Recently, I blogged about how the China-based affiliates of the Big 4 (Deloitte Touche Tohmatsu, Ernst & Young, KPMG and PwC) settled SEC administrative charges by each paying $500k and admitting that prior to the commencement of the agency’s enforcement proceedings, they didn’t provide the SEC with the work papers for audits conducted for US companies. Here’s some thoughts from Baker & McKenzie’s Dan Goelzer on the settlements:
While the settlement is a victory for the SEC in the sense that it results in findings that the four firms violated the law and imposes sanctions against them, as a practical matter, the settlement seems to vindicate the firms’ position. In the future, a firm’s obligation in the event of an SEC work paper request will be to provide the work papers to the Chinese authorities, who will then make the final decision as to what should be provided to the SEC. This approach seems to acknowledge that the firms need not violate Chinese law in order to comply with Section 106, just as the firms had argued.
From a public company audit committee perspective, the significance of the settlement is that it removes the risk that the Big Four might be unable, for some period of time, to perform audit work in China, thus complicating the ability of SEC-registered companies with operations in China to complete their audits. However, the settlement leaves unresolved the issue of PCAOB inspections of China-based accounting firms. Unless and until the Chinese government consents to PCAOB inspections in China, the risk remains that the China firms will be de-registered by the PCAOB and that audits of U.S. public companies with operations in China will be disrupted.
In comparison, this WSJ editorial – and piece from the “China Accounting Blog” thinks that the SEC caved; here’s an excerpt:
I believe that the SEC went after the Big Four firms intending to use the lawsuit as a way to coerce China to the negotiating table. The Big Four are not the problem with the widespread fraud that has plagued US listed Chinese companies. The problem, of course, is corrupt company officials. The firms should have done a better job vetting new clients, and have faced challenges with adapting audit processes to Chinese business practices. The explosive growth of these firms has left them short of experience – especially with inadequate numbers of “no-hair, gray haired” partners with well-seasoned judgment. In my opinion, the Big Four are doing their best in a difficult market, and because of the failure of the SEC and PCAOB to effectively regulate US listed Chinese companies, the Big Four are the only meaningful line of defense for investors.
In my view, banning the Big Four was never the objective of the SEC. The suit was a way to show Chinese regulators that the SEC was willing to deploy the “nuclear option” of kicking Chinese companies off U.S. exchanges. The SEC apparently believed that the threat of delisting Chinese companies would bring Chinese regulators to the negotiating table. The SEC miscalculated and Chinese regulators called their bluff. In the end, banning the firms, which would lead to a mass delisting of Chinese companies from US exchanges, was simply a step too far for the SEC to take. I am sure the SEC was heavily lobbied by US investment banks, lawyers, and accounting firms that have lucrative business interests in keeping capital flowing.
So today we have different rules for Chinese companies that list in the US than we have for others. Not only is the SEC dependent on Chinese regulators to decide what documents they can see, the PCAOB remains unable to conduct inspections of auditors. But the different rules go beyond auditing. Other rules, like Regulation Fair Disclosure, do not apply to US listed Chinese firms, creating an unfair market for investors.
In this blog, David Smyth does an about-face from his other blog on the topic of how the SEC handles injunctions. I can relate as blogging sometimes tests your mettle as its challenging to think of all the possible permutations about a topic when writing about it. Here’s an excerpt from the new blog:
Last week I wrote a post discussing the injunctions the SEC typically obtains against defendants in federal court. I noted the oddity of these obey-the-law injunctions and wondered aloud why the Commission never pursues findings of contempt when those defendants disobey the very provisions they were ordered never to disobey again.
In a comment to the post, Robert Knuts noted “[t]wo simple reasons. 1. A permanent injunction triggers potential collateral consequences under various provisions of the Federal securities laws. 2. If such a recidivist went to trial, the violation of the prior injunction would likely lead to maximum civil penalties.”
These are both probably true. The first certainly is. Especially for large financial institutions, limiting and avoiding the collateral consequences of SEC injunctions and other regulatory sanctions can be almost its own practice area. I had meant to mention this in the original post and forgot in the late night fog of composition. As for the second, I don’t have supporting data, but violation of prior injunctions certainly wouldn’t be helpful to a defendant in a second go-round with the SEC in federal court. So the original injunction would have value to the Commission in that respect.
