Last year, I blogged about how Hewlett-Packard became the first big company to hold a virtual-only annual meeting. This year, Intel became the new bellwether. Intel had tried to become the first large company to do this about six years ago – but the resulting bad publicity forced them to turn the meeting into a hybrid.
Not so this year. The only bad press I saw was this NY Times piece – that didn’t come out until after the meeting was over! [By the way, the NYT piece incorrectly states that Intel held a virtual-only meeting in ’09 and that it was the first ever. Wrong on both counts – see my list of the true pioneers, starting with Inforte in 2001. The piece is also wrong in that Intel did take questions from the web during the ’16 annual meeting.]
We have posted the transcript of our popular webcast: “Yes, It’s Time to Update Your Insider Trading Policy.” The transcript for our Non-GAAP webcast – the one that almost broke the Internet – will be up in a few days…
DTCC Re-Proposal: Imposition of Chills & Global Locks
Hat tip to McDermott Will’s Gary Emmanuel for informing me that DTCC has re-proposed a rule change with the SEC that would establish the circumstances under which DTC would impose and/or release a ‘Deposit Chill’ or a ‘Global Lock’ on a security. It also sets forth the proposed criteria for releasing these restrictions – and the procedures that would allow an issuer to challenge the restriction.
This re-proposal was necessary after DTC withdrew its prior rule – that it submitted over two years ago – in the face of negative comments…
DOJ’s FCPA Pilot Program: First Declinations & Rare NPAs
Recently, as noted in this memo, the DOJ issued the first public declinations of a criminal enforcement action since implementing its new “Pilot Program” enforcement plan when it declined prosecution of Akamai and Nortek for FCPA violations by their respective Chinese subsidiaries.
On the same day, both companies separately entered into non-prosecution agreements (“NPAs”) with the SEC, only the second and third FCPA NPAs from the SEC…
You gotta love any SEC case that uses the phrase “Bacchanalian Adventure”…
Yesterday, the SEC proposed rules – in this 296-page proposing release – to modernize the disclosure requirements for mining companies by killing Industry Guide 7 – and updating Item 102 of Regulation S-K to include all mining disclosure requirements in one S-K subpart. As noted in this press release, the proposal would:
– Provide one standard requiring registrants to disclose mining operations that are material to the company’s business or financial condition
– Require a registrant to disclose mineral resources and material exploration results in addition to its mineral reserves
– Permit disclosure of mineral reserves to be based on a preliminary feasibility study or a final feasibility study
– Provide updated definitions of mineral reserves and mineral resources
– Require, in tabular format, summary disclosure for a registrant’s mining operations as a whole as well as more detailed disclosure for material individual properties
– Require that every disclosure of mineral resources, mineral reserves and material exploration results reported in a registrant’s filed registration statements and reports be based on, and accurately reflect information and supporting documentation prepared by, a “qualified person”
– Require a registrant to obtain a technical report summary from the qualified person, which identifies and summarizes for each material property the information reviewed and conclusions reached by the qualified person about the registrant’s exploration results, mineral resources or mineral reserves
House Committee Passes Proxy Advisor Reform & Garrett Bill
As noted in this MoFo blog, the House Financial Services Committee passed a dozen bills yesterday – including the one on proxy advisor reform (“Corporate Governance Reform and Transparency Act of 2016”) and the Garrett bill (“SEC Regulatory Accountability Act”) that I bashed two days ago. See this CII press release…
Conflict Minerals: EU “Political Understanding” Reached
As noted in this Elm Sustainability Partners piece, the European Commission announced two days ago that a “political understanding” has been reached on the European conflict minerals law. This means that the relevant political entities have agreed upon high level legal principles for the conflict minerals requirements for covered businesses in Europe. The technical and implementation details are to be developed in the future.
Also see this piece noting that nearly 1200 companies filed a Form SD by the June 1st deadline…
No sooner do I blog about a House bill that would make it challenging for the SEC to conduct any rulemaking, than Cooley’s Cydney Posner blogs about an executive summary of the “Financial Choice Act” – which would require the SEC to conduct rulemaking to dismantle nearly all of the corporate governance rules that the SEC has adopted under Dodd-Frank over the last six years.
