This is a challenging – and complex – question. A fair answer truly can’t be given unless you happen to work right now at the SEC at the highest levels. But I still can give my 10 cents without the benefit of true inside baseball. I’ll go out on a limb with an answer of “not really ‘destroying,’ but things aren’t good – and not necessarily for the reasons expressed by many today.” Here’s what I mean by that:
1. The Commissioners Certainly Are More Rebellious – SEC Commissioner unity is a thing of the past. Over the past decade or so, each succeeding slate of Commissioners have publicly fought more and more. As I’ve blogged before, back when I worked for a Commissioner in the late ’90s, Chair Arthur Levitt rarely would take a matter to a vote unless he knew he had a 5-0 vote in his pocket. And he certainly wouldn’t have tolerated public displays of contention. There occasionally were heated debates behind the scenes – but I don’t recall any of that spilling out into the open. Chair White – just like Chair Schapiro before her – doesn’t have that luxury. Oral & written dissents are a regular occurrence; not a rarity.
2. Rebellion Isn’t Necessarily a Bad Thing – My observations about Commissioner dissent above don’t mean that I think that’s a bad thing. I’m just noting a trend. Since it only takes three Commissioner votes to approve something, the fact that there are two dissenting votes – or even that a Commissioner is vocal in expressing displeasure – shouldn’t impact the agency’s daily operations. Of course, divisive dissent does have an impact on Staff morale – and certainly on how the public views the agency. But in terms of rulemaking & pursuing Enforcement cases, etc., that alone should be a small speedbump given the limited power that Commissioners have by themselves (learn more about that from the transcript of our webcast: “How the SEC Really Works”). You certainly don’t want Commissioners acting as rubber stamps.
3. Congress Is The Primary Partisan Problem – Partisan politics has seeped from Capitol Hill down into all the federal agencies – and the SEC is no exception. It used to be that a Congressional Committee Chair might only occasionally ask something of an agency head. Now it’s all the members of a Congressional Committee seeking an audience, with a greater frequency. During Chair Schapiro’s term, I blogged several times about the abuse – asking SEC officials to constantly testify in hearings. It’s hard to get real work done when you are constantly preparing to testify – or to respond to lengthy written requests from Congress. These shenanigans continue. Very little of this is driven by a desire to protect investors or benefit our markets. Most of it is purely for “show” – or an attempt to disrupt how the agency functions.
4. Rulemaking Will Always Be Hard Going Forward – Today’s WSJ article entitled “SEC Bickering Stalls Mary Jo White’s Agenda” provides us with some nice statistics for this point. It notes how Chair White has brought a record 755 enforcement actions in the latest fiscal year – but only finalized 7 rules in ’14 (compared to an average of 17 per year over the past decade). In my opinion, the largest factor for this rulemaking dearth is how hard it is to get a rule over the line since the DC Circuit’s 2011 proxy access decision in the Business Roundtable/Chamber lawsuit. Trust me, rulemaking was hard before that – now the requisite enhanced economic analysis & other new mandated processes increases the difficulty by an untold magnitude.
And things are bound to get worse before they get better. Congress continues to explore ways to meddle in affairs for which they have limited expertise. The latest is the “Regulation Sensibility Through Oversight Restoration Resolution of 2015,” which establishes a joint select committee charged with reviewing how agencies adopt rules – including holding hearings on how to reduce regulatory overreach. The SEC could only get 7 rules adopted last year – is that overreach? The circus plays on…
“Bad Actor” Waivers: Now for Forward-Looking Statements
A few days ago, SEC Commissioner Piwowar gave a speech supporting waivers relating to a company’s’ ability to rely on the PLSRA statutory safe harbor for forward-looking statements. Here’s a related blog by Steve Quinlivan:
The Securities Act (Section 27A(b)) and the Exchange Act (Section 21E(b)) exclude reliance on the safe harbor for forward-looking statements if, among other things, the statement is made with respect to an issuer that has, within the past three years, been convicted of any felony or misdemeanor described in paragraphs (i) through (iv) of Section 15(b)(4)(B) of the Securities Exchange Act of 1934. The Securities Act and the Exchange Act each provide the disqualifications may be waived “to the extent otherwise specifically provided by rule, regulation, or order of the Commission.” The SEC granted this waiver to Barclays PLC to continue be able to continue to rely on the safe harbor for forward looking statements as a result of a guilty plea for a violation of the Sherman Antitrust Act.
Meanwhile, another day, another waiver dissent from a SEC Commissioner…
IPO Analyst Research: FINRA Issues 7 FAQs on Conflicts
Many market participants were left in a quandary following FINRA enforcement actions in connection with member firm research analyst “participation” in meetings with prospective issuers. Recently, FINRA published a handful of Frequently Asked Questions relating to its research rules.
The FAQs outline three stages of an IPO a pre-IPO period, a solicitation period, and a post-mandate period. Each such stage is described in the FAQs and FINRA also describes the attendant risks associated with a research analyst’s activities during these various stages. Of course, during the pre-IPO stage, the attendant risks are attenuated and FINRA believe that these attenuated risks can be addressed adequately through properly designed policies and procedures. However, FINRA cautions that member firms ought to be sensitive to any communications that would suggest the issuer already had determined to proceed with an IPO. The guidance also provides FINRA’s view regarding when the “solicitation period” would be deemed to begin, although this would seem, in real life, to be a highly fact-specific matter. In the post-mandate period, again, the risks are attenuated, in FINRA’s view, and may be effectively addressed by member firms through their policies and procedures. The guidance is particularly strident with respect to valuation analyses. For example, the FAQs note that a member firm that is competing for an IPO role must repudiate any communication that would seemingly indicate that a valuation reflects the analyst’s views and expressly note that the firm cannot make any representations about the analyst’s views on valuation.
The big news comes from this WSJ article, which says that the SEC will “soon” propose the clawback rules required by Section 954 of Dodd-Frank. If it happens as rumored, this surely is Exhibit A that the SEC’s Reg Flex Agenda is meaningless (as I hammer home down below) – because the SEC’s new Reg Flex Agenda had an April ’16 date for this activity. Here’s my quote in the WSJ piece:
Broc Romanek, a former SEC attorney who edits the websites CompensationStandards.com and TheCorporateCounsel.net, said the SEC should make sure it implements the new clawback requirements in a way that makes practical sense for companies and allows them discretion in determining whether it is economically efficient for them claw back pay, given legal, administrative or other expenses that may be involved. “It would not be ideal if a company is forced to spend more resources clawing back than [what] they would get in return,” he said.
The critical issue is whether the proposed clawback rules will be principles-based or prescriptive (remember how the recent P4P rule proposal was proscriptive, which was surprising to some). “Principles-based” means “just disclose what you have that you treat as a clawback.” And there are lots of tough questions about how a financial misstatement impacts compensation that may be indirectly – but not directly – based on financial performance, such as stock options (ie. how much is the stock price influenced by a restatement, as compared to performance criteria that is tied to EPS which is much more directly influenced). Remember this blog from last year: “Clawbacks & The New Revenue Recognition Rules: On a Collision Course?”
Whether the proposal is prescriptive or principles-based will in turn impact how much the rules drive a certain type of conduct – the more prescriptive, the more the SEC is making a judgment call and companies will have to come in line with what the SEC determines to be encompassed. And remember as to timing, the SEC’s rulemaking will just be the first step – because SEC will be proposing rules that the stock exchanges then have to adopt standards to implement…
Yesterday, Senator Elizabeth Warren wrote this 13-page letter to SEC Chair White expressing her unhappiness with the pace of the SEC’s rulemaking. Warren isn’t happy – and even used the Reg Flex Agenda as one reason why she feels that White hasn’t been truthful with her (see my blog below about how that is meaningless). Pretty wild stuff.
Though the SEC has recently reported it now expects to complete the rule by next spring, Ms. Warren said that deadline—revealed in a list of agency projects published by an arm of the White House—appears to contradict what Ms. White said in a face-to-face meeting last month with Ms. Warren. In that meeting, the SEC chairman predicted the SEC would complete the rule “by fall,” Ms. Warren wrote. “I am perplexed as to why you told me personally that the rule would be completed by the fall of 2015 when it appears that you were or should have been aware of additional delays,” Ms. Warren wrote.
The SEC’s New Reg Flex Agenda is Out (But It’s Meaningless!)
I continue to see so many people citing the SEC’s Regulatory Flexible Agenda as an indication for when the agency will propose and adopt rules. Don’t believe that – it’s not true! As I’ve blogged about before, all kinds of whacky and aspirational stuff makes it into the Reg Flex Agenda, which then winds up as part of the OMB Unified Agenda (in this blog, Keith Bishop explains what the OMB Unified Agenda is). And then the timelines for proposing & adopting rules are rarely accurate.
The internal process at the SEC (and other agencies) is complicated – maybe one day I’ll explain it in detail (eg. pet projects get thrown in that have zero chance of moving; timelines thrown in simply to fill out the form). But trust me, it has NEVER been a reliable source for when things might move at the SEC. But go ahead and keep citing it if it makes you happy – even though it will likely prove you wrong in the end (as it does over and over). I find it funny how the Reg Flex Agenda is now a newsworthy item after being completely ignored for decades.
Wrapping up a project that I feverishly commenced two years ago, we are happy to say the inaugural 2015 Edition of Romanek’s “The In-House Essentials Treatise” is done being printed. Here’s the 79 pages of our “Detailed Table of Contents” listing the topics so you can get a sense of the Treatise’s practical nature. You will want to order now so you can receive it as soon as possible.
With over 1400 pages, this tome is the definition of being practical. You can return it any time within the first year and get a full refund if you don’t find it of value.
Compliance Program Improvement: DOJ Gives Cooperation Credit for 1st Time
A few weeks ago, the DOJ made good on a promise made last fall to give credit to companies that improve their compliance programs when a Barclays plea deal included a provision along those lines. Here’s an excerpt from this memo:
For the first time, the antitrust division of the U.S. Department of Justice (DOJ) has awarded a company sentencing credit for implementing an effective compliance program after the start of an investigation. Getting credit for compliance efforts should not be as hard as space travel, but up until last week, a company’s chances for getting any credit (short of being the winner-takes-all leniency applicant) were no better than landing on the moon. Barclays PLC, along with four other investment banks, entered into a plea agreement with the DOJ on May 20, 2015, for its participation in the alleged FOREX cartel conspiracy to manipulate the price of U.S. dollars and euros exchanged in the foreign currency exchange (FX) spot market.
The sentencing credit is apparent from a single line in the plea agreement: “The parties further agree that Recommended Sentence is sufficient, but not greater than necessary to comply with the purposes set forth in 18 U.S.C. §§ 3553(a), 3572(a), in considering, among other factors, the substantial improvements to the defendant’s compliance and remediation program to prevent recurrence of the charged offense.”1 The four other major banks that entered into plea deals did not have this same provision, and it appears that they did not receive credit for their compliance programs.
Shareholder Engagement: ESG Style
In this 68-page guide, BlackRock & Ceres have teamed up to provide guidance for institutional investors on how to engage on sustainability issues. The guide includes tactics & case studies as 30 institutional investors describe their priorities and strategies they use to engage with companies across different asset classes, both internationally and domestically, on ESG matters. Here’s more from this Davis Polk blog…
Meanwhile, as reported in the Society of Corporate Secretaries’ Alert, based on data from Proxy Insight (see pages 8-9), CalSTRS is one of the least likely of the public pension funds to support the election or re-election of directors – supporting management nominees just 36.7% of the time. CalSTRS is also almost twice as aggressive as the next pension fund on the list identified as least likely to vote for management’s slate – the Illinois State Board of Investment – coming in at 67.4% support.
Sights & Sounds: “The Women’s 100 Conference” in DC
I’ll be blogging more about yesterday’s magical event in the near future. But I can’t resist posting this pic of the two men shepperding the event – my newly graduated high school son & me:
Parsing through the dozens of memos about the SEC’s recent KBR action, law firms seem to vary about what you should be doing now with your agreements. The positions fall into one of these three camps: (a) KBR settlement language is sufficient; (b) KBR settlement language is overly broad; or (c) not sure at all what is sufficient. The SEC’s Enforcement Division seems to still be looking at – and asking – for agreements to review – but I believe that will settle down soon enough. I’ve just calendared a September webcast that includes the SEC’s Chief of the Whistleblower Office Sean McKessy to help us sort through these choices (and more).
Meanwhile, here’s an excerpt from this WSJ article entitled “Whistleblowers Find SEC Rewards Slow and Scarce”:
The SEC program pays out based on sanctions that have been collected, rather than the amounts imposed by a judge that are up to the agency to recover. That can leave whistleblowers with nothing to show for their efforts if the money has vanished in the fraud or if the perpetrator has fled beyond U.S. jurisdiction. So far, more than 10,000 tips have been submitted to the SEC whistleblower program, about 300 people have applied for awards and 17 payouts have been made, according to SEC data. An SEC spokeswoman declined to say how much money has been collected for any of the 658 enforcement actions the agency’s website lists as being potentially eligible for awards. She also declined to say how many, if any, of the pending award claims relate to cases in which no bounty is available, even if the claim is approved.
Montana Joins Massachusetts in Regulation A+ Challenge
As I added late to last week’s blog, Montana has joined Massachusetts in suing the SEC over Regulation A+. Here’s the Montana scheduling order – the Montana & Massachusetts cases have been consolidated by the US Court of Appeals for DC…
Even though contingent fee audits in the escheatment area have been around for some years now, companies continue to be shocked when they find themselves subject to one. Tune in tomorrow for the webcast – “Escheatment Soup to Nuts: Handling Unclaimed Property Audits & More” – to hear Reed Smith’s Diane Green-Kelly, Keane’s Valerie Jundt and Exelon’s Scott Peters cover everything you need to know about escheatment, from the basics to handling the growing number of unclaimed property audits.
Cleary Gottlieb just created this chart with the status of the SEC’s Dodd-Frank rulemakings fyi
Our June Eminders is Posted!
We have posted the June issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
As the PCAOB continues to toy with the long-floated idea of “expanded” audit reports – which means that auditors would be required to include some narrative in their boilerplate – I thought it would be helpful to provide an example of what that might look like. Since 2012, companies in the UK have been required to provide this type of expanded audit report. And last year’s audit report (see page 130) for Rolls Royce has been held up as one of the best since the company & its auditor – KPMG – go further than what the UK’s Financial Reporting Council’s rules require. Here’s an excerpt from this CFA Institute Blog:
In short, the auditor reports the greatest risk of material misstatement and how it responded to those risks. KPMG could have stopped there to be in compliance with the new standard, but that wasn’t good enough for Rolls Royce. With the investor user in mind, KPMG in cooperation with management took it a step further and included the findings. Aside from the communicative value of this information to investors, extending the auditor’s report to include the findings demonstrates a willingness on the part of the auditor and management to work together toward meaningful communication to investors — a major departure from past practice.
In addition, check out this explanation from KPMG about what they did – and this article about the UK requirements…
PCAOB Seeks Comment on Specialists Use
Yesterday, the PCAOB issued this Staff Consultation Paper – “The Auditor’s Use of Specialists” – that seeks input on potential changes to standards for the auditor’s use of the work of specialists, specifically the objectivity and oversight of specialists and the use of their work in audits.
BE-10 Reports: Deadline Flexibility & How to File
Here’s a question posted yesterday on our “Q&A Forum” (#8437): “Tomorrow, May 29, 2015 is the due date. Does anyone know if the BE-10 reports must be in the hands of the BEA by tomorrow or is it sufficient if it is postmarked with tomorrow’s date? Also, any reason we can’t Fed Ex the survey? The instructions however state to send the reports filed by mail “through the U.S. Postal Service.”
Here’s an answer that I received from Gibson Dunn’s David Wolber: “I haven’t heard officially from BEA on the due date aspect – and haven’t seen much explicit guidance – but I note the BE-10 Instructions say: ‘A fully completed and certified BE-10 report comprising Form BE-10A, and Form(s) BE-10B, BE-10C, or BE-10D is due to BEA no later than May 29, 2015 for U.S. Reporters required to file fewer than 50 forms, and June 30, 2015 for U.S. Reporters required to file 50 or more forms.’ This would tend to imply the report must be in there hands by sometime on Friday.
However, note that the BEA recently extended the deadline for all ‘new filers’ to June 30th. A new filer is ‘a U.S. company or person that is required to file on the BE-10 survey but has never filed any BEA survey of U.S. direct investment abroad, including the BE-10, BE-11 and BE-577 surveys.’ This is probably good news for quite a number of folks. Also, it appears that 30- and 60-day extensions are being readily granted.
Regarding method of delivery, BEA guidance in the BE-10 Instructions and in FAQs on the website contemplates a range of acceptable methods including mail, hand delivery and fax. Although I haven’t seen anything official from BEA on this, overnight would seem to be a safe choice, and I suspect that, as long BEA gets the report at the end of the day, they shouldn’t care too much if it arrived via USPS or some other carrier such as FedEx.”
If you haven’t heard about this, brace yourself. Some sophisticated scammers have been successful learning the style of how your CEO and other senior executives write their emails – and then are capable of sending emails from their email addresses. For example, a scammer will write an email that looks like it comes from your CEO to your controller asking for a wire transfer to be made to an offshore account. And the controller naturally will do it. This will be among the topics covered in our upcoming webcast: “Cybersecurity: Governance Steps You Need to Take Now.”
A large number of U.S. businesses have recently been the target of a very sophisticated email scam that is designed to convince company employees who are responsible for executing financial transactions to wire funds to overseas accounts that are controlled by the perpetrators of the scam. The FBI’s Internet Crime Complaint Center (“IC3”) refers to these kinds of frauds in their various forms as Business Email Compromise (“BEC”) scams, which are usually aimed at companies that regularly wire money outside of the United States. In recent months, there have been over 2,000 reported incidents of these scams, resulting in hundreds of millions of dollars in losses.
Political Contributions Disclosure: Three Former SEC Commissioners Support It
Yesterday, three former SEC Commissioners – Bevis Longstreth, William Donaldson & Arthur Levitt – sent this letter to the SEC supporting the push for political contributions disclosure rulemaking (remember how the SEC was recently sued for not rulemaking in this area). These former Commissioners are the latest in a number of folks that continue to weigh in on the 2011 rulemaking petition, including this letter from 70 foundations and this letter from a group of State Treasurers.
Transcript: “The NYSE Speaks ’15: Latest Developments and Interpretations”
We have posted the transcript for our recent webcast: “The NYSE Speaks ’15: Latest Developments and Interpretations.”
Barbara Blackford’s 2500-Mile Ride!
I’ve blogged before about the inspirational Barbara Blackford. She recently stopped in DC, about 1500 miles through her ride up the East Coast. Check out her blog – and Facebook page, as well as this explanation of “Cycling for Good” and how you can donate…
Last Friday, in this “Petition for Review,” the Massachusetts Secretary has sued the SEC in the US Appeals Court for the District of Columbia asking the court to vacate the portion of the SEC’s new Regulation A+ rules that preempt state law – and issue a permanent injunction prohibiting it from going into effect on June 19th. The petition is just two paragraphs! Here’s the scheduling order. According to this article, Montana has filed a similar lawsuit.
During the rulemaking process, NASAA – the association of state securities regulators – repeatedly argued that the preemption aspects of Regulation A+ were inconsistent with legislative intent…
I just calendared a new webcast to track developing market practices in the wake of the new Regulation A+ rules…
The SEC’s Waiver Controversy Extends to Other Federal Agencies
This Reuters article notes how Senator Elizabeth Warren has called for hearings on the Department of Labor’s waiver practices in the wake of the SEC’s waiver controversy…
This Bloomberg article criticizes the pace of the SEC’s rulemaking – and notes how politics at the Commissioner level have contributed to that…
Hooli Board: A Lack of Gender Diversity
I’m a devoted fan of the HBO comedy called “Silicon Valley.” Pulled from the last episode, I thought this 7-second clip featuring the fictional tech giant’s CEO was hilarious as it shows him addressing his board with the opening: “Gentlemen of the Hooli board…and lady…” That says it all about the continuing problem of gender & racial disparity on boards:
Last month, Vanguard sent letters to its 500 largest holding as we blogged about a few months ago. Since then, a number of members have asked how to respond to the letters – and we’ve found that most companies responded by simply acknowledging receipt.
As for whether companies have actually formed these committees, I haven’t seen any other than this recent announcement from Tempur Sealy (note that H Partners didn’t request formation of this committee in its governance settlement with the company). But perhaps there are some others out there (or they’re coming). But I believe that many companies have concluded that there doesn’t need to be a specific committee to handle this role. Too many board committees is not a good thing.
Michael Levin of “The Activist Investor” recently wrote an email about the topic under the title of “A Shareholder Liaison Committee? Really?” – his punchline was: “Why isn’t the board of directors the “shareholder liaison committee”?” I agree.
For those considering creating a standing – or special – board committee along these lines, see our checklist about doing so…
Discretionary Bonuses: The Cost of Extramarital Affairs
Here’s an interesting blog by Rolf Zaiss & Kerry Berchem of Akin Gump about how a company cut the bonus of the CEO due to an affair with someone at a consulting firm. What price love (or lust)?
Last week, as noted in this blog, the House Financial Services Committee approved 13 bills, many of which are JOBS-Act related…
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor 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:
– Blackholes in the Boardroom
– Stand-Alone Conflicts of Interest Policy Considerations
– Audit Committee Survey: Workload at Tipping Point?
– 2015 Cyber Risk Agenda
– Navigating Corporate Governance Hot Topics
This Q4 blog covers this recent study about how social media influences investment decisions. Here’s an excerpt:
The article pulls interesting research from Greenwich Associates, which notes that “almost 80% of institutional investors use social media as part of their regular work flow, and approximately 30% say the information consumed via social media has directly influenced an investment decision.” With input from 256 corporate and public funds, insurance companies, endowments and foundations in the U.S, Europe, and Asia, the research outlined that: 48% of investors noted that information from social media prompted them to do an additional research on an industry issue or topic; 37% said they shared information from social media with decision-makers at their companies; 34% said information learned on social media influenced a decision to work with a particular client or company; and that 33% said information obtained on social media triggered a discussion with their investment consultant.
Overall, the article points to the increasing effect that social media has on influencing investment decisions with investors. For example, 40% of the global institutions are expected to increase their use of social media in 2016. Using social media as part of your investor relations communications process will also benefit your company as it paves way for engagement, expands reach, and increases awareness with institutional investors and the financial media.
Social Media: Getting Up-to-Speed
Here’s other good stuff relevant to the use of social media:
Many of you are on Twitter – and perhaps you are looking for funny or interesting things to follow outside your worklife (& beyond following me). I canvassed what some friends do for Twitter entertainment & received these recommendations (send me yours):
– @BeschlossDC – Historian who posts historical pictures
– @BullandBaird – Wall Street perspective with humor thrown in
– @BorowitzReport – pretty funny on political commentary
