Exodus, movement of Jah people! At the SEC, in addition to Chair White, the exodus that occurs when an Administration changes has begun: Trading & Markets Director Stephen Luparello and Enforcement’s Chief Litigation Counsel Matt Solomon are the first. And Chief Accountant Jim Schnurr retired, with Wes Bricker taking Jim’s spot – Wes has been serving as Interim Chief Accountant since July. Many more to come I would imagine…
Yesterday, ISS issued its 2017 policy updates, which applies to meetings starting in February (here’s the policy updates for outside the US). Similar to Glass Lewis, the ISS’ updates aren’t too significant for existing public companies – but there are several new & revised policy changes related to equity plans, including on director compensation. Davis Polk’s Ning Chiu gives a rundown of the most significant changes in this blog…
CDIs: A Big One on Reg D’s Integration; Three Small Ones for Reg A
Nicely timed with the annual “Small Business Capital Formation Forum,” Corp Fin released 3 CDIs on Regulation A & one on Reg D last Thursday. As noted in this Stinson Leonard Street blog, the Reg D one is about integration – only fitting as I was taping a podcast with Stan Keller that day, the “Dean of Integration”:
Corp Fin Updates Financial Reporting Manual (Been a While)
Recently, Corp Fin indicated that it updated its “Financial Reporting Manual” to add guidance relating to the implementation of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (as amended by Accounting Standards Update No. 2015-14) and IFRS 15, Revenue from Contracts With Customers, Accounting Standards Update No. 2016-02, Leases (Topic 842) and IFRS 16, Leases, and Accounting Standards Update No. 2015-09, Disclosures about Short-Duration Contracts (Topic 944); clarify guidance on emerging growth company financial statements; clarify filings required after effectiveness of Form 10; and clarify guidance on impact of loss of smaller reporting company status on filing deadlines, among others. Think it’s been nearly a year since the last change (other than for the FAST Act)…
As noted on their blog, Glass Lewis posted 49 pages of “Guidelines for the 2017 Proxy Season” on Friday, which includes a summary of the policy changes on the first page. Dorsey & Whitney has a new blog – and Kimberley Anderson has blogged some analysis of the policy changes there…
Glass Lewis: Companies Allowed to Review Rudimentary Draft Reports! Get In Early!
On Friday, Glass Lewis also announced “open enrollment” in its “Issuer Data Report” program. This enables companies a chance to access – for free! – a data-only version of their Glass Lewis report. This is an opportunity for companies to weigh in prior to Glass Lewis completing its recommendations for the upcoming proxy season!
As Glass Lewis doesn’t provide drafts of its voting recommendations report for companies to review like ISS does (for the S&P 500), this is your only chance to review what Glass Lewis factors into its recommendations. Open enrollment ends on the earlier of January 6th – or when Glass Lewis decides its annual limit has been reached. So do it now!
PCAOB: New ’17 Budget & 5-Year Plan – & Hanson Dissents!
Last week, as noted in this press release, the PCAOB approved its 2017 fiscal-year budget of $268.5 million and its 2016-2020 strategic plan. The total accounting support fee for 2017 is $268 million, with $232.6 million allocated to public companies and $35.3 million to brokers. The budget still has to be submitted to the SEC for its approval.
The big news is that there was one dissent among the 5 PCAOB Board members when voting on their budget! Jay Hanson dissented, as noted in his statement. Here’s a note from Lynn Turner on this:
I understand this is the first vote since the PCAOB was created in 2002, in which a board member voted not to approve their budget. It appears the principle point of disagreement is over economic analysis. Interesting, the US Treasury Committee did recommend the PCAOB do more analysis through a fraud center. However, as I understand it, some on the board do not support research that may result in unfavorable data for the profession becoming public.
Interestingly, the PCAOB inspects only a couple hundred audits each year of the total audits of public companies and broker-dealers which totals over 10,000 entities. Those inspections have consistently found a 20-40% rate of non-compliance with generally accepted auditing standards, despite the auditor saying in their report they had complied.