The kicker is that all of this repealing isn’t in the executive summary (and the full bill isn’t public yet); rather the executive summary just says “repeal non-material specialized disclosures.” You can’t make this stuff up! But Cydney’s blog notes that Cooley’s “Government Analytics Practice Group” dug in to uncover what is behind the bill’s executive summary:
– Repeal specialized public company disclosures for conflict minerals, extractive industries and mine safety (Dodd-Frank Title XV)
– Expand the Sarbanes-Oxley Act Section 404(b) exemption for non-accelerated filers to include issuers with up to $250 million in market capitalization (up from the current threshold of $75 million) or $1 billion in assets for banks (Dodd-Frank Section 989G).
– Repeal the burdensome mandate that publicly traded companies disclose the ratio of median vs. CEO pay (Dodd-Frank Section 953(b))
– Repeal the SEC’s authority to further restrict the ability to engage in legitimate securities short selling (Dodd-Frank Section 929X)
– Amend the mandate on public companies to provide shareholders with a vote on executive compensation to occur only when the company has made a material change to the executive compensation package (Dodd-Frank Section 951).
– In the event of certain financial restatements, hold bad actors responsible by limiting ‘clawbacks’ of compensation to the current or former executive officers of a public company who had control or authority over the company’s financial reporting (Dodd-Frank Section 954).
– To reduce the burdens on emerging growth and smaller reporting companies, repeal the reporting requirement for public companies regarding employee or board member hedging of equity securities granted as compensation (Dodd-Frank Section 955).
– Repeal federal financial regulators’ ability to prohibit types and features of incentive-based compensation arrangements (Dodd-Frank Section 956).
– Repeal the SEC’s authority to issue rules on proxy access (Dodd-Frank Section 971).
– Repeal the SEC’s authority to issue rules to require disclosures regarding Chairman and CEO structures (Dodd-Frank Section 972).
As Cydney notes in her blog, it wouldn’t quite repeal all of Dodd-Frank’s corporate governance provisions – pay-for-performance would still be on the books. The bill would also incorporate about a dozen bills that are floating around in the House these days – and would “streamline” the SEC’s Enforcement Division process so that individuals received “fair treatment.” Cydney writes:
According to the NYT, the bill “has little chance of passing Congress this year.” And, even if it did, President Obama still holds the veto pen, at least until January. Nevertheless, Speaker Ryan has encouraged his Republican brethren to develop affirmative policies and programs, and, as the NYT suggests, this bill “may influence the presidential debate and help shape the Republican agenda in the next term.”
FASB’s New Lease Accounting: Most Companies Not Ready Yet
As noted in this memo, a webcast poll by Deloitte indicates that fewer than 10% of accounting professionals say their companies are ready for the FASB’s new lease accounting standards. They cited the top two challenges as collecting the necessary data in all organizational leases in a centralized, electronic repository – and instituting reporting processes to evaluate quarterly adjustments for the balance sheet. Of the 5,400 respondents, only 15% said they expect compliance to be easy.
Gender Pay Gap Becomes a Proxy Season Issue
Here’s an excerpt from this blog by Davis Polk’s Ning Chiu:
The White House recently announced an initiative by 28 companies that have pledged to conduct annual gender pay analysis, similar to a shareholder proposal this proxy season that received a fair amount of press attention. Arjuna Capital sent proposals to nine major technology companies, including Apple, Alphabet, Facebook, Intel and Microsoft, asking them to prepare reports on their policies and goals to reduce the gender pay gap. This was defined as the difference between male and female earnings expressed as a percentage of male earnings. According to the proposal, the median income for working women is 78% that of their male counterparts.
The SEC staff denied several companies’ initial efforts to exclude the proposal on the basis of vagueness. At one company where the proposal went to a vote, it received 51% support in favor, highly unusual for a social proposal. Nearly all of the other companies got the proposal withdrawn by the proponent after they agreed to provide information on their gender pay differences. Those that already reported stated that there is no pay gap, or a very negligible gap, between men and women who work at the same job-grade level. Some companies included salary and stock while others excluded stock. Exact methodologies were generally not provided. Two companies released their information to coincide with National Equal Pay Day (April 12).
Although almost all of the press has been favorable in light of the results, some in the media criticized the companies for obscuring the types of jobs women tend to work, finding that men are more likely to hold higher-paying tech positions. In addition, women make up around a quarter or less of the senior leadership at these companies.