A few days ago, ISS released the following three new FAQs to its “Equity Plan Scorecard FAQs” (so there were 20 FAQs before; now there are 23):
FAQ #11: Are there additional factors that could result in a recommendation on an equity plan proposal that differs from the EPSC “score” recommendation, including proposals with “bundled” amendments?
Yes. Plans that seek approval solely to qualify awards as tax deductible compensation under Internal Revenue Code Section 162(m), for example, will generally receive a positive recommendation as long as all members of the plan’s administrating committee are determined to be independent directors, per ISS’ standards. In addition, plans being amended without a request for additional shares or another modification deemed to increase potential cost (e.g., extension of the plan term) may receive a recommendation based on the overall impact of the amendments regardless of the EPSC score – i.e., whether they are deemed, on balance, to be beneficial or detrimental to shareholders’ interests.
FAQ #22: How will ISS assess a plan’s minimum vesting requirement for EPSC purposes?
In order to receive EPSC points for a minimum vesting requirement, the plan should mandate a vesting period of at least one year which should apply to no less than 95 percent of the shares authorized for grant.
FAQ #23: How does the treatment of performance-based awards affect determination of whether a plan provides for automatic single-trigger accelerated vesting upon a change in control?
ISS will deem performance-based awards as being subject to automatic accelerated vesting upon a CIC, unless (1) the amount considered payable/vested is linked to the degree of performance attainment as of the CIC date, and/or (2) the amount to be paid/vested is pro-rated based on the time elapsed in the performance period as of the CIC date.
15 Cool Things About GE’s 2015 Form 10-K
This 1-minute video describes how General Electric overhauled its Form 10-K this year to make it investor friendly (here’s a hard copy of the slides in the video):
A View on Proxy Access
In this podcast, Matt Orsagh of the CFA Institute discusses proxy access, including:
– Can you summarize the key results of the CFA Institute’s 2014 research on proxy access?
– Given that proxy access is no longer a back burner issue, does the CFA Institute still believe that SEC rulemaking mandating proxy access is warranted or necessary?
– Does the CFA Institute’s position on proxy access take into account the diverse investor and issuer communities, and associated disparate views on proxy access?
– Does the CFA Institute support private ordering?
– What should investors and companies do now in light of the SEC’s suspension of views on the application of 14a-8(i)(9)?
Also see this blog by Mike Gettelman about how a management proxy access proposal would trigger a preliminary proxy statement filing…
In an effort to entice more investors to read it, General Electric has overhauled its Form 10-K this year – and the final product is quite impressive. In a nutshell, the company has applied its enhanced usability principles that it learned from upgrading its proxy statement (see my video from last year about that) to its 10-K. A video on this exciting development is coming soon – but you can learn much about what GE did to enhance the 10-K in this 15-page presentation posted in our “Usable Disclosure” Practice Area.
Here’s a WSJ article on GE’s 10-K. And here’s a Seeking Alpha interview with GE’s CFO Jeff Bornstein entitled “How We Have Reimagined Our Financial Reporting”…
Warren Buffett’s Annual Letter to Shareholders
A few days ago, Warren Buffett released his annual letter to shareholders, his 50th and its more than 40 pages! Here are some articles about it:
Interestingly, Buffett’s annual letter declines to clarify the succession plan at Berkshire Hathaway (as noted in this article) – but Vice Chair Charlie Munger wrote his own letter (starts at page 38) to shareholders and named two potential CEO successors (as noted in this piece)…
Coming Soon: “The Women’s 100 Conference” in Palo Alto
I’m excited to say that we are holding a 2nd annual “Women’s 100 Conference” in DC this year on Monday, June 1st – and it’s already sold out without even marketing it (but the waiting list is short right now). In addition, I am holding a 1st annual on the West Coast – on Tuesday, June 9th in Palo Alto. That one is nearly sold out – but there are a handful of slots left (plus a few folks typically drop out – so there likely would be some movement if you get placed on a waiting list). The attendees are a mix of in-house, law firm & investors of all ages.