They’re doing it again! Just like in 2013, some companies are receiving letters from the St. Petersburg Stock Exchange stating that they have been admitted into the non-quotation section of the list of securities admitted to regular trading of the exchange. This is happening without the company’s consent!
If you go to this page and scroll down, you will see many well-known – and non-Russian – NYSE/Nasdaq companies included on the list. Look to the far right column – those are the dates that companies are effectively listed (a bunch became effective yesterday).
According to the letter that companies are now receiving, the admission of the securities into the non-quotation section of the list does not impose any obligations on the company. Specifically, the company is not required to disclose information and perform any other obligations under the Russian securities and insider trading legislation.
Remember that back in 2013, as noted in this blog, a number of companies responded to those original letters and requested that their securities not be admitted to trading on the Exchange – and the Exchange generally did not proceed with the admissions.
But then the Russian securities laws were amended in July 2014 to relieve foreign issuers from Russian reporting & disclosure obligations with the listing of their securities and allowing the Exchange to proceed with the listing without a company’s consent. Since then, the Exchange has been actively admitting foreign securities to the “non-quotation section” of the list of securities admitted to trading – but it’s really picking up steam now. So far, it appears that attempts by companies to cease the listings have been unsuccessful. Thanks to Brian Breheny & Justin Kisner of Skadden for their help on this!
FCPA: JPMorgan Chase Pays $264 Million!
Yesterday, as noted in this DealBook article, it was announced that JPMorgan Chase agreed to pay more than $264 million in FCPA sanctions resulting from the firm’s referral hiring practices – the regulatory breakdown is $130 million to settle SEC charges; $72 million to the DOJ and $61.9 million to the Federal Reserve…
Cybersecurity: NIST’s New Small Business Guidance
Following it’s widely-followed 2014 framework for larger companies, NIST has finally issued this 54 pages of cybersecurity guidance for small businesses. As noted in this press release, it’s designed for those companies with 500 employees or less. Check out the worksheets at the end…
The “Financial Choice Act” is much more than merely repealing big chunks of Dodd-Frank. There are a handful of provisions that would render the SEC’s ability to conduct rulemaking much more difficult. But this provision in particular – infamous “Section 631” – just blows me away:
SEC. 631. CONGRESSIONAL REVIEW. If the agency classified a rule as “major,” according to specified criteria, the rule would require a joint resolution of Congress to go into effect, unless the President finds that an emergency requires that it be effective (for 90 days). Congress would also have the right to disapprove certain non-major rules.
Read that provision again. A joint Congressional resolution to adopt a “major” rule – and even some non-major ones! It’s goal appears to be neutering the so-called “independent” federal agencies that govern our financial institutions & markets. Talk about putting partisan politics into “independent” agencies. And here I was worried that having Congress involved in the SEC’s budget process was too much meddling with a federal agency!
Remember that federal agencies are part of the executive branch of government. Not to mention that members of Congress don’t have the expertise, resources or time to understand what the various rules of an agency are. This would be a major windfall for lobbyists who would be able to effectively pay Congress to stop an agency from doing anything. Either the Senate or the House could stop a rulemaking – by simply sitting on their hands. The polar opposite of needing an “Act of Congress” to change something. It’s brazen & breathtaking – and a whole lot of other things that I can’t mention in this family-oriented blog.
The ironic thing is that many of those rules that you despise are the product of Congress. Since SOX was enacted 15 years ago, the vast majority of the SEC’s rulemakings have been mandated by one piece of Congressional legislation or another. Not many initiated by the agency itself…and here’s a nugget from this blog by Steve Quinlivan:
President-Elect Trump’s “Contract with the American Voter” contains a pledge to implement a requirement that for every new federal regulation, two existing regulations must be eliminated. So it would place many in a conundrum. If you want to implement a universal proxy card, what two SEC regulations do you want to jettison? Maybe SEC Rule 14a-8? What else?