Ever since the SEC – and other federal agencies – have been required to conduct more cost-benefit analyses in the wake of the proxy access court decision in 2011, the pace of rulemaking certainly has slowed – despite a huge ramp up in the size of the SEC’s relatively new Division of Economic & Risk Analysis (Risk Fin).
Things might get worse before they get better. As highlighted in this CII letter, a House bill from Rep. Garrett – the “SEC Regulatory Accountability Act” (HR 5429) – includes provisions that could really paralyze the SEC’s ability to adopt new rules or modify old ones. For example, the bill would require the SEC to revisit a rule within one year of it’s passage – and then every five years after that.
On its face, I know this sounds reasonable – but it would require more resources than you think to undertake this task. Resources that the SEC doesn’t have. Remember that the SEC already is conducting extensive cost-benefit analyses, etc. And bear in mind that all of this doesn’t protect us from stupid laws that Congress passes that requires the SEC to adopt stupid new rules. The bulk of the rulemaking conducted by the SEC over the past decade has been mandated by Congress. So if Congress has a beef with the rules that the SEC is adopting, it should look in the mirror…
Regulation A+: States Lose Challenge In DC Circuit Court
Yesterday, as noted in this blog and this blog, the states of Montana and Massachusetts lost their challenge to the SEC’s adoption of Regulation A+ in the DC Circuit court – as was expected…
Political Contribution: Still a Live Wire for Senate Democrats
Yesterday, SEC Chair White testified before the Senate Banking Committee about the SEC’s oversight obligations. You might recall that two Commissioner nominees still remain to be confirmed – mainly because some Senate Democrats are angry that the nominees wouldn’t commit to adopting rules on disclosing political contributions as noted in this blog.
Anyway, the hearing yesterday produced some fireworks as Senator Schumer & Warren criticized Chair White for removing political spending disclosure from the Reg Flex Agenda – and for launching the disclosure effectiveness project (see this blog). In fact, my blog about the Reg Flex Agenda being “aspirational” even made it into this MarketWatch article that describes the testy exchange.
Great quote from the MarketWatch piece – White to Warren: ‘I am disappointed in your disappointment.’
Free stock! As noted in this Wired article, loyal T-Mobile customer may be eligible for a share of free stock starting last Tuesday if they refer a new customer (two shares if they’ve been a customer for 5 years). Here’s T-Mobile’s prospectus for this “Stock Up Rewards Plan.”
Free stock as a marketing ploy for companies with loyal customer bases is not exactly new – a few existed even before the Internet (eg. Dr. Pepper did one in the early ’80s). But they are rare – and for good reason. These FAQs that I drafted long ago lay out some of the concerns (and here’s a WaPo article about potential tax issues – and an old WilmerHale memo about the SEC cracking down on freebie offerings).
A prime example of unexpected problems comes from the first online free stock offering, which was conducted by Travelzoo.com in April 1998. Reportedly, the company subsequently had difficulty locating the people who received free stock when it sought to conduct an exchange offer – primarily because the only contact information it had for many stockholders was e-mail addresses (many of which had changed and didn’t have forwarding information).
Interestingly, Loyal3 is helping to administer this freebie stock promotion for T-Mobile. As you might recall from this blog, Loyal3 is the entity that has been helping companies to create “Customer Stock Ownership Plans” – these are plans that run through on an app for your smart phone, tablet, etc. This is an alternative solution to giving away the stock for free…
Here’s other innovative stuff from the ’90s: Spring Street Brewing, Wit Beer (Wit Capital), tracking stock, David Bowie bonds, SOES bandits, online brokers and Pearl Jam!
XBRL: SEC Announces “Inline XBRL”
Yesterday, the SEC announced that it will allow companies to voluntarily file structured financial statement data in a format known as “Inline XBRL.” From what I gather from the SEC’s press release, this will enable filers to use XBRL in their HTML filings rather than be forced to file their XBRL as an exhibit to a filing. It’s supposed to reduce costs & improve the quality of filings…
Transcript: “Legal Opinions – The Hot Issues”
We have posted the transcript for our recent webcast: “Legal Opinions: The Hot Issues.” This was a great & highly informative program!
