morgan, Banco Santander & Northern Trust that employed blockchain technology to “enhance global proxy vote transparency and analytics.” The pilot was Broadridge’s first application of blockchain technology, and adapted distributed ledger capabilities to provide a limited group of users with secure, daily insight into the progress of the annual meeting vote throughout the proxy voting period.
Why all the interest in blockchain technology for proxy voting? This “IR Magazine” article provides some insight:
One financial services function ripe for reimagining is the proxy voting process. A blockchain can, in theory, end errors associated with manual audits, improve efficiency, reduce reporting costs and – potentially – support deeper regulatory oversight.
Blockchain’s potential as a proxy voting solution is being explored by a number of other interested parties, including Nasdaq and TMX Group, the parent of the Toronto Stock Exchange.
“Freedonia’s Going to Market”: FAQs on Foreign Government Offerings
Honestly, I don’t know how relevant this Latham memo on FAQs about registered offerings by foreign governments is to many of our members. But they called it “Hail, Hail Freedonia: Frequently Asked Questions About SEC Registration on Schedule B by Foreign Governments” – and as far as I’m concerned, anybody who references the Marx Bros. in the title of a client memo has earned a plug from me.
For those of you who aren’t Marx Bros. fans, the reference is to the 1933 classic “Duck Soup,” & the fictional nation of Freedonia, for which Groucho’s “Rufus T. Firefly” serves as an unlikely war leader. It also contains my favorite Groucho quote: “Chicolini may look like an idiot and sound like an idiot, but don’t let that fool you – he really is an idiot.”
There are all sorts of interesting tidbits in Proskauer’s “IPO study”, but this one in particular jumped out at me:
We continue to see a decrease in the average and median number of SEC comments in the first comment letter. Since 2013, there has been a 40% decrease in the number of first-round comments. This decrease appears to be partially related to issuers receiving fewer boilerplate comments, i.e., comments that are not issuer specific and relate more to general process requirements.
In addition, the only JOBS Act-related comment that appears to still be issued consistently is the request for testing-the-waters communications materials. 2016 also saw a significant decrease in the maximum number of comments issued in a first comment letter, decreasing to 55 from 78 in 2015 and a three-year average of 85 from 2013 to 2015. The average number of comment letters received by an issuer during the SEC review process was four. The average number of comments in the first, second and third comment letters were 25, six and four, respectively.
Despite the decline in comments, the amount of time required to complete an IPO continued to climb – rising to 221 days in 2016 from 156 days in 2015 and 123 days in 2014. The study suggests that the increase was likely attributable to increasing market volatility.
IPOs: Handling Comment Letters
While we’re on the topic of IPO comments, here’s a recent PwC blog by Corp Fin’s former Chief Accountant, Wayne Carnall, with advice to companies on how to deal with Corp Fin comments. Although the blog focuses on IPOs, much of Wayne’s advice is applicable to comments received in other settings. For example, here are some thoughts about the implications of comments & responses ultimately being made available to the public:
Remember, the comment letters and responses are public information shortly after the registration statement is declared effective. Even comment letters related to EGCs (Emerging Growth Companies), which have the ability to submit an IPO confidentially, are made public.
These letters & responses are part of your public communications and should be viewed the same as disclosures included in the S-1. The financial press writes stories about issues raised in the comment letter process. You do not want your company to be the subject of an unflattering story based on a poorly drafted response letter.
DOJ: Staying the Course on FCPA & White Collar Enforcement
This Wachtell memo says that recent remarks by Acting Principal Deputy Assistant AG Trevor McFadden suggest that the Trump DOJ will continue to aggressively pursue FCPA & white collar enforcement. Here’s an excerpt:
In these speeches, McFadden rejected what he called the “myth” that DOJunder Attorney General Sessions was not interested in prosecuting white-collar crime. McFadden emphasized that DOJ continues to “vigorously enforce” the Foreign Corrupt Practices Act, cited with approval a robust record of FCPA prosecutions in 2016, and praised the recent hiring of additional prosecutors in DOJ’s FCPA Unit, thereby suggesting that the new administration will maintain a significant
commitment to FCPA enforcement.
McFadden also praised two recent Obama Administration corporate resolutions, that imposed hundreds of millions of dollars in penalties, required criminal admissions & the retention of independent monitors. He also said that AG Sessions was committed to individual accountability for corporate misconduct.
Yesterday, the Senate voted 61-37 to confirm Jay Clayton as the next SEC Chair. The AP reports that 9 Democrats & independent Angus King of Maine joined 51 Republicans in voting for his confirmation. Jay will likely be sworn in by the end of the week…
Don’t Forget to File Your “Say-When-on-Pay” 8-K!