Here’s another reason why I can’t comprehend Section 631. As I understand it from Wikipedia, a joint Congressional resolution is essentially the equivalent of a bill being enacted into law – which includes the slew of procedural rules that would make it fairly easy for someone in Congress to throw up roadblocks to anything that they didn’t like. Both the Senate & the House have to approve it by a majority of their members – and then it’s presented to the President for signature. If so, it really would take legislation – an “Act of Congress” – to get a rule adopted by the SEC. Wow…
Here’s a WSJ profile of former SEC Commissioner Paul Atkins, who is serving as the point man for President-Elect Trump’s transition team on issues related to the markets & regulation…
Poll: What’s a “Major” Rule?
Please participate in this anonymous poll about what you think a “major” rule might mean in the context of Section 631 of the “Financial Choice Act”:
Nearly a decade after its last study on proxy advisors, the GAO issued this 49-page report yesterday on the state of the proxy advisor industry. Taking a quick swing through it, I didn’t see anything all that surprising. Several factors have led to increased demand for proxy advisor guidance (eg. rise of institutional investing & voting requirements) – but views are mixed on the extent of their influence. Proxy advisors have increased the level of shareholder engagement. And more.
It’s a nice summary of the state of the industry as we know it. Nice graphic on page 22 to illustrate how ISS & Glass Lewis communicate their policy-formulating process. All that might change soon enough with Section 1082 of the “Financial Choice Act” or whatever reform legislation gets enacted with a new Administration coming in soon…
The “GAO” is the “Government Accountability Office,” the investigative arm of Congress charged with examining matters relating to the receipt & payment of public funds…and of course, if you really want to know about the proxy advisors, read my “Proxy Advisors Handbook“…
SEC’s Budget Request: Not Going Anywhere? HQ May Move?
Given how the SEC may soon dramatically change – President-Elect Trump will be selecting three new Commissioners right off the bat! – I read SEC Chair White’s testimony before the House yesterday about the SEC’s budget with curiosity. For the 2018 fiscal year, the SEC’s request is $2.227 billion, a $445 million increase over the 2017 request – a 25% increase. Approval of this request isn’t likely – as this Gibson Dunn memo notes, the new Administration may seek to reduce, or least stop the growth in, the SEC’s annual budget.
Even more interesting was the fact that the SEC’s HQ may relocate – here’s an excerpt about that:
The current leases for the SEC’s headquarters buildings (Station Place I, II, and III) will expire in FY 2019, 2020, and 2021. In accordance with the memorandum of understanding (MOU) between the GSA and the SEC, we have begun work with GSA to begin the procurement process for a new headquarters lease. The SEC is working collaboratively with GSA to develop a package of materials to submit through the prospectus lease process. We have been informed by GSA that the SEC must be prepared to obligate the funds necessary for the build out of a new headquarters, if relocation is required, before a new lease can be executed. GSA’s current schedule calls for a new lease to be executed in FY 2018.
Thus, the SEC’s FY 2018 authorization request reflected the GSA’s estimate at that time for the build-out of which would cover expenses for construction, IT cabling and equipment, security-related equipment, and appropriate GSA fees were we required to re-locate. The estimate will continue to be refined as the prospectus lease process unfolds.
Tomorrow’s Webcast: “This Is It! M&A Nuggets”
Tune in tomorrow for the DealLawyers.com webcast – “This Is It! M&A Nuggets” – to hear Weil Gotshal’s Rick Climan, Kaye Scholer’s Joel Greenberg and McDermott Will’s Wilson Chu impart a whole lot of practical guidance!