Hat tip to Steve Quinlivan for pointing out this speech by SEC Deputy Chief Accountant Wes Bricker last Thursday that contains his views about transition disclosure as the effectiveness of the new revenue recognition standard nears. Here’s an excerpt from Wes’ speech:
Speaking of disclosures, the SEC staff has long advised that a registrant should provide transition disclosures to investors of the impact that a recently issued accounting standard will have on its financial statements when that standard is adopted in a future period.
The preparation of the transition disclosures should be subject to effective ICFR and disclosure controls and procedures. As management completes portions of its implementation plan and develops an assessment of the anticipated impact the standard will have on the company’s financial statements, internal and disclosure controls should be designed and implemented to timely identify relevant disclosure content from the implementation assessments and to ensure, where necessary, that appropriately informative disclosure is made.
Investors should expect the level of transition disclosures to increase as a company progresses in its implementation plans and, when necessary, engage with company management to understand these disclosures.
Tomorrow’s Webcast: “Proxy Season Post-Mortem – The Latest Compensation Disclosures”
Tune in tomorrow for the CompensationStandards.com webcast – “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear Mark Borges of Compensia, Dave Lynn of CompensationStandards.com and Morrison & Foerster, Ron Mueller of Gibson Dunn analyze what was (and what was not) disclosed this proxy season.
Yates Memo: Counterproductive Impact?
Here’s an excerpt from this blog by Kevin LaCroix that analyzes this new research from the Chamber of Commerce:
Individual actors “may find their own legal interests to be at odds with those of the company’s.” This dynamic could lead to “an ‘every man for himself’ mindset within the company.” Junior employees may refuse to cooperate, at least without their own legal representation. Other may decide to secure their own attorneys, without going through corporate channels.
These impacts could add complexity, expense and delay to the company’s efforts to complete its investigation in order to receive cooperation credit. Perhaps even more importantly, these factors could have a “chilling effect” on the company’s ability to fully investigate and develop the full factual record needed to secure cooperation credit. The upshot could be that in the end this internal dynamic could “impede the corporation’s ability to perform what is intended by the Yates memo – to gather facts and report to the Department any individuals engaged in wrongdoing.” Rather than allowing the agency to leverage a corporation’s access to information, “the Yates Memo’s impact is likely to have the opposite effect.”
Hat tip to Bjorn Hall of Fundrise for letting me know that the Fundrise Real Estate Investment Trust, LLC (which they lovingly call the “Income eREIT”) filed the first-ever “Annual Report on Form 1-K” back in late April. Under Rule 257(b)(1) of Regulation A, Form 1-K is the annual report now required to be filed by Tier 2 companies that conducted their offerings under Regulation A+. The form is due within 120 calendar days of fiscal year covered by the report. Only Tier 2 companies are required to file a Form 1-K, one of trade-offs for not having to register with the states. Since Fundrise made their filing back in late April, there have been four other Form 1-Ks filed.
And as noted in this blog, the OTC Markets has filed a rulemaking petition with the SEC to open Regulation A+ to reporting issuers..
When I served in Corp Fin in the mid-90s, I was tasked for a while with reviewing novel products created by investment banks. Back then, that was handled out of one of the normal Operations groups – now that is done under Amy Starr’s “Office of Capital Market Trends.” Anyway, I wound up looking at some weird stuff and found out that there is even something called a “Form 1” filed with the SEC. That is the form that stock exchanges file to be registered with the SEC as an exchange…
ISS Responds to Proposed Proxy Advisor Legislation
Last week, I blogged about a statement from Glass Lewis about the proposed House bill that would enhance proxy advisor oversight. Now Ning Chiu has blogged about a statement from ISS on the proposed bill…
Dodd-Frank Repeal: Details of the “Financial CHOICE Act”
On Monday, I blogged about the efforts by the GOP in Congress to repeal Dodd-Frank. As laid out in this blog, the details of the “Financial CHOICE Act” have been unveiled by House Financial Services Committee Chair Jeb Hensarling.
See this report about the revolving door between the staff of the House Financial Services committee and the financial industry…
– It is extremely rare for any company to use GAAP earnings for bonus calculation purposes (word searching “non-GAAP” probably missed the other 42% of companies that refer to adjusted EPS, adjusted revenue, etc.).
– Most incentive plan targets are based on operating results, which is why it is common to exclude non-operating items – like FX or asset impairments – from the bonus calculation. It is also common for some industries to exclude non-cash expenses, like equity compensation expense.
