We haven’t seen many successful climate change proposals in past years, but this year is different. Last week, Broc blogged about the proposal at Occidental Petroleum for a “2-degree scenario analysis” – notably passing with BlackRock’s support. Yesterday, ExxonMobil shareholders approved a similar proposal – with 62% supporting! – bringing the tally to three major companies this month (PPL being the third).
This Washington Post article suggests that in addition to BlackRock & State Street, Vanguard also voted in favor of the ExxonMobil proposal – which would be consistent with its recently updated E&S policies. But as noted in this article, this would be a break for Vanguard because they rarely challenge management. This new trend in institutional investor voting practices means we’ll probably see many more climate proposals in the near future.
As far as PPL, Oxy & ExxonMobil, this excerpt from Cydney Posner’s blog explains the next steps:
As is typical, these proposals are all precatory, but, as you know, companies do feel the heat when a proposal receives a majority vote in favor. According to Reuters, a PPL spokesman said that the company “is committed to sustainable energy” and that the board “‘will carefully consider the results and determine the best path forward.’”
Reuters also reported that the ExxonMobil CEO indicated that “the board would review the request.” Bloomberg BNA reported that the Chair at Occidental acknowledged shareholder support for the proposal and said that the company looked “forward to continuing our shareholder engagement on the topic and providing additional disclosure about the company’s assessment and management of climate-related risks and opportunities.” Reuters also noted that proposals have been submitted at several other companies but were withdrawn the companies conceded to take steps the proponents viewed as acceptable.
Are “Operating Metrics” the New Non-GAAP?
Earlier this month, SEC Chief Accountant Wes Bricker remarked that lessons from recent non-GAAP scrutiny also apply to disclosure of operating metrics, forecasts & other kinds of supplemental information:
I believe that much of the recent experience with non-GAAP financial metrics also provides lessons for other kinds of reporting by companies. Similar to non-GAAP financial reporting, key operating metrics and forecasts may also be distorted via bias – for example, painting a potentially misleading picture – error, or fraud, all of which undermine the credibility of the reporting. Therefore, it is important that companies proactively and thoughtfully address risks to their reporting.
Companies should first understand the other information being reported, including how operating metrics are defined.
Companies then should have adequate disclosure controls and procedures in place. In some respects, these other reporting processes may require more steps than some GAAP processes, not fewer. This is because, for example, a company’s other reporting does not have the benefit of standard-setting due process, which solicits stakeholder views on a representationally faithful manner of reporting a particular event or transaction and the types of disclosures needed by financial statement users. When a company determines a supplemental reporting framework, it does not have the benefit of a standard setter’s due process and must look to its own policies, audit committee, and other stakeholders for input.
Finally, companies should consider whether it would be beneficial to obtain insight into their other reporting processes from those outside of the finance and investor relations functions. Sometimes a fresh perspective can provide new insight into potential risks and ways to maintain the effective operation of essential controls and procedures.
This blog from Cooley’s Cydney Posner delves into more details. She notes that the SEC’s accounting staff used the big AICPA conference last year to forewarn of their impending crackdown on misleading non-GAAP practices. We’ve been talking about Corp Fin’s updated CDIs – and the related comment letters and Enforcement sweep – ever since.
Our June Eminders is Posted!
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Reportedly, SEC Chair Jay Clayton plans to tap one of his former Sullivan & Cromwell partners to lead the SEC’s Enforcement Division – Steve Peikin. Sounds like Steve will be the co-head with Stephanie Avakian, who was elevated from Deputy Director to Acting Director back in December. Here’s an excerpt from this WSJ article by Dave Michaels:
The decision to hire two top managers for the SEC’s enforcement division would ease some of the issues created by Mr. Peikin’s past work for Wall Street. Mr. Peikin has done high-profile defense work for Barclays PLC and Goldman Sachs Group Inc. Under SEC ethics rules, he would be barred for one year from supervising any cases that affect Goldman or other clients of Sullivan & Cromwell.
Mr. Peikin, a graduate of Harvard Law School, leads the criminal defense and investigations group at Sullivan & Cromwell. From 1996 to 2004 he was an assistant U.S. attorney in Manhattan, where he oversaw the Southern District of New York’s securities and commodities task force. During that era, Mr. Peikin earned headlines for his prosecution of star technology banker Frank Quattrone, who was convicted of obstructing a government investigation and witness tampering, although an appeals court later threw out the judgment.
More recently, Mr. Peikin was part of the defense team for futures trader Michael Coscia, who became the first U.S. trader criminally convicted of spoofing, a fraudulent trading strategy. Spoofing, which became illegal under the 2010 Dodd-Frank Act, involves placing orders that one doesn’t intend to fulfill, in an effort to trick other traders into altering their prices in a direction that benefits the spoofer. Mr. Coscia’s case is now pending before a federal appeals court.
This wouldn’t be the first time the Enforcement Division had Co-Directors. Broc blogged about Mary Jo White’s decision to “split the baby” back in 2013. The use of co-heads solves any conflict issues caused by bringing in someone from outside the agency to lead the Division…
D&O Insurance: Structuring Concerns
No director wants sub-par insurance coverage – and counsel is at least partially on the hook if that happens. This blog by Kevin LaCroix explains why program structure matters & how competing interests affect coverage decisions. Here’s the intro:
Most D&O insurance buyers understand the critical importance of limits selection – that is, deciding how much insurance to buy. But an equally important question involves the issue of program structure – that is, how the insurance program is put together.
Many insurance buyers understand that, in order to be able to purchase an insurance program with the desired limits of liability, their D&O insurance will be structured with a layer of primary insurance and one or more layers of excess insurance. In addition, these days many D&O insurance buyers also purchase an additional layer – usually on the top of program – of Side A Difference in Condition (DIC) insurance.
As noted in a recent post on the “Pillsbury Policyholder Pulse” blog, no coverage may be less understood than the Side A DIC policy. But even if frequently misunderstood, the coverage provides corporate directors and officers an important safety net. Moreover, there are other important D&O insurance program structure issues, beyond just the need for Side A DIC insurance.
D&O Insurance: What Startups Need To Know
D&O insurance is also important for private companies – more than 25% have had claims in the last three years & the average loss was $387,000. For early-stage ventures, it’s purchased around the time the company gets outside investors & directors, or at the time of hiring employees – but the list of potential claimants can also include customers, vendors, suppliers, creditors & others.
This Morrison & Foerster article gives tips on deciding what coverage to get – and when & how to get it (also see this blog by Kevin LaCroix). Here’s some intel on how coverage & premiums are determined:
A startup can plan on approximately $15,000 in premiums for $1 million of coverage, depending on market condition & policy wording. Specific premium amounts are largely determined by the company’s current financial statements – income statement & balance sheet. Any prior claims will also have a negative impact on pricing.
It’s critical to be able to negotiate policy wording to extract the broadest coverage grants for the business. Policy premiums may vary among insurance providers, but a startup can expect to pay higher premiums for greater coverage.
Back in March, the SEC adopted new rule & form amendments requiring that the exhibit index in registration statements & ’34 Act reports contain links to the exhibits that are listed – & that these filings be made in HTML. We’ve posted in memos in our “Exhibits” Practice Area.
The effective date is delayed for most companies until September 1st – and for smaller reporting companies and non-accelerated filers that use the ASCII format, until September 1, 2018. But companies can comply earlier of course – and some indeed have. Here’s some examples from the most recent group of Form 10-Qs – note the different approaches:
Links to Exhibits: SEC Staff Still Needs to Update Edgar Manual
Interestingly, these companies have experimented by including links to their exhibits voluntarily – without the benefit of an updated Edgar Manual. Some members told me that the updated Manual was expected in mid-May – but we haven’t seen that happen yet (nor do I think we’ll see anything soon). Without the updated Manual, companies are lacking clear instructions on how to do accomplish what the SEC will be expecting…
Per Weil Gotshal’s Howard Dicker, here are other issues that might be addressed by the Staff:
1. Amended Reg S-K Item 601(a)(2) requires an “Exhibit Index” appearing before the signatures. Current rule is immediately preceding the exhibits.
2. For exhibits that have been previously filed, what should companies do about (a) exhibits that were filed in ASCII and (b) exhibits that are not separate files (e.g., pre-2000 when the exhibits and the report were all included in one single ASCII file.
How To Fix “In Progress” Edgar Filings
In the latest issue of Edgar Filer Support’s newsletter, there’s a discussion of how to handle “in progress” Edgar filings. Here are 3 pointers:
1. If your filing shows this status for 4 hours or more, there might be a technical issue with your CIK, tax ID or filing fee.
2. If you see the “in progress” status for over 12 hours, call Edgar Filer Support at 202.551.8900.
3. Your filing will usually show up with the original filing date once the issue is resolved.
One of the more challenging aspects of this new job is learning how to blog. Luckily, I’m learning from one of the best. Here’s 5 things I’ve learned from Broc so far:
1. Write like you speak. I’m human. You’re human.
2. Get to the point. People tend to scan online rather than straight read.
3. Show a little personality.
4. But don’t show too much personality.
5. Have fun!
Annual Meetings: Another Season in the Books!
This year, the number of annual meetings peaked on May 18th. Time for your two-second break…
Last month, John blogged about disclosing material changes to ICFR that result from the new revenue recognition standard – which takes effect at the start of next year. It’s also worth noting that revenue recognition is one of the most common accounting issues that trigger a material weakness. And having a material weakness is more than just embarrassing – SEC Chief Accountant Wes Bricker cited these nasty consequences in his recent speech:
– Companies disclosing internal control deficiencies have credit spreads on loans about 28 basis points higher than that for companies without internal control deficiencies
– After disclosing an internal control deficiency for the first time, companies experience a significant increase in cost of equity, averaging about 93 basis points
According to this Deloitte memo, companies can avoid a material weakness by identifying controls necessary to make judgments under the new standard. Here’s a teaser:
The new revenue standard requires companies to apply a five-step model for recognizing revenue. As a result of the five steps, it is possible that new financial reporting risks will emerge, including new or modified fraud risks, and that new processes and internal controls will be required. Companies will therefore need to consider these new risks and how to change or modify internal controls to address the new risks.
For example, in applying the five-step model, management will need to make significant judgments and estimates (e.g., the determination of variable consideration and whether to constrain variable consideration). It is critical for management to (1) evaluate the risks of material misstatement associated with these judgments and estimates, (2) design and implement controls to address those risks, and (3) maintain documentation that supports the assumptions and judgments that underpin its estimates.
You’ll need to consider one-time controls that relate to implementing the new standard as well as ongoing controls to track information and support sound revenue recognition judgments going forward. And remember – strong controls are also a “must” for your pre-adoption transition disclosures…
Revenue Recognition: Enhance All Of Your Revenue Disclosures…
This blog from Cydney Posner digs in to the myriad of revenue recognition disclosure issues that are coming our way. I blogged last month about transition disclosures – but those are just the tip of the iceberg. In recent remarks, Sylvia Alicea of the SEC’s Office of Chief Accountant explained:
The disclosures required by the new standard are designed to allow an investor to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
The pertinent facts and related reasonable judgments related to a registrant’s contracts with customers, including the significant judgments made in applying the principles of the new revenue standard, should be disclosed to better inform investors’ decisions.
This disclosure will be different & more detailed than what currently exists – and it’s best to think through it before you face a looming reporting deadline.
Revenue Recognition: Impact on Contracts
Here’s a friendly reminder that you should already be incorporating the new revenue recognition concepts in your contracts. This blog by Steve Quinlivan elaborates on drafting tips that align with the 5 steps outlined in the new standard. Here are a few things to watch for:
– In some situations, you might have to combine contracts entered into around the same time with the same customer & account for them as a single contract
– If the contract involves both goods & services – and you want to separately recognize revenue for these deliverables – make sure to draft them as distinct obligations and allocate the contract price
– Variable consideration can make it tricky to estimate & recognize revenue
– Make sure your team understands that performance under the contract – not necessarily timing of payments – triggers revenue recognition
For even more detail on these points, take a look at this speech from Sylvia Alicea of the SEC’s Office of Chief Accountant.
I recommend that you watch my quasi-parody below before you watch the SEC’s video. When I fed my buddies their lines before we taped, I didn’t inform them that this was a spoof. They thought I had written the lines as a joke. After we taped – in just one take! – I showed them that the lines were actually drawn from the SEC’s real video. I call my video a “quasi-parody” because I think we showed more teamwork in creating our version. Let us know your feelings about them in the poll below…
This Nixon Peabody memo cracked me up. It describes a criminal insider trading conviction based on one buddy sliding a napkin to his pal at a bar with the name of a company that was going to be acquired (ie. nonpublic material information – “MNPI”)). What cracks me up is the manner in which some folks share MNPI – as if sliding over a napkin solves the problem of his pal placing a huge order that is totally out of character for him!
Which reminds me of this “Cap’n Cashbags video” that parodies another real-life SEC enforcement action involving napkins & insider trading tips. What’s with the napkins!
I’m thinking of compiling a list of “Top 50 Funny Stories of Insider Trading.” Please send me your ideas. I won’t attribute to you unless you give me permission (as always)…
NYSE Turns 225!
Congrats to the NYSE! As noted in this article, the NYSE celebrated 225 years of trading stocks last week — back in 1792, 24 stockbrokers created the exchange when they signed an agreement to trade with each other…
Tom Conaghan on Doing Beer Deals
In this 27-minute podcast, McDermott Will’s Tom Conaghan discusses his career – including:
– How did you wind up becoming a lawyer?
– How did you wind up selecting securities laws?
– What was the most interesting/challenging thing you have worked on?
– How do you think the practice of securities law has changed over the years?
– How did you get into alcohol beverage deals?
This podcast is also posted as part of my “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…
If you’re a regular reader of this blog, you know that nothing excites me more than when someone fools the SEC’s Edgar & makes a fake filing! A little drool perhaps. Plug the term “fake” into the search box of this blog & you’ll see plenty of fake filings coverage.
The latest involves the filing of a fake Schedule TO-C, making it look like Fitbit was in play (here’s an article from back when that happened). The SEC brought a civil case; the DOJ brought a criminal one. And this dude went through all this trouble – and got into so much trouble – for a measly $3k in profit! Dummy.
According to the SEC’s complaint, Robert W. Murray purchased Fitbit call options just minutes before a fake tender offer that he orchestrated was filed on the SEC’s EDGAR system purporting that a company named ABM Capital LTD sought to acquire Fitbit’s outstanding shares at a substantial premium. Fitbit’s stock price temporarily spiked when the tender offer became publicly available on Nov. 10, 2016, and Murray sold all of his options for a profit of approximately $3,100.
The SEC alleges that Murray created an email account under the name of someone he found on the internet, and the email account was used to gain access to the EDGAR system. Murray then allegedly listed that person as the CFO of ABM Capital and used a business address associated with that person in the fake filing. The SEC also alleges that Murray attempted to conceal his identity and actual location at the time of the filing after conducting research into prior SEC cases that highlighted the IP addresses the false filers used to submit forms on EDGAR. According to the SEC’s complaint, it appeared as though the system was being accessed from a different state by using an IP address registered to a company located in Napa, California.
Shareholder Proposals: The Battle Over BRT’s Reform Proposal Begins
Raising the bar for proponents to get their shareholder proposals on the ballot is a theme in the “Financial Choice Act,” as well as the reform package offered by the Business Roundtable last year. The Choice Act’s reform would go beyond what the BRT seeks, as noted in this Bloomberg article. This article also notes how shareholders are asking questions about the BRT proposal this proxy season. Here’s an excerpt:
Anne Sheehan, director of corporate governance at the California State Teachers’ Retirement System (CalSTRS), and Tim Smith, who leads Walden Asset Management’s shareholder engagement, have also sent letters to the CEOs of nearly 50 companies that are members of the roundtable asking where they stand on shareholder proposals. “We do not believe that the Business Roundtable is reflecting the views of companies with a history of meaningful and constructive engagement with investors,” the letters say.
Another letter from Sheehan and other institutional investors with more than $4 trillion in combined assets was sent May 17 to all members of the House of Representatives as they gear up to vote on the bill soon.
I blogged this on our “Proxy Season Blog” on Friday, but it bears repeating: As noted in this Reuters article, a shareholder proposal at Occidental Petroleum – often referred to as “Oxy” – earned 67% support last week even though the company’s board recommended against. This was a “climate risk two-degree scenario analysis” proposal. As discussed in the Reuters article, BlackRock supported the Oxy proposal — its first support for a climate resolution, which bodes well for future climate proposals (but not all of them).
Now, all eyes are on the ExxonMobil vote on this same issue, May 31st in Dallas (where interestingly, ISS also came out against Exxon CEO’s pay package)…
I worry that some companies might be relying on Congress to step in and delay the implementation of the pay ratio rule. That’s looking less likely by the day. So the time that you have to prepare is narrowing.
It’s also far from clear whether the SEC would take action to delay implementation of a rule required by Dodd-Frank. Then-Acting SEC Chair Piwowar’s re-opening of comments earlier this year did not result in an outpouring of complaints from companies. Beyond 13,000 form letters in favor of pay ratio disclosures, the SEC received about 180 comment letters – of which only about 15% were against the rule. In this blog a few months ago, I linked to some of the comment letters from specific companies. And Ning Chiu blogged yesterday about a specific comment letter.
Our upcoming “Proxy Disclosure/Say-on-Pay Conferences” will comprehensively cover what you need to be doing now to implement pay ratio – with 20 panels spread over two days. Many of the panels will be drilling down into pay ratio issues. Act by June 9th for a 20% early bird rate. You can attend in-person in Washington DC – or watch by video online.
I strongly believe that executive pay should be reformed. My own research demonstrates the substantial benefits to firms of treating their workers fairly. However, disclosure of pay ratios may have unintended consequences that actually end up hurting workers. A CEO wishing to improve the ratio may outsource low-paid jobs, hire more part-time than full-time workers, or invest in automation rather than labor. She may also raise workers’ salaries but slash other benefits; importantly, pay is only one dimension of what a firm provides. Research shows that, after salary reaches a (relatively low) level, workers value nonpecuniary factors more highly, such as on-the-job training, flexible working conditions, and opportunities for advancement. Indeed, a high pay ratio can indicate promotion opportunities, which motivates rather than demotivates workers. A snapshot measure of a worker’s current pay is a poor substitute for their career pay within the firm.
The pay ratio is also a misleading statistic because CEOs and workers operate in very different markets, so there is no reason for their pay to be linked — just as a solo singer’s pay bears no relation to a bassist’s pay. This consideration explains why CEO pay has risen much more than worker pay. As an analogy, baseball player Alex Rodriguez was not clearly more talented than Babe Ruth, but he was paid far more because baseball had become a much bigger, more global industry by the time he was playing. Even if the best player is only slightly better than the next-best player at that position, the slight difference can have a huge effect on the team’s fortunes and revenues.
I agree with some of what Alex says – but he also doesn’t understand that boards can take internal pay into consideration as just one factor in their decisionmaking. And instead of comparing pay ratios of different companies – a company should just be looking at its own pay ratio over an extended period (ie. decades).
In fact, one reason why a company should be doing this internal look is that comparing a CEO’s pay package to peers is a primary cause of how we got into this mess in the first place – peer group benchmarking where CEOs got paid in the top quartile for years & years…
Pay Ratio: From the ’77 Archives
Hat tip to Deloitte Consulting’s Mike Kesner for sharing this 1977 WSJ op-ed from Peter Drucker on the notion of pay ratios. Executive pay was considered excessive even back then!
The full House is expected to vote on – and pass – the “Financial Choice Act” as soon as next week. But as John blogged a few weeks ago, it’s not expected that the Senate will act on the Choice Act. As noted in this article from “The Hill” (and this Bloomberg article), Senator Mitch McConnell reiterated the view that Dodd-Frank reform faced long odds in an interview yesterday. And those remarks came before the Special Counsel Mueller bombshell. Events in DC may dramatically slow down legislation in all areas.
So for those expecting pay ratio to be repealed, you might want to still prepare since time is getting tight for reform…
Meanwhile, as noted in this press release, CII and 53 institutional investors with collectively more than $4 trillion in assets sent letters to all members of the House asking them to not vote for the Choice Act…
A Pet Peeve: Use of PR Firms
One of the “bennies” of this job is that I hear from PR firms all day long. Most of the pitches are completely unrelated to the topics covered on our sites. But some do fit – and sometimes I actually take up an offer to work with a client.
But what annoys me is when I get pitched to talk to someone that I already know. I just received an email to talk to three people that I used to work with! Why didn’t they just email me directly? All it takes is a one-sentence email: “Hey dude. How would you like to [blank].” In my opinion, you’re wasting money on PR – just sit down & bang out a dozen emails – should take about 10 minutes.
I pride myself on being one of the more approachable people in our community. That’s the philosophy upon which I built our sites. It just feels odd. Just south of “I’ll have my assistant call your assistant – and we’ll do lunch.” But maybe I’m overreacting. Let me know what you think…
“Deal Tales”: Our New 3-Volume Series
Education by entertainment. This series of three paperback books – “Deal Tales” – teaches the kind of things that you won’t learn at conferences, nor in treatises or firm memos. With the set containing over 600 pages, John Jenkins – a 30-year vet of the deal world – brings his humorous M&A stories to bear.
This series is perfect to help train those fairly new to deals. And it’s also perfect for more experienced practitioners interested in what another vet has to share. John’s wit will keep you coming back for more. Check it out!