If you are interested in more information about either event, please email me. It is heavily geared towards networking and the panels are intimately interactive with the audience (see this framework & agenda and this 1-minute video from last year for an inkling of what the event is like)…
Here’s my reaction when I learned of this new development:
It looks like the Corp Fin Staff has reversed course on a line of proposals that asks the board to adopt a policy that the board chair shall be an independent director who is not a current or former employee of the company, and whose only nontrivial professional, familial or financial connection to the company or its CEO is the directorship. After Pfizer received a no-action response from the Staff in December allowing the exclusion of this type of proposal for being vague & indefinite under (i)(3) (which itself was an extension of this Abbott Labs letter dated 1/13/14 – there the proposal said that the directorship could be the “only connection” to the company and the Staff allowed exclusion as vague under (i)(3)), a number of companies filed similar no-action requests.
Then last week, the Staff started to issue responses to those requests (eg. this one to Boeing) and it appears to have changed its tune. Here’s an excerpt from those Staff responses:
We are unable to concur in your view that ____ may exclude the proposal under rule 14a-8(i)(3). You have expressed your view that the proposal is vague and indefinite because it does not explain whether a director’s stock ownership in accordance with the company’s stock ownership guidelines is a permissible “financial connection.” Although the staff has previously agreed that there is some basis for your view, upon further reflection, we are unable to conclude that the proposal, taken as a whole, is so vague or indefinite that it is rendered materially misleading. Accordingly, we do not believe that ______ may omit the proposal from its proxy materials in reliance on rule 14a-8(i)(3). (emphasis added)
I highlighted the “upon further reflection” language above because I don’t recall ever seeing that language in a Staff response before. So with the (i)(9) debate raising the profile of the shareholder proposal process, it’s possible that the playing field may continue to evolve for no-action requests under Rule 14a-8…
Add this to the list of things that will be discussed during our March 24th webcast: “Proxy Access: The Halftime Show”! Also check out this blog that I just posted in our “Proxy Season Blog” about shareholder proposals and the background of audit committee members…
Shareholder Proposals: Delay in No-Action Responses?
Last week, we got this query in our “Q&A Forum”:
Any idea what is going on at Corp Fin? They haven’t published a 14a-8 ruling in almost a week and I have clients who filed in mid-December – over 2 months ago – still waiting for a ruling. Many companies are going to press in the next week or two. Any insight?
The Corp Fin Staff works so hard on this thankless task that I am loathe to say it, but it does seem that they are behind – maybe not in numbers (it appears they have issued only slightly fewer letters compared to the same time last year and that could just be due to the time it takes to update their website), but by leaving some letters raising substantive arguments to be decided closer to 60 days after the requests were filed with the Staff. They may have fallen behind on the harder letters because they have been dealing with the sticky (i)(9) issue – and also because there are more no-action requests this year compared to last year. Moreover, even with the Staff declining to respond to the (i)(9) arguments, some of those would-be-and-now-partially-stunted requests raise arguments under other exclusion bases, plus some companies have filed supplemental requests raising alternate arguments since (i)(9) is no longer a viable argument this proxy season.
Remember that if you have a looming print deadline, you need to call the Staff and alert them to that as they typically make every effort to accommodate companies who might incur additional costs if they print belatedly. Or to accommodate companies facing a notice & access deadline as they need to know whether to include the proposal on the notice when they get it printed & mailed in time (ie. sending the notice at least 40 days in advance of the meeting date)…
Webcast: “Merger Filings with the SEC: Nuts & Bolts”
Tune in tomorrow for the DealLawyers.com webcast – “Merger Filings with the SEC: Nuts & Bolts” – to hear Dennis Garris of Alston & Bird, Laurie Green of Holland & Knight and Jim Moloney of Gibson Dunn discuss the nuts & bolts of preparing disclosure documents that are filed with the SEC, including practical guidance into what should be disclosed (or not disclosed) to minimize litigation risk – as well as how to handle common Corp Fin comments.