Yesterday, the SEC announced that Chair Mary Jo White will leave her position when President Obama leaves office on Inauguration Day. Last week, Broc blogged that Mike Piwowar will almost certainly become interim Chair since he’s the sole sitting GOP Commissioner. Former Commissioner Paul Atkins is heading the financial regulatory transition team for the incoming Administration – and speculation about White’s possible successor has already begun…
Brexit: UK Parliament Must Okay EU Withdrawal
These memos in our “Europe” Practice Area address the recent UK High Court decision to require the UK government to seek approval of British Parliament before notifying the EU of its intention to withdraw. A few weeks ago, the High Court held that the government did not have the constitutional authority to notify the European Council of the UK’s decision to leave the EU without the prior approval of Parliament. The UK government has announced that it intends to appeal the judgment to the UK Supreme Court. That appeal will be heard in December, with a ruling expected in January…
Brexit: Topics for Audit Committees & Management
This Grant Thornton memo gives some advice to audit committees about the topics that they should discuss with management as a result of Brexit. These include:
– Does management have a strategic plan to manage risks and lessen negative effects? Has the organization done a thorough Brexit risk assessment? What hedging strategies are in place for foreign exchange exposure and how does Brexit affect those strategies? To what extent is the company exposed to debt denominated in pounds sterling?
– How will Brexit affect the carrying value of assets or business units exposed to the UK or EU?
– Will the company see significant translation gains and losses in terms of functional currency? Are foreign subsidiaries using the right functional currency?
– How will Brexit affect historical guidance? How will Brexit affect customers and suppliers and the company’s interactions with them? How will this affect existing guidance?
– What are the implications for communications? How and what does the company plan to communicate to stakeholders about the effect of Brexit – including investors, customers, vendors and employees?
– How will Brexit affect the company’s financial statements? For entities that have significant exposure, what should they expect to see in the June 30 quarter, and what might they see going forward?
The audit committee & management should also discuss what kind of additional regulatory compliance and reporting burdens might result from Brexit, as well as whether there are potential benefits – such as lower borrowing costs resulting from a delay in Fed interest rate increases.
This blog from Steve Quinlivan notes a recent settled SEC enforcement proceeding against PowerSecure International involving allegedly inadequate segment reporting. Here’s an excerpt:
According to the SEC, PowerSecure’s Form 10-K for the year ended December 31, 2015, outlined errors in prior period disclosures and revised its segment reporting disclosure to reflect information for the years ended 2012 to 2014 on a basis consistent with its 2015 reportable segments. In its 2015 filing, PowerSecure also concluded that its disclosure controls and procedures for that three year period were not effective due to a material weakness in its internal control over financial reporting that it identified in 2015 related to its misapplication of GAAP related to segment reporting.
Segment reporting has long been an area of intensive focus by Corp Fin. Determining the appropriate reportable segments is often a complex process involving a lot of judgment – & this means that staff comments often create some anxiety for a company’s accounting personnel.
In my own experience, I’ve seen a number of clients receive multiple, highly detailed comments probing how they determined their reportable segments. Responding to these comments often results in several rounds of follow-up comments – & has occasionally culminated in a Staff request for a conference call involving several Staff accountants & senior company officials. Those calls are fun. . .
This is another area where a regular review of peer company comments & responses can be a very valuable exercise. Comment letters often provide an early warning of the Staff’s interest in segment reporting practices within a particular industry & allow companies to see how their peers have responded to challenges to their own decisions about reportable segments.
For many years, I have been raising the possibility of climate change-related corporate and securities litigation. However, despite my best prognostication, the climate change-related corporate and securities lawsuits have basically failed to materialize – that is, until now. On November 7, 2016, investors filed a purported securities class action lawsuit in the Northern District of Texas against Exxon Mobil Corporation and certain of its directors and officers.
The lawsuit specifically references the company’s climate change-related disclosures, as well as the company’s valuation of its existing oil and gas reserves. One lawsuit doesn’t make a trend, and many of the lawsuit’s allegations relates specifically to Exxon Mobil and its particular disclosures. Nevertheless, the filing of the lawsuit raises the question whether there may be other climate change-related disclosure cases ahead.