This Bass Berry blog provides a timely reminder that companies holding a “say-on-pay frequency” vote this year have an 8-K that needs to be filed:
Registrants should be reminded of the requirement under Item 5.07(d) to report the determination of the registrant, in light of the shareholder vote on say-when-on-pay, regarding how frequently the registrant intends to hold say-on-pay votes until the next required say-when-on-pay shareholder vote. Under the Form 8-K rules, this disclosure may be made in the Form 8-K disclosing the annual meeting voting results or in a separate Form 8-K amendment filed within 150 days following the date of the annual meeting (but, in any event no later than 60 days prior to the Rule 14a-8 shareholder proposal submission deadline).
In 2011, many companies overlooked this requirement. Most filed their 8-K disclosing the results of the vote, but forgot to follow up with the board’s decision on frequency. Since it was the first time through the cycle, the Staff cut companies some slack and granted waivers so they could continue to use S-3. Companies shouldn’t count on Corp Fin being as accommodating this time around.
Tomorrow’s Webcast: “Public Company Carve-Outs – The Nuggets”
Tune in tomorrow for the DealLawyers.com webcast – “Public Company Carve-Outs: The Nuggets”– to hear Sidley’s Sharon Flanagan, Sullivan & Cromwell’s Rita O’Neill & Covington & Burling’s Catherine Dargan discuss hot issues & tricks of the trade in dealing with public company carve-outs.
Here’s the results from our recent survey on codes of conduct:
1. At our company, we require “code of conduct” certifications from:
– All employees – 73%
– All Section 16 officers – 0%
– Different subset of employees – 27%
2. At our company, we typically obtain “code of conduct” certifications from this percentage of the employees that are required to submit one:
– 100% – 59%
– Over 90% – 35%
– Over 75% – 6%
– Below 75% – 0%
3. At our company, we require “code of conduct” certifications from our directors:
– Yes – 41%
– No – 59%
– Tax Reform: Transaction Strategies for Uncertain Times
– Coming to Grips With Appraisal
– Purchase Price Adjustments for Tax Benefits
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
Our May Eminders is Posted!
We’ve posted the May issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
While Congressional efforts at financial regulatory reform may end up languishing this year, this McGuire Woods blog speculates that 2017 may be the year that finally sees Congress act to sort out the mess that is the law of insider trading:
House Judiciary Committee Chairman Bob Goodlatte announced the committee’s agenda for the 115th Congress. Rep. Goodlatte observed that he and Ranking Member John Conyers were “committed to passing bipartisan criminal justice reform.” Rep. Goodlatte considered it “imperative [to] continually examine federal criminal laws” in conjunction with this effort.
Although past Congressional efforts to codify insider trading laws have failed, these remarks suggest that there may be an opportunity to try again. And some observers are optimistic that a reform bill could pass this year.
What might a statute addressing insider trading look like? The blog points to recent comments from Judge Jed Rakoff as providing a possible model:
Judge Rakoff spoke approvingly of the EU’s approach that focuses on equal access to market information rather than U.S. law’s focus on the insider’s fiduciary duty. Specifically, the EU prohibits anyone from trading on information “that person knows, or ought to have known, [is] insider information.” Thus, the focus is on the information itself, rather than the source.
Such an approach would eliminate disputes over the “personal benefit” test. It would also reverse Newman’s requirement that the tippee know of the tipper’s benefit. While the question of whether a trader “should have known” a tip to be insider information might be problematic, the insider trading statute – like other federal statutes – could define knowledge to include deliberate indifference or reckless disregard.
A clear and uniform federal insider trading standard would benefit everyone – prosecutors, traders & the markets.
Update: Keith Bishop notes that California has enacted an insider trading statute that, in contrast to federal law, actually defines what constitutes unlawful insider trading. Check out Keith’s blog on the statute.
Compliance Programs: Building a Risk Assessment Methodology
This “Compliance & Enforcement” blog provides advice on how to create the cornerstone of an effective compliance program – a well-constructed risk assessment methodology. Here’s an excerpt from the intro:
A deliberate, iterative self-assessment methodology is crucial to obtaining the benefits of both mitigating enforcement risk and achieving a high-efficiency compliance program. This post describes a four step process foundation for a self-assessment methodology: (1) get a detailed picture of what your company actually does, (2) map the potential compliance risk “contact points” that exist in your company, (3) assess the current controls in place to prevent, detect, and correct violations, and (4) determine and prioritize the compliance enhancement measures you undertake.
Reg FD: One Stat Says It All on Need for Training
The next time your Reg FD compliance training budget comes up for review, be sure to cite this recent study on the role of the IR officer in providing disclosure – and this finding in particular:
IROs indicate that private phone calls are more important than 10-K/10-Q reports, on-site visits, and management guidance for conveying their company’s message, and more than 80% of IROs report that they conduct private “call-backs” with sell-side analysts and institutional investors following public earnings conference calls.