If you head to our home page today, you’ll see that we have launched a newly redesigned site! Long overdue, it’s my first rethink since I completely overhauled the site when I took it over in January 2003. The reality is that only the home page has changed. The underlying content is the same, the blogs are the same, etc. If you have subscribed to have a blog or eminders pushed to you, you will still receive them as you always have. And there is no log-in box on the home page, as you will only be prompted to log-in when you encounter members-only content.
My primary redesign goal was to enable you to more easily navigate to our main areas of content, which is accomplished now through the prominent 16 tabs at the top of the home page (for example, the 500+ Practice Areas are accessible from the top left tab rather than being forced to scroll through a long left column of the home page). And you’ll see that the rest of the page isn’t cluttered anymore. Rather, the bulk of the home page highlights developing news & key resources. A secondary goal was to have the home page look “clean” on any mobile device. Give me your honest feedback please!
Webcast: “Conduct of the Annual Meeting”
Tune in tomorrow for the webcast – “Conduct of the Annual Meeting” – to hear Randy Clark of Sempra Energy; Angela Hilt of Clorox; Jeff Taylor of Pepco, Carol Ward of Mondelez International and Carl Hagberg of The Shareholder Service Optimizer explain how they handle the many challenges of running an annual shareholders meeting.
Our March Eminders is Posted!
We have posted the March issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
A few weeks ago, I blogged that General Electric and two other companies had adopted proxy access bylaws in the face of shareholder proposals seeking access. Now comes the news from this WSJ article (& this Reuters piece) – in this case, Citi will support the adoption of the 3%/3-year formula sought by the shareholder proponent, Jim McRitchie, after he changed his formula as noted in this blog. Here’s the draft support language for Citi’s proxy statement. So the Citi situation isn’t quite like the other companies because the company hasn’t adopted proxy access – rather, it has just agreed to support an amended non-binding shareholder proposal…
Meanwhile, a coalition of 17 groups sent this letter to the SEC on Wednesday expressing concern about the SEC’s decision to review its (i)(9) views in the midst of the proxy season…
The U.S. Securities and Exchange Commission has sent letters to several companies asking for years of nondisclosure agreements, employment contracts and other documents to investigate whether companies are muzzling corporate whistleblowers, the Wall Street Journal reported. The inquiries come as SEC officials have expressed concern about a possible corporate backlash against whistleblowers, the newspaper said. It couldn’t be determined how many or which companies were sent the letters or what penalties the SEC could potentially levy in the probe, the Journal said.
Transcript: “Proxy Solicitation Tactics in M&A”
We have posted the transcript for the recent DealLawyers.com webcast: “Proxy Solicitation Tactics in M&A.”
I just love how Kevin LaCroix details his trips in his blog – the latest is about Australia! And coming this weekend, the first site redesign for TheCorporateCounsel.net in over 12 years! Email me if you want a preview…
Recently, SEC Commissioner Piwowar delivered this speech entitled “A Fair, Orderly, and Efficient SEC.” The piece of the speech that interested me was the one below calling for shorter adopting releases – and perhaps even breaking rulemakings into smaller parts. Before I give my ten cents, I am interested to hear your feedback on the Commissioner’s remarks – email those to me and also provide your anonymous responses to the two surveys just below this excerpt from the speech:
Fairness demands that the Commission not act arbitrarily or capriciously. Those we regulate therefore should know the rules and standards to which they will be held. While we cannot guarantee that everyone has actual knowledge and understanding of our entire rule set, it is incumbent upon us to make sure that those we regulate are on notice as to the rules and standards by which they must operate. In particular, we must ensure that the rules do not change day-to-day on the whims of the Commission and/or its staff. This means that, as required by the Administrative Procedure Act, the Commission must not adopt any new rule or rule amendments without proper notice and an opportunity for comment by the public. The corollary of this principle is that the Commission and staff must not engage in rulemaking by enforcement or through examinations of regulated entities. For example, we must resist the temptation to include undertakings in enforcement settlements or principles in examination reports that serve as de facto rule requirements.