– Agree that some items should not be excluded from GAAP results when calculating incentive payouts – and there is typically a very rigorous process that management and the compensation committee use to evaluate what to exclude.
– Lay-off expenses are mentioned as an example of a bad adjustment to GAAP results for incentive plan purposes. If you are the board, would you want to provide management with a financial incentive to delay a lay-off or plant closure until next year to avoid a reduction in the current year’s bonus? I can think of many examples where the entire industry faced excess capacity and closing facilities was not anticipated at the beginning of the year. Most boards would want the management team to get out in front on an issue like that – and would be happy to reward them for doing so, rather than create a financial penalty. I recognize that paying big bonuses to management during large layoffs is not a good practice and should be avoided.
– Agree that if management wants relief from FX headwinds one year, they need to exclude FX tailwinds in future years.
FINRA Proposes Changes to Communications Rules
As noted in this memo, FINRA recently filed proposed revisions to its communications rules with the SEC that include a few substantive revisions to existing rules, eases some burdensome filing requirements and leaves the door open for future changes…
Sights & Sounds: “Women’s 100 Conference ’16”
This 1-minute video captures the sights & sounds of the “Women’s 100” events that just wrapped up in DC and Palo Alto:
Tune in tomorrow for the webcast – “Non-GAAP Disclosures: What Is Permissible?” – to hear Meredith Cross of WilmerHale; Brink Dickerson of Troutman Sanders; Steven Jacobs of E&Y; and Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster provide practical guidance about what to do now with your non-GAAP disclosures given Corp Fin’s new & revised CDIs and the attention being paid to them by the SEC, media and investors. It’s at a special time – 11 am eastern. The audio archive will be posted directly after the live program is over – and a transcript will be posted about 10 days later. The agenda includes:
A. Analysis of CDIs
1. Problematic misleading measures – adjustments, period-over-period inconsistency, offsets
2. Revenue
3. Prominence – when presenting a non-GAAP measure, present most directly comparable GAAP measure with equal or greater prominence
4. Reconciliation of forward-looking measures if available without “unreasonable efforts”
5. Free cash flow
6. Per share measures including FFO
7. Income tax effects related to adjustments
B. What to Do Now
1. What might be expected from Corp Fin during the comment process going forward
2. How hard should you push back on Corp Fin comments
3. What should be considered when rethinking whether to continue disclosing certain non-GAAP financial measures
4. How to monitor what other companies are doing – and not doing
5. What is the real SEC enforcement risk
This Cooley blog summarizes a WSJ article that lays out the increasing prevalence of non-GAAP measures in proxy statements…
But these adjusted metrics aren’t just showing up in earnings releases. Pro forma figures have been proliferating in annual proxy statements, too. There, when used with compensation metrics, they can help executives draw bigger pay packets. Research firm Audit Analytics finds that the term “non-GAAP” appeared in 58% of proxies for companies in the S&P 500 that have released them so far this year. Five years ago, that term showed up in 27% of proxies for current S&P 500 constituents.
There is nothing improper about using non-GAAP measures as long as they are disclosed properly. And corporate boards decide on the measures they want to use for compensation purposes. Plus, there is an argument to be made for sometimes excluding items from results for compensation purposes. If, say, a natural disaster hits a company with expensive repairs, perhaps an adjustment is in order. But other items that often get excluded in pro forma results, such as layoff-related charges, do seem like a reflection of management’s performance. And boards have too often shown a willingness to set awfully low bars for executives to clear.
That, though, can disadvantage shareholders and wreck the idea of pay for performance. In that vein, the dramatic rise in the number of companies using pro forma measures to determine bonuses would indicate the balance between shareholders and executives is being skewed in executives’ favor. Indeed, an examination of the most recent proxy statements from companies in the Dow Jones Industrial Average shows about a dozen of the index’s 30 constituents had annual pro forma earnings well in excess of GAAP ones and used the pro forma ones in annual bonus calculations.
Poll: Non-GAAP Numbers In Headlines (Without the GAAP)
Corp Fin’s new CDIs touch on the prominence of non-GAAP numbers in the headlines of earnings releases – and some members tell me that’s what they were already advising their clients to do for quite some time. Yet, there are many examples of contrary conduct. Here’s an anonymous poll about what you’ve been advising:
