As I blogged before, buybacks continue to be a source of controversy. Here’s the intro from this IR Magazine article:
More buy-siders than sell-siders believe companies are sacrificing too much to fund expensive share buybacks, according to IR Magazine research into what the investment community thinks about the best way to spend excess cash.
As part of the research for the Investor Perception Study – US 2016, buy-side and sell-side respondents were asked some general questions of interest to the IR community, including: do you think companies are sacrificing long-term organic growth and increasing wages to do buybacks? Forty-one percent of US buy-siders agree with the statement, compared with just 25 percent of those on the sell side. Correspondingly, the sell side is far more likely to disagree with the sentiment (65 percent) than respondents on the buy side (41 percent).
Tune in tomorrow for the webcast – “Company Buybacks: Best Practices” – to hear Skadden’s Kady Ashley, Hunton & Williams’ Scott Kimpel, Simpson Thacher’s Lee Meyerson and Foley & Lardner’s Pat Quick discuss what you should now be considering as you conduct stock repurchase programs. The agenda includes:
1. What is the debate over whether buybacks are the best use of a company’s funds
2. What are the “best practices” for an issuer repurchase program
3. When implementing a buyback, should a Rule 10b5-1 plan be part of it? And if so, what level of control should a company give up? What are the risks?
4. Should a Rule 10b5-1 plan only apply during blackout periods? Should a company just rely on 10b-18 during open windows?
5. How can, and should, a company use multiple 10b5-1 plans/brokers during a certain period
6. How might a stock repurchase stack up against paying cash dividends? Or other alternatives?
7. How to conduct buybacks when engaging in M&A
Cap’n Cashbags: Out-of-Control!
In this 20-second video, Cap’n Cashbags receives $100 million in stock options for the year:
As I blogged yesterday on CompensationStandards.com, the banking regulators are finally rolling out a permanent proposal under Dodd-Frank’s Section 956 regarding excessive incentive pay. The NCUA kicked the proposing off. Here’s the summary from this Sullivan & Cromwell memo (also see this WSJ article – and this blog):
Earlier today, the National Credit Union Administration issued a notice of proposed rulemaking for a new interagency rule on incentive-based compensation that applies to financial institutions with consolidated assets of at least $1 billion. Today’s new proposal replaces one originally issued 5 years ago in the first half of 2011. The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency and the Securities and Exchange Commission are all expected to propose the same new rule.
The new proposed rule establishes general qualitative requirements applicable to all covered companies, additional specific requirements for institutions with total consolidated assets of at least $50 billion and further, more stringent requirements for those with total consolidated assets of at least $250 billion. The general qualitative requirements applicable to all covered institutions include (1) prohibiting incentive arrangements that encourage inappropriate risks by providing excessive compensation, (2) prohibiting incentive arrangements that encourage inappropriate risks that could lead to a material financial loss, (3) establishing requirements for performance measures to appropriately balance risk and reward, (4) requiring board of director oversight of incentive arrangements and (5) mandating appropriate recordkeeping (which replaces the annual reporting contemplated by the 2011 proposal).
As noted in this MarketWatch article – and this WSJ article – Senator Warren is once again taking aim at the SEC, saying it has let down investors by allowing Steven Cohen back into the hedge-fund business…
FINRA: Proposes Delay for New Debt Research Rule
As noted in this MoFo blog, FINRA has proposed delaying further the implementation date of its new debt research rule (Rule 2422) until July 16, 2016. Rule 2422 was set to take effect today, after the implementation date was extended from the initial February 22nd deadline.
To help you access your suitability, I’ve developed what I call the “Board Seat Readiness Audit.” Over many years, I’ve designed for clients a ton of research audits and surveys that used some fancy measurement metrics. (Likert Scale, anyone?) But my goal was brevity, and so I’ve kept this audit simple! I envision someone completing this on a flight from Houston to New York, for instance.
I’ve worked hard to reduce your responses to the good ole “Yes, No, or Maybe,” with the following values: Yes = 3 points; No = 0 points; Maybe = 1 point. Before you begin, take a moment to reflect on your work style and employment history. Above all, be truthful and candid with yourself. (You can find the online version at BoardSeatReadinessAudit.com.)
1. Do you truly have the time to serve?
Saying “yes” to a seat can carry a commitment of five to ten years. In fact, it’s not unusual to serve for ten years or more. This includes attending, on average, six to eight meetings a year (and the travel time to and from those meetings), serving on at least one committee, and being “on call” when unexpected issues arise.
2. Is compensation a secondary motive for you in seeking corporate board service?
If to any degree you are driven by money to seek a seat on a corporate board, think again. There are probably far easier ways to earn it. Board service should ideally happen when you are financially stable and do not “need” the fees or stock.
3. Are you well-informed about board of directors’ liability?
Action 1: testing your readiness – Officers and directors of public companies always face the possibility that investors, regulators, and even criminal prosecutors might challenge their decisions. This increased scrutiny makes it more important than ever that you understand the obligations and potential liabilities inherent in public board service. Beginning in 2001, major corporate accounting scandals at Enron, WorldCom, and other large-cap companies cost investors billions of dollars when their share prices collapsed. This shook public confidence in the US securities markets. Soon thereafter, on July 30, 2002, the Sarbanes-Oxley Act was enacted, which covers the responsibilities of a public corporation’s board of directors, adds criminal penalties for certain misconduct, and addresses issues such as auditor independence, corporate governance, internal control assessment, and enhanced financial disclosure. Bottom line: Public board service comes with serious obligations. Proceed with caution.
4. Do you think like an entrepreneur?
The very best and the most successful companies in America (3M, for instance) have always managed to maintain an entrepreneurial spirit no matter how big they’ve become. A culture that encourages creativity and inventiveness instills in its people passion and an urgency to create, and in its leaders openness to entirely new ideas—many of which come from outside the firm’s respective industry.
5. Are you financially literate?
Financial acuity is an essential proficiency in a board director. While you don’t have to be a CFO or an accountant, you must have the know-how to analyze financial statements. Enron’s and other corporations’ scandals drove legislation to ensure this.
6. Are you a natural mentor?
The role of a director differs greatly from that of an operating executive who is accustomed to “running the show.” Most director time is spent reviewing and assessing strategy, risk, financial reporting, and management performance. Aspiring board members should be comfortable in the role of mentoring. On the Luby’s board on which I serve, we have used a “board buddy” system in which a board director and a senior executive are matched. In my case, I was paired with Scott Gray, the firm’s CFO. He and I meet periodically and exchange ideas. He’s taught me how to dig deeper into financial statements, and I’ve helped him build on his already savvy marketing acumen.
7. Can you bring valuable contacts to the table?
Board directors are expected to make their network of problem solvers available to the corporation’s management team. Do you have a wide network, especially in your field of expertise, and are you generously willing to share their names? For instance, I live in Austin, a city known for its software start-ups. Through networking, I came across a leading-edge technology. It allowed Luby’s to survey customers via a touch-point screen strategically located at the entrance of each restaurant. This information has helped us serve our patrons better. But even more gratifying for me was that, after a year of relentless system testing, Luby’s signed a contract with this deserving start-up, which moved it into profitability.
8. Do you naturally bring humor to stressful situations?
Great board members, like great leaders, have a sense of humor and know how to have fun. But they intuitively understand the rules of humor and don’t have fun at someone else’s expense. Instead, they make light of themselves.
Many stories told by President John F. Kennedy show the power of humor and the art of self deprecation.
The website The Hill shares a few great examples in the article, “Kennedy’s wit and humor: A legacy for political leadership” (November 20, 2013). Dan Glickman wrote, “During the 1960 campaign when pundits and opponents complained about his wealth, he simply replied ‘I just received the following wire from my generous Daddy. “Dear Jack, Don’t buy a single vote more than is necessary. I’ll be damned if I am going to pay for a landslide.”’. . . Or when a young boy asked him how he became a war hero, he gracefully responded that ‘it was absolutely involuntary; they sunk my boat.’ That’s one of my favorite examples.
9. Do you like to dig deep for insight?
Men and women with this gift have a natural curiosity that drives in-depth analysis. This innate talent is prized in the boardroom. James S. Turley, retired chairman and CEO of Ernst & Young, advises: “You are empowered to ask any question as a director. You are not management. Your job is to provide governance and oversight. Outside of board meetings, there is often a lot of homework to be done with managers and understanding how they see the business and how they think. These are serious roles. You don’t just hang out.”
10. Are you a team player?
A team player is generally described as one who communicates constructively, demonstrates reliability, works as a problem-solver, treats others in a respectful and supportive manner, shows commitment to the team, and is skilled at building on the ideas of others. Are these your strong suits?
11. Are you optimistic?
An optimistic mindset enables a board director to view a conflict as a problem to be solved. Rather than focus on blame, he or she will focus on solutions. Boards need men and women with this mindset to avoid gridlock and to move the firm forward. Ask yourself: Would your colleagues describe you as seeing the glass half-full rather than half-empty? Make no mistake: Boards want what Seth Godin calls “a generous skeptic.” That’s the director who can take the opposing position and help shed light on its merits. But, at the end of the day, the best boards work as a team and move ahead with an optimistic, can-do attitude.
12. Are you willing to speak up about sensitive topics?
Boards depend on directors who not only speak up about sensitive topics but also are skilled in framing their points in an honest, confident, respectful, and positive manner. Sensitive topics can range from nepotism and outward signs of prejudice to unanswered telephone calls and queries. In making such probing yet diplomatic remarks, it’s especially important to show respect for the work of the team. Does this kind of diplomacy come naturally to you?
13. Can you cast the lone vote?
Are you capable of casting the lone “no” vote? Can you do so even when your vote is clearly out of step with valued colleagues? My friend and valued colleague Ralph Hasson contributed this question and remembers the so- bering experience well. On a critical vote, he stood alone and voted “no” when the majority of his fellow directors voted “yes” and one abstained. Ralph recalls that afterward, the director who abstained turned to Ralph and said, “I wish I had voted ‘no.’” Like Ralph, I have cast the lone vote. You may be uncomfortable when you do it, but you eventually experience a satisfied feeling of knowing you have looked inside your heart and stood for your values.
What do your colleagues think? After reflecting on your own, have some close friends and colleagues take the same audit on your behalf, imagining you in the boardroom. How do their impressions of you compare with your own? What can their impressions teach you about your true fit for corporate board service?
I received a flurry of questions in reaction to my blog last week about how the two SEC Commissioner nominees faced trouble during the Senate Banking Committee approval process. I turned to Jack Katz – former long-time Secretary of the SEC – to help me sift through these questions:
1. In the recent past (meaning the last 40 years), have any SEC nominees failed to be confirmed?
I can’t remember any nominees who were not confirmed. The closest comparison to this situation was the joint nomination of Norm Johnson and Ike Hunt. They were tied up in holds. Commissioner Johnson was a close friend & former law partner of Senator Orrin Hatch. Hatch ultimately broke the hold on Norm’s nomination and he was confirmed. Commissioner Hunt was not. During the confirmation hearing, Johnson and Hunt had gotten to know each other well. When Johnson learned that Hunt’s nomination was still in limbo, Norm called Hatch and asked him to do what he could to clear Hunt. Hatch did so – and Hunt was confirmed shortly after Johnson.
2. With two Commissioners not sitting, does it take a majority of the three to get something passed?
The quorum rules provide that three Commissioners is a quorum – and a majority of a quorum is sufficient to act.
3. I blogged a while back about needing three Commissioners for a quorum – how did things get done when there were just two Commissioners – Chair Levitt & Commissioner Wallman – back in the ’90s?
Simon Lorne, the General Counsel at the time, anticipated that there was a good chance that we would be functioning with only two Commissioners before it happened. So before it happened, we amended the Commission’s Rules of Practice on quorum and duty officer to provide that if there were only two Commissioners, then two would be a quorum (Rule 200.41 establishes a quorum rule for meetings of the Commissioners). This was an aggressive position that was buttressed by the duty officer authority. Since one Commissioner can act when necessary on behalf of the Commissioner, we felt comfortable that two Commissioners could act when necessary.
The limitation in this position is that the duty officer can’t act on rulemakings – only the full Commission can. So we were very reluctant about a two-person Commission engaging in adoption or amendment of final rules. To the best of my memory, the “Levitt-Wallman Commission” didn’t adopt any final rules – but it did approve enforcement actions. The “two-person quorum rule” was challenged and upheld by the D.C. Circuit (see In Falcon Trading Group Ltd. v. SEC, No. 96-1052 (D.C.Cir.)).
By the way, the duty officer rule requires the full Commission to ratify all duty officer actions. For years, we used to wait for additional Commissioners to come on board to ratify actions for which a quorum didn’t exist at the time of the action – for example, if Commissioners were recused.
1. Companies now taking longer than ever to address issues identified by employees:
– 2015 companies took an average of 46 calendar days to close whistleblower cases, up from 39 in 2014, and 32 in 2011.
– Best practice case closure time is an average of 30 days.
– This trend is especially significant for organizations overseen by the SEC. They have limited time to complete internal investigations under that agency’s whistleblower provisions.
– Outside of this, the trend threatens to undermine employee confidence in their company.
2. Companies are not getting warnings of retaliation:
– Last year’s report found that the substantiation rate of retaliation reports more than doubled over the prior year.
– This higher rate was sustained in 2015 with 26 percent of all reports of retaliation substantiated.
– However, the total number of reports of retaliation that organizations are capturing is still very low – less than one percent of all reports.
– When we look at external whistleblowing – taking an issue to an outside entity – retaliation is still the Equal Employment Opportunity Commission’s most frequently filed charge of discrimination, making up 45 percent of all private sector charges filed.
3. More reports being substantiated:
– Overall 41 percent of all reports received were substantiated in 2015, up from 30 percent in 2010.
– The anonymous report substantiation rate remained at 36 percent in 2015, the same rate as in 2014 and 2013.
4. Report volume remains at an all-time high:
– Between 2010 and 2014 a significant rise in the reporting rate occurred, a 44 percent increase since 2010, where the median was 0.9 reports per 100 employees, to 1.3 reports per 100 employees.
– In 2015, the reporting rate remained at the elevated level of 1.3 reports per 100 employees.
More on our “Proxy Season Blog”
We continue to post new items regularly on our “Proxy Season Blog” for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– CalPERS & AFL-CIO Announce Proxy Season Priorities
– Proxy Access: Vanguard Reduces Preference to 3%
– Annual Meeting Preparation: Considerations & Tips
– Audit Committee Considerations for Enhanced Disclosure
– SEC Comment Letters: Trend Towards Reviews Resulting in No Comments
– Webcast Archive: “Challenges in Compliance & Corporate Governance”
As noted in this press release, the SEC has a new filing fee estimator for companies. This tool is designed to assist registrants in preparing filing fee-related information for EDGAR filings – it’s optional to use & isn’t a substitute for doing your own calculations (as noted in our “SEC Filings Handbook,” there can be some tricky scenarios). The SEC will be building it out to include more forms & scenarios over time…
XBRL: Watch The Errors
As a reminder that making mistakes in your XBRL filings can happen, see this blog. However, the blog incorrectly insinuates that Corp Fin issued a comment to Goldman Sachs that resulted in the company having to amend its Form 10-K. The reality is that the error was self-caught and a reported printer error – and while not material, the company told the SEC about it as a matter of course when correcting….
Understanding the SEC Research Industry
Check out this 40-minute podcast with Phil Brown, who is the Chief Strategy Officer of Intelligize – & the former Co-Founder & CEO of GSI Online. Phil addresses these topics:
– How did you get into this business?
– What were things like in the beginning for your business?
– What was Edgar like in the beginning?
– How did all this work out for you personally?
– How crazy was it to FOIA all those Corp Fin comment letters?
– Can you tell us about the “great water heater incident”?
– What is the “conflicts authority” failure?
– What is Intelligize?
Hi there! This is Julie Kim, the newest member of TheCorporateCounsel.net team. As noted in my bio, I spent 9 years in-house – and six years in a law firm – in NYC before relocating to sunny Southern California. Broc asked Susan & I to think of five reasons why we hate the proxy season to kick us off on this blog.
Now, you probably have one of three reactions:
– “Only 5 reasons? Are you kidding? I can think of 20!”
– “Thank goodness somebody else at my company/firm deals with the proxy statement. Those poor suckers.”
– “This looks like a Huffington Post article. Is this website now resorting to click bait?”
For those of you still reading – whether out of misery or schadenfreude – please know I don’t think my 5 reasons have caused me to feel an emotion as intense as hatred. They did, however, make me have some existential moments where I questioned the very meaning and value of my profession.
I don’t know. Maybe it was hatred after all.
1. Scheduling – and participating in – an endless number of meetings involving a cast of thousands (the company’s in-house working group, outside counsel, shareholder proponents, etc.) regarding various parts of the proxy statement during a very busy time for all.
2. Once December comes rolling around, not being able to attend weekday holiday parties because you have to make the board mailing deadline – or the courier delivery deadline for procedural deficiency letters. Essentially, you’re saying goodbye to your friends until March or April.
3. Those other companies with their beautifully designed proxy statements in eye-catching colors, making the rest of us look bad.
4. Surprise NEO perquisite issues, leading to stressful discussions about the SEC’s perks guidance and proxy disclosure rules.
5. Post-10-K fatigue so that everyone then forced to turn to the proxy statement – other lawyers, the controller’s group, outside auditors, etc. – are grumpy and impatient.
For those of you in the home stretch of proxy season, good luck and know that you are not alone!
And 5 More Reasons Why I Hate the Proxy Season
Hi everyone. Susan Reilly here, excited to start blogging after spending a year quietly lurking on the team! Here’s my bio – and here’s my list:
1. Clients who ask for hand-marked comments on a PDF version of the proxy statement. This was the bane of my existence when I was a junior lawyer.
2. Having to draft shareholder proposal statements in opposition before hearing from the Corp Fin Staff that you have to include the proposal. This is especially frustrating when you’re confident the proposal will be excluded – but you still have to send the statement in opposition to the proponent by the 30-day deadline.
3. Waiting until the last minute (compliance/rule check) to make outside counsel aware of related party transactions/independence issues. Since these relationships have a huge impact on ISS & Glass Lewis voting recommendations, knowing what to disclose and how to disclose it is critical – and it’s easy to miss some of the nuances.
4. Proxy statements that repeat the same information in multiple places. Of course, it makes sense to highlight certain important information in the executive summary and also later in the proxy statement, but nobody needs to read about the voting standard four times!
5. Five months of non-stop craziness. Moving straight from shareholder proposals, to preparing the 10-K, then the proxy statement and first quarter 10-Q . . . all without coming up for air in between.
Why Do You Hate the Proxy Season?
Send reasons why you hate the proxy season to Broc – and he’ll compile them anonymously and blog them. Tis the season to hate!
– FAQ #2: Which equity compensation proposals are evaluated under the EPSC policy?
– FAQ #17: If a company assumes an acquired company’s equity awards in connection with a merger, will ISS exclude these awards in the three-year average burn rate calculation?
– FAQ #28: How does ISS evaluate an equity plan proposal seeking approval of one or more plan amendments?
– FAQ #29: How are plan proposals that are only seeking approval in order to qualify grants as “performance-based” for purposes of IRC Section 162(m) treated?
– FAQ #30: How are proposals that include 162(m) reapproval along with additional amendments evaluated?
– FAQ #31: How does ISS evaluate amendments by companies listed in France that are made in response to that market’s adoption of the Loi Macron (Macron Law)?
– FAQ #47: How does ISS determine the treatment of performance-based awards that may vest upon a change in control?
Director Viewpoints: Desired Director Attributes & More
According to Corporate Board Member’s annual “What Directors Think” survey, directors continue to rank industry expertise as the most important new director attribute (83%), followed by financial experience (78%), gender diversity (59%), and CEO experience (55%) – other results include:
– Long-term strategic planning is the primary issue directors wish to spend more time on – followed by innovation/disruption and cyber risk.
– Most respondents say they are satisfied with the level of information and in-person reporting they receive from their CFO (94%), CEO (93%), GC (90%), internal audit (88%), CCO (84%), and CIO/CISO (65%).
– At least 1/3 of respondents believe information flow between their board and management could be improved through a higher frequency of updates (36%), more concise reporting (31%), or in the time allotted to review materials prior to a meeting (34%). Other communication components directors believe could be of benefit include additional onsite visits with managers (44%) and more time allotted to discussing critical agenda items (47%).
– Nearly 1/3 of respondents worry that direct shareholder engagement carries undue risk of board and individual director liability; 28% say it elevates the risk of violating Reg. FD; 21% think it creates a wedge between the CEO and the board: and 14% believe direct engagement creates undue influence on the board.
– While half of the directors believe the recent wave of hedge fund activism has created more awareness for the need for good governance, 62% believe it has reinforced and rewarded short-termism.
SEC Enforcement: Document Why Significant Deficiency Isn’t a Material Weakness
The SEC recently announced settled administrative proceedings against Magnum Hunter Resources Corporation (MHR), the former chief financial officer and chief accounting officer of MHR, the engagement partner on MHR’s external audit, and the lead consultant responsible for documenting and testing MHR’s internal control over financial reporting (ICFR). The SEC states in the five orders issued on March 10 that registrants must fully document why a significant deficiency in ICFR is not a material weakness. Adequate documentation to provide reasonable support for the assessment of the effectiveness of ICFR is required by Instruction 2 to Item 308 of Regulation S-K and the SEC’s guidance relating to management’s report on ICFR in Financial Reporting Release No. 77.
This blog was not hacked. I scrapped what I had planned to post so that I can try a little social experiment. Below is a poll about whether you only bothered to read this blog because it said “Trump & Sausages.” But don’t fear, this blog really is about those two topics – and in the context of our community!
Annual Meeting Disturbed By (Thrown) Sausages!
As noted in this article from “The Guardian,” a fight between shareholders over free sausages at Daimler’s annual meeting broke out. The company served 12,500 sausages to the 5500 shareholders who attended. That’s a lot of meat! Brings back memories of Animal House’s “food fight” scene. “That boy is a P-I-G, pig”…
A Real Trump Deal Cube!
If you’re relatively new to this blog, you missed my year of running a March Madness-style contest pitting the hundreds of toys in my “Deal Cube Museum.” I was showing off the museum to a friend recently & was reminded that it does indeed include a Trump deal cube!
Poll: How Often Do You Read This Blog?
Take this anonymous poll about how often you read this blog:
I don’t want the SEC to modernize Regulation S-K! That means I’ll have to update 1500 pages of our “Handbooks“! At least the SEC is not touching Item 402 – at least not yet.
Here’s an excerpt of this blog by Cooley’s Cydney Posner with notes from the open Commission meeting (also see this WSJ article):
Although the concept release has not yet been posted nor have any of the Commissioners’ remarks, the presentations and discussion at the meeting indicated that the release will address three basic topics: framework, line items and presentation and delivery.
Framework. The staff observed that, although there are some prescriptive and structured elements, the current requirements are largely principles-based, with disclosure determined on the basis of “materiality” as defined in TSC Industries, Inc. v. Northway, Inc., specifically, whether there is a substantial likelihood that a reasonable investor would consider the information important in decision-making and whether a reasonable investor would view the information to significantly alter the “total mix” of information available. However, Chair White also recognized the importance of not burying material information in an avalanche of trivia. Considering the costs and benefits, including the expressed interests of shareholders in receiving more information and the expressed interests of companies in efficiencies, how should the disclosure requirements be structured? Should some level of investor sophistication be assumed? As Commissioner Stein suggested, should the system be re-imagined? for example, she questioned why the release did not address concepts as basic as the form-based system.
Line items. The discussion indicated that the release addresses six items: core company disclosure, company performance (primarily financial), risk, securities, industry guides and exhibits. The release also considers whether the categories for scaled disclosure are appropriate and whether recent topics of interest and shareholder engagement should be added to the requirements, for example, stock buybacks and sustainability. In addition, the release hints at the prospect of semi-annual, instead of quarterly, reporting.
Presentation and delivery. Here, the release will consider various approaches to presenting and accessing the disclosure and ways to reduce repetition, including cross-references, incorporation by reference, hyperlinks, company websites and standardization versus flexibility. Stein expressed the concern that, in considering whether the quantity of information is excessive, the SEC needs to balance that with concerns about the quality of information. In addition, she observed that a re-imagined delivery system should take into account that different generations may prefer to have their information delivered in different ways, for example, a younger audience may prefer to receive information through tweets.
Technical question: So why is this a “concept release” – but the S-X counterpart was just a “request for comment”? Maybe to satisfy the FAST Act’s requirement for an S-K study? No idea. Here’s the opening statements from the various Commissioners about the concept release…
Deferred Prosecution Agreements: DC Circuit Limits District Court Review
In a case with significant implications for the power of district judges to review the terms of deferred prosecution agreements (“DPAs”) between the Department of Justice (“DOJ”) and corporations to resolve criminal investigations, on April 5, 2016, the United States Court of Appeals for the District of Columbia Circuit took the extraordinary step of granting a writ of mandamus and vacated a lower court decision that had the practical effect of rejecting a DPA between the DOJ and an aerospace services company, Fokker Services, B.V. The case has significant implications in light of a judiciary that has been increasingly questioning the terms (and in some instances, the wisdom) of the DOJ’s decisions to enter into DPAs.
Anti-Bribery Study: 600 CCOs Weigh In
I couldn’t resist blogging about this new Hogan Lovells’ study on anti-bribery & corruption because I just love the microsite that the firm created to house the thing. The microsite not only houses the study, but it has a self-assessment compliance quiz & more. The study is based on interviews with 604 chief compliance officers (CCOs) and equivalent roles in more than 600 of the world’s largest organizations in Europe, U.S. and Asia. The study’s findings include:
– Commercial priorities push anti-bribery and corruption down the agenda
– 57% of chief compliance officers say sales culture is a major threat
– 28% of companies fail to tailor global anti-bribery programs to local markets
– 53% of companies train half their staff or less in anti-corruption
– Significant business operations “hidden” from chief compliance officers
I think this will be a trend going forward where firms work harder on their marketing to showcase the hard work that they’ve done…
A while back, we blogged about a study showing a five-year decline in the number of Form 10-K & 10-Q comment letters issued by Corp Fin. We ran a poll as to why the number of comment letters has declined – and most folks thought it was due to companies doing a better job with their disclosures (34%); followed by Corp Fin being too busy reviewing deals (31%) and the fact that there are fewer public companies these days (9%; there’s been a 30% reduction in the number of public companies since 2000).
But here’s a response from Reid Hooper of Covington & Burling about a possible reason that we didn’t poll on:
The reason why the number of Form 10-K/10-Q comment letters has been falling for the past few years is relatively straight-forward. The Corp Fin Staff has a much higher materiality threshold. One reason could be a shift in Staff focus from commenting on ’34 Act reports to a “fuller” review of repeat issuer registration statements. Another reason for the possible change in the staff’s materiality threshold could be due to the change from a rules-based exam report to a more principles-based approach when reviewing Form 10-K/10-Qs.
Comment letters on a Form 10-K are now just 1-2 comments (depending on the reviewer & group) – and the comments will now almost always be “futures” comments. In those instances where the Staff may seek an amendment to a Form 10-K/10-Q, the comments generally relate to a material disclosure matter rather than a mere matter of technical compliance.
After hearing Corp Fin Director Keith Higgins this weekend at the ABA conference, it appears that Reid is indeed correct. Keith talked about how Corp Fin has raised its materiality threshold in issuing comments – and how the Office of Disclosure Standards has assisted the Division in being more consistent about the type of comments issued. Corp Fin’s comments are more likely to impact the significance of disclosure these days – rather than ensure mere compliance with a regulation that doesn’t necessarily elicit disclosure that has real meaning.
Keith also noted that the Staff tends to issue more industry-specific comments these days. And he felt we were doing a better job in drafting – so that we can take some credit for the reduction in comments…
Here’s Congressional testimony about the SEC’s budget from Chair White yesterday. It looks like Corp Fin won’t be increasing its head count. And that Corp Fin reviews the filings of 9100 companies. And today is a big day – the SEC Commissioners meet on a Reg S-K concept release!
PCAOB: “Auditor Supervision of Other Auditors” Proposal
Yesterday, the PCAOB proposed changes to a slew of existing auditing standards that would strengthen existing requirements and impose a more uniform approach to a lead auditor’s supervision of other auditors. Here’s the proposing release.
Auditors that Prepare the Corporate Tax Return Tend to Do So Cautiously
Here’s a nugget from Baker & McKenzie’s Dan Goelzer: An academic study finds that the corporate tax returns of companies that retain their financial statement auditor to prepare the return take less aggressive tax positions than do returns prepared by either the company itself or by other kinds of external advisers. The study, “Auditors, Non-Auditors, and Internal Tax Departments in Corporate Tax Aggressiveness,” was conducted by Kenneth J. Klassen, University of Waterloo, Petro Lisowsky, University of Illinois at Urbana–Champaign Norwegian Center for Taxation, and Devan Mescall, University of Saskatchewan. It is based on a review of uncertain tax positions reported under FASB Financial Interpretation No. 48 (FIN 48) by companies in the S&P 1500 during 2008-2009, coupled with information obtained from the IRS regarding the signer of the corporate return.
The full text of the study appears in the January-February 2016 issue of the American Accounting Association’s publication, The Accounting Review (available for purchase). The study’s abstract states:
“Using confidential data from the Internal Revenue Service on who signs a corporation’s tax return, we investigate whether the party primarily responsible for the tax compliance function of the firm—the auditor, an external non-auditor, or the internal tax department—is related to the corporation’s tax aggressiveness. We report three key findings: (1) firms preparing their own tax returns or hiring a non-auditor claim more aggressive tax positions than firms using their auditor as the tax preparer; (2) auditor-provided tax services are related to tax aggressiveness even after considering tax preparer identity, which supports and extends prior research using tax fees as a proxy for tax planning; and (3) Big 4 tax preparers, in particular, are linked to less tax aggressiveness when they are the auditor than when they are not the auditor.”
The authors explanation of their findings is that the auditor has more downside risk if tax positions underlying the return are rejected by the IRS than do other tax preparers, including the company’s tax staff. The auditor’s higher risk exposure stems from two sources: “(1) financial reporting restatement risk due to an audit failure related to the tax accounts; and (2) reputation risk, in that the auditor-preparer’s work is more visible and sensitive to the firm’s leadership.”
As to the later point, the authors argue that audit committee pre-approval of auditor tax services, required under the Sarbanes-Oxley Act, exposes the board to potential embarrassment if the company’s tax positions are rejected and that this risk incentivizes the auditor to be more cautious. “[I]f the firm employs its auditor for tax services, then its audit committee has explicitly sanctioned this relationship under the requirements of the Sarbanes-Oxley Act of 2002 (SOX). Therefore, the board of directors, as well as managers, may bear additional costs if negative tax outcomes result * * *, relative to the case if the tax work was conducted separately from the audit.” The authors also note that the PCAOB’s rules prevent the financial statement auditor from advising the company to use tax strategies that have tax avoidance as a significant purpose and do not meet the standard of “at least more likely than not to be allowable.” Other return preparers are not subject to this limitation.
Comment: Traditionally (i.e., since the early 2000s), non-audit services, including tax preparation, have been regarded as potential threats to auditor independence and therefore to audit quality. The theory behind this view is that the greater the aggregate fees the auditor is generating from the client, the less inclined the firm’s personnel will be to risk the relationship by challenging management’s views on financial reporting issues. This study looks at the issue from another perspective – promoting tax compliance – and suggests that, when viewed through that lens, auditor return preparation creates positive incentives. Of course, an audit committee considering whether to approve return preparation as a non-audit service would need to weigh a variety of factors, in addition to the auditor’s potential tax conservatism, including (1) cost of the service, relative to other options; (2) the level of in-house tax expertise; (3) the value, in the company’s circumstances, of having more than one perspective on the tax reserve; and (4) the risk of disagreements between the preparer and the auditor resulting in additional FIN 48 disclosures.
Spanking brand new. By popular demand, this comprehensive “Non-GAAP Financial Measures Handbook” covers a challenging topic, from the basics to everything you want to know about Regulation G, Item 10(e) of Regulation S-K & Form 8-K’s Item 2.02. This one is a real gem – 89 pages of practical guidance – and its posted in our “Non-GAAP Disclosures” Practice Area. Big HUGE hat tip to Joe Alley of Arnall Golden Gregory for authoring this beast! This is a hot topic, as noted in my blog last week entitled “Non-GAAP Financial Measures: Will the SEC Curb Their Use?“…
On my “wish list” from the SEC, I’ve had a wish that the SEC would inform us when EDGAR is experiencing problems – or problems are resolved – through a blog or other sort of channel. Good news! The SEC’s Filer Support team recently implemented an “announcement” functionality on the “Information for Filers” page. It’s a RSS news/announcement feed that folks can sign-up to receive an email every time that Filer Support has something important to note (i.e. EDGAR closings, change in support hours, etc.).
Each announcement will be posted on both the “Information for Filers” page – and this “Announcements” page. I’m not certain whether the announcements will include information about outages & other problems – but fingers crossed…
Board Diversity: Shareholder Nominees Come Under Fire
A few months ago, I blogged about an interview with SEC Chair White about board diversity & activism – but that interview tackled the two topics separately. This recent Bloomberg article has raised eyebrows as it shows that – since 2011 – only 7 of the 174 people nominated to boards by five of the largest US activist funds have been women. Here’s an excerpt from this Davis Polk memo about this news:
This is not a surprise given that shareholder activist funds often nominate their employees, and to date their senior employees remain predominantly men. (A “pipeline” problem does not, of course, fully explain the numbers since shareholder activist funds also nominate independent directors who are not employees.) These news reports echo Andrew Ross Sorkin who raised the question last year of whether shareholder activists target women CEOs, noting that although only 23 women lead companies in the S&P 500, nearly a quarter of them have been in the crosshairs of shareholder activists. We recognize that shareholder activists are not alone in having room for improvement when it comes to diversity – most of the companies they target and the professional services firms that advise on these matters could improve in this area as well.