Another issue with our rulemaking process that raises fairness concerns is the increasing length of the releases that accompany and explain our rules. As many in this room can attest, it is becoming the norm that our adopting rule releases number well over 500 pages. While some of this length can be attributed to a more robust economic analysis, a significant portion is simply an attempt to explain the new rule(s) or amendments. Where 500 or 1,000 pages are required to explain the rules we have adopted, the Commission must ask itself whether our rule text is too complex for market participants to reasonably understand and apply. Moreover, the sheer length may discourage many from even attempting to read the rules, which is a significant problem for an agency seeking to promote compliance with its own rules.
The voluminous nature of many recent releases also suggests that rather than merely explaining our rules, these documents now include extensive guidance akin to rulemaking, which can create entirely separate fairness concerns. For example, the most recent amendments to our money market fund rule included key guidance akin to rulemaking for all mutual funds, not just money market funds, which was buried in a footnote within an almost 900-page release. We must reduce the size of our releases. I know that our rules can be quite complex, but perhaps we can start by breaking rulemakings into smaller pieces contained in multiple releases rather than in one omnibus rulemaking.
polls & surveys
customer surveys
Recap: The SEC’s Latest Investor Advisory Committee Meeting
The SEC’s Investor Advisory Committee is ramping up its activity lately. From SIFMA, here’s a summary of the committee’s latest meeting. Meanwhile, the SEC’s Advisory Committee on Small and Emerging Companies – which is a different committee – meets next Wednesday…
A SEC Commissioner Dissents Over Listing of ETFs
As noted in this Reuters article, SEC Commissioner Stein issued this dissent from the SEC’s order that approved the Nasdaq listing of a group of new exchange-traded funds. I’ve blogged before about concerns over ETFs – and whether they are turning the stock markets into more of a casino…
In this recent joint statement about climate change, CalPERS and CalSTRS note that they intend to ramp up their engagement efforts on this topic (remember that the NY Comptroller’s office sent proxy access shareholder proposals to 33 energy companies as part of its 75 access proposal initiative). In addition, CalSTRS updated its corporate governance principles noting that it would oppose any proxy access formula more stringent than 3%/3-years. Here’s an excerpt from CalSTRS’ related announcement:
“CalSTRS will, in the coming proxy season, support any shareholder proposal that includes a three-and-three group structure,” said Ms. Sheehan. “Our intention is to oppose any proxy access proposal with a structure more onerous than three-and-three ownership by a group of shareholders.” CalSTRS Corporate Governance unit will also urge fellow shareholders to withhold their votes from company directors who either exclude a three-and-three shareholder proposal from the proxy statement, or who deliberately preempt such a shareholder proposal with one of their own that establishes more excessive thresholds.
In addition, this Cooley blog notes comments from a BlackRock representative about proxy access. And, I finally found the full set of new FAQs from ISS that addresses proxy access, exclusion of shareholder proposals and unilateral bylaw & charter amendments (read more in Ning’s blog). Last week, I only found the policy about proxy access.
Finally, check out page 7 of this “Proxy Insight Monthly” for a list of how asset managers have voted for proxy access shareholder proposals in the past…
Amalgamated Bank Seeks Delaware Legislative Action to Curtail “Fee-Shifting” By-Laws
This recent Amalgamated Bank letter calls for reforms in the wake of ATP Tour v. Deutscher Tennis Bund in which the Delaware Supreme Court last year upheld a unilaterally-adopted company bylaw by which a shareholder who sues the company and does not prevail may be forced to pay the company’s legal fees and expenses. Numerous companies have adopted similar bylaws without shareholder approval in the wake of the ATP Tour case…
People have been clamoring for the transcript from the recent webcast: “Conflict Minerals: Tackling Your Next Form SD.” And it’s now posted. The topics include:
– Pending Litigation and Current SEC Guidance
– Observations from 2014 Form SD Filings
– Common Errors in 2014 Form SDs
– Recent Corp Fin Guidance
– How Disclosures Should Be Changed for 2015
– Independent Private Sector Audit (IPSA) Considerations
The SEC Commissioners Speak: More Changes Coming?
Recently, the SEC Commissioners have delivered a higher volume of speeches than normal. Some of them seek some interesting changes. Here are a few:
– SEC May Encourage “Venture Exchanges” – In this speech, SEC Chair White noted that the SEC may encourage the development of venture exchanges as venues to provide more liquidity for the securities of smaller companies (see this Bloomberg article)
– SEC May Issue Guidance on Bad Actor Waivers – As I’ve blogged a few times, the Commissioners have been battling over the topic of bad actor waivers. It’s such a hot potato that most waivers now coming from the Commissioners, not the Corp Fin Staff itself. In this speech (and covered in this blog), SEC Commissioner Gallagher addressed the current debate over this topic (and this Reuters article notes that the SEC will be issuing guidance in this area).
– SEC May Revisit E-Proxy – As noted in this Reuters article, SEC Commissioner Piwowar wants the e-proxy rules to be studied, particularly its impact on retail voting.
– SEC Looking to Bring Enforcement Cases Over Cybersecurity Disclosure – As noted in this Reuters article, David Glockner, Director of the SEC’s Chicago Regional Office, said the SEC wants to bring enforcement cases over poor internal controls and/or misleading disclosure about a cybersecurity breach.
– SEC May Issue Guidance on When Its Cases Will Go Before an Administrative Law Judge – As I have blogged several times (and as noted in this blog), there is controversy over when the SEC uses administrative proceedings to seek penalties against non-registered respondents. As noted in this speech, SEC Commissioner Piwowar wants the SEC to issue guidelines about when the SEC will use an ALJ. As noted in this article, the SEC has been getting sued over the use of its own administrative law judges to try enforcement cases. Here’s a Perkins Coie memo with more info about speeches on enforcement issues.
The Glaring Lack of Racial Diversity Continues in Our Profession
In this speech, SEC Commissioner Luis Aguilar listed his priorities including wrapping up the outstanding rulemakings required by Congressional acts and the need for the SEC to bring enforcement cases that are a real deterrent. Aguilar has been the Commissioner to periodically make speeches about diversity, probably the most challenging task facing our profession. The speech lays out the progress – and lack thereof in some cases – that the SEC has made in promoting diversity. But this is not a challenge just for the SEC. It is a challenge across the board for law firms, for companies, etc.
The results of NIRI’s 2014 Earnings Call Practices Survey are summarized in this recent memo. Notable stats include:
Quarterly calls common: A whopping 97% of respondent companies hold quarterly earnings calls, compared to 80% 20 years ago.
When quarterly earnings calls are held: Over 70% of surveyed companies hold calls on Wednesdays or Thursdays. 75% of companies hold their call on the same day that earnings are released. There’s almost an even split between holding calls during and outside of market hours.
How calls are announced:
– Press releases (93%)
– Corporate website (83%)
– E-mail blasts (55%)
– Twitter (9%)
When calls are announced: 86% announce between one week and one month in advance of the call. 35% announce 2 – 3 weeks before.
Length of calls:
– 46 – 60 minutes for 68% of respondents
– 30 – 45 minutes for 20% of companies
Formats used to broadcast calls to listeners: Telephonic (94%) and webcasts (almost 90%)
Call script & rehearsal practices:
– 63% begin preparing for an earnings call three weeks in advance or less; 30% prepare four weeks out. 22% ask the Street during their preparation period which topics they would like the company to address during the call.
– The IRO, CFO & CEO are most commonly involved in both script development and review. 37% and 71% involve in-house counsel in script development and review, respectively.
– Rehearsal practices are diverse, and 22% don’t rehearse at all.
Call participants: IRO, CFO & CEO virtually always participate. Less frequently but still common are CCOs (83%), in-house counsel (78%), CMOs (70%)
Screening practices: More than 3/4 screen call participants
Archival practices:
– 73% archive a webcast on the corporate website. 73% archive the audio. 57% archive a slide presentation. Only 25% archive the full call script.
– 40% archive their call audio for less than 90 days.
– 46% archive their scripts and 51% archive their slide presentations for longer than one year.
In this new Deloitte piece, veteran IR managers share their views on how to handle difficult scenarios – including gaps in company and investor/analyst perspectives, communicating bad news and dealing with activist investors.
Transcript: “Rural/Metro & the Role of Financial Advisors”
We have posted the transcript for the recent DealLawyers.com webcast: “Rural/Metro & the Role of Financial Advisors.”