Securities Class Actions: Are We Headed into a Perfect Storm?
Here’s an excerpt from this blog by Lane Powell’s Doug Greene:
Although I don’t know if we’re about to enter a period of quirky cases, like stock options backdating, I’m confident that we’re going to experience a storm of securities class actions caused by a convergence of factors: an increasing number of SEC whistleblower tips, a drumbeat for more aggressive securities regulation, a stock market poised for a drop, and an expanded group of plaintiffs’ firms that initiate securities class actions.
The first Schedule 14N! Back in July, Broc ran a poll asking when we’d see the first proxy access nominee – only 11% of responders thought it would happen this year. The other 89% were wrong – including the 24% who said ‘never’! Here’s the intro from this Gibson Dunn blog:
In what appears to be the first use of a company’s proxy access bylaw, GAMCO Asset Management filed today a Schedule 13D/A and a Schedule 14N announcing that it has used the proxy access bylaw at National Fuel Gas (NFG) to nominate a director candidate for election at NFG’s 2017 Annual Meeting. According to the 13D/A, GAMCO and its affiliates beneficially own in the aggregate approximately 7.81% of NFG’s Common Stock and yesterday delivered a letter to NFG nominating Lance A. Bakrow to the Board of Directors.
NFG amended its bylaws in March 2016 to include a proxy access bylaw & its terms are pretty typical:
The Bylaws provide that a shareholder, or a group of up to 20 shareholders, owning 3% or more of the Company’s outstanding Common Stock continuously for at least three years may nominate and include in the company’s proxy materials directors constituting up to 20% of the board, provided that the shareholders(s) and the nominee(s) satisfy the bylaw requirements. Here is NFG’s proxy access bylaw.
In this blog, Davis Polk’s Ning Chiu also lays out the circumstances…
Delaware Says “No” to Director’s Books & Records Request
Every now & again there’s a case that isn’t likely to have a big practical impact, but is worth noting just because it exists – and the Delaware Chancery Court’s recent decision in Bizarri v. Suburban Waste Services is that kind of case. Most corporate lawyers believe that directors have a virtually unlimited right to access books & records. As this blog from Francis Pileggi notes, it turns out that there are some limits after all:
This opinion provides a rare instance in which the court denies a director unfettered access to the books and records of a corporation on whose board he serves, but this case also involves somewhat extreme facts which are not often replicated.
The court found during trial that the director and stockholder, who was also a member and manager of an affiliated LLC, engaged in efforts to compete with and inflict reputational harm on the entities. The plaintiff’s actions in that regard were “driven by his intense hatred of the entities’ other two owners and principals.” Together with the familial relationship of the plaintiff with one of the entities’ main competitors, it makes the “prospect of the plaintiff misusing the books and records both real and troubling.”
There’s a strong presumption in Delaware that a director is entitled to “unfettered access” to books & records – and it’s up to the company to demonstrate an improper purpose. This is one of the rare cases where the company was able to meet that burden.
CEO Succession: Boards Pass Over Corporate “Fredos”
This Stanford study concludes that boards are pretty good about identifying which potential CEO candidates should be “passed over” – like Fredo in The Godfather:
Our data modestly suggests that corporate boards do a reasonable job of identifying CEO talent. Fewer than 30% of the executives passed over among large corporations are recruited by other firms as CEO. Most (over 70%) are not.
If an executive who is passed over has valuable skills that make him or her a viable CEO candidate, it is likely that another corporation would identify and hire that individual. Furthermore, candidates who are recruited to new firms after being passed over appear to perform worse (relative to benchmarks) than those who were selected at the original company.
I guess Fredo also is a good example of the potential dangers of a disgruntled senior executive.
In September, I blogged about several pending no-action requests seeking exclusion of proposals from the McRitchie/Chevedden group to revise existing proxy access bylaws on the basis that they had been “substantially implemented” under Rule 14a-8(i)(10). As I described it back then, the burning question was whether there would be any “evolution” in Corp Fin’s position in H&R Block, in which the staff refused to grant no-action relief to a proposal to amend the company’s existing proxy access bylaw — a so-called “fix-it” proposal. In particular, there were two pending no-action requests that applied different approaches in efforts to overcome the result in H&R Block (and two more similar requests have subsequently been submitted). Corp Fin has now acted on all four of these letters. One of them received a favorable response.
As you may recall, the fix-it proposal at issue in H&R Block (which also came from the prolific James McRitchie) requested that the board amend its existing proxy access bylaw provisions as specified in the proposal. The company sought to exclude the proposal on the basis that it had already been “substantially implemented” under Rule 14a-8(i)(10), contending that the staff had previously allowed exclusion of dozens of proposals as substantially implemented based on the companies’ representations that the proxy access bylaws that had been adopted addressed the proposals’ “essential objective.” (See this PubCo post.) No-action relief was granted in those cases so long as the companies’ bylaw provisions contained the same percentage and duration of ownership thresholds (3%/3 years) as in the proposal, even though the bylaws also included “certain procedural limitations or restrictions that were inconsistent with or not contemplated by the proposals.”
In the case of the fix-it proposal at issue in H&R Block, however, the Corp Fin staff refused to allow the company to exclude the proposal, responding that it was unable to conclude that the company had “met its burden of establishing that it may exclude the proposal under Rule 14a-8(i)(10).” (See this PubCo post.) As a result, companies that adopted versions of proxy access that McRitchie et al viewed as “proxy access lite” have begun to see new proposals for amendments to those proxy access bylaws. According to Agenda, fix-it proposals have now been submitted to over three dozen companies.
Keep in mind that, where the proposal related to initial adoption of proxy access, Corp Fin has continued to grant no-action relief and permit exclusion under Rule 14a-8(i)(10), even where the proponent has identified specific elements of the proposal that he views to be essential.
Filing Fee Calculations & Form S-8: Two New CDIs (& Two Revised Ones)
Yesterday, as noted in this Cooley blog, Corp Fin issued two new CDIs on Form S-8 & Rule 457 (regarding filing fee calculations) and two revised ones:
Pay-for-Performance: ISS Supplements TSR With 6 New Metrics
A few days ago, ISS announced changes to its pay-for-performance methodology for companies in the US, Canada, and Europe that will become effective on February 1st. Following feedback from constituents, ISS will present relative evaluations of return on equity, return on assets, return on invested capital, revenue growth, EBITDA growth, and cash flow (from operations) growth to supplement ISS’ legacy (and continued) use of TSR as the key metric for P4P.
Pay-for-performance updates for US companies include:
– A new standardized comparison of the subject company’s CEO pay and financial performance ranking relative to its ISS-defined peer group will be added to ISS’ benchmark policy proxy research reports beginning Feb. 1, 2017. Financial performance will be measured by a weighted average of multiple financial metrics including return on equity, return on assets, return on invested capital, revenue growth, EBITDA growth, and cash flow (from operations) growth. The metrics and weightings will be based on the company’s four-digit GICS industry group, and are based on extensive back-testing over multiple years. The financial performance and pay ranking information will be displayed for all companies subject to ISS’ quantitative pay-for-performance screens. While this information will not impact the quantitative screening results during the 2017 proxy season, it may be referenced in the qualitative review and its consideration may mitigate or heighten identified pay-for-performance concerns.
– Relative Degree of Alignment (RDA) assessment will only be considered in the overall quantitative concern level when the subject company has a minimum of two years of pay and TSR data. Companies that only have one year of data will receive an N/A (not applicable) concern for their RDA test.
ISS’ peer submission window will be open starting on November 28th – and will close on December 9th…
