Even with the SEC’s new policy on Reg A & D waivers fresh on the books, the topic of whether to grant waivers remains topical. Last week, SEC Commissioner Stein dissented from the SEC’s order granting a waiver to Deutsche Bank over its WKSI status (you may recall that Corp Fin issued a revised statement about how it would process WKSI waivers last year).
The WKSI waiver debate is new; there’s been controversy before. And interesting, although Deutsche Bank got its WKSI waiver request, apparently the same did not happen for Credit Suisse. According to this Reuters article, Credit Suisse withdrew a WKSI waiver request after SEC Staff informed it that the request would likely be denied.
But what apparently is new is a growing battle between the SEC and the CFTC, as noted in this excerpt from Stein’s dissent:
However, based on a loophole contained in Rule 506(d)(2)(iii), the CFTC has intervened and prevented the bad actor disqualification question from even coming before the Securities and Exchange Commission. The CFTC saw fit to opine on the SEC’s Rule 506 jurisprudence about whether Deutsche Bank AG should receive a waiver from automatic disqualification under SEC rules. It is unclear to me what, if any, analysis went into this decision and what prompted the CFTC to insert language into its final order stating that a bad actor disqualification “should not arise as a consequence of this Order.” The implications of the CFTC’s actions here — and in other actions — are deeply troubling. The Commission should closely review this provision and how it is being used.
The Rule 506(d)(2)(iii) provision has actually been used once before by the CFTC to “waive away” the 506 disqualification – last year in this CFTC order against JPMorgan for the London Whale incident. So two times now makes a trend perhaps.
But what may be the interesting trend is whether companies – faced with the SEC’s deadlock over 506 waivers – will look to get around the deadlock by relying on this provision in its negotiations with other state or federal regulators. The provision also allows courts to decree that there should be no 506 disqualification as well. Below is the language from the adopting release for Rule 506(d) (which was adopted by a 5-0 vote) that explains the purpose of this provision:
The amendments we are adopting include a provision under which disqualification will not arise if a state or federal regulator issuing an order advises in writing that Rule 506 disqualification is not necessary under the circumstances. We believe this provision will create cost savings for affected covered persons such as issuers, individuals and compensated solicitors by eliminating the need to seek waivers from the Commission or pursue other means of raising capital. We expect that some issuers and other covered persons will adjust their settlement negotiations to bargain for an express determination that disqualification from Rule 506 is unnecessary. As the provision applies only where state or federal regulators have determined that Rule 506 disqualification is not necessary, we do not believe it is likely to impair the intended investor protection benefits of the bad actor disqualification scheme.
Former Corp Fin Deputy Director Lona Nallengara to Leave SEC
Yesterday, the SEC announced that Lona Nallengara – who was Corp Fin’s Deputy Director before he headed upstairs to be Chair White’s Chief of Staff – will leave the agency at the end of next month. No next destination listed…
As noted in this blog, the House Financial Services Committee will mark-up a flurry of JOBS Act-related bills today…
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:
– Form 10-K Preparation Tips
– How to Proactively Tackle the Director Tenure Issue
– Code of Ethics/Conduct Primer
– Audit Committee Role in Improving Disclosure
– CEO Succession Planning Guidance for CEOs & Boards
If you have read this blog for a while, then you know I dig fake SEC filings. As noted in this blog last year on the topic, they tend to be one of my most popular types of blogs. So last week was Christmas for me as this fake Schedule TO about a $8 billion takeover bid caused a stir and caused Avon’s stock to tank (see this DealBook piece).
This latest incident is a cautionary tale for investors as it’s not the first fake takeover announcement. My favorite dates back to 2001, as noted in this piece, when a fake “blank check” company calling itself “Toks Inc.” filed a Form SB-2 with the SEC announcing plans to take over General Motors, General Electric, AT&T, Hughes Electronics, AT&T Wireless, AOL Time Warner and Marriot International – for roughly $2 trillion in “Toks” stock. The promoter – Ade O. Ogunjobi – didn’t give up even when the SEC issued a “Stop Order” to prevent the registration statement from going effective and suing him for selling unregistered securities, later launching a website to promote his wild ambitions and plans to then hold press conferences to announce his plans for these major US companies he was to take over!
Transcript: “Form S-8: Share Counting, Fee Calculations & Other Tricks of the Trade”
We have posted the transcript for our recent webcast: “Form S-8: Share Counting, Fee Calculations & Other Tricks of the Trade.”
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:
– Study: Data Breach Preparedness
– Survey: Current (& Future) State of Compliance
– Spencer Stuart Addresses Board “Refreshment”
– Avoiding & Managing Boardroom Disputes
– Using COSO to Assess & Manage Cyber Risks
Recently, the SEC’s Division of Enforcement Staff issued this 4-page guidance. This issue continues to generate controversy, with the SEC being criticized for its increased use of administrative proceedings. For example, the WSJ recently penned this article claiming the SEC won against 90% of defendants before its own judges in contested cases from October 2010 through March of this year – compared to a 69% success rate in federal court. See also this DealBook piece and Corporate Crime Reporter article.
As noted in these memos posted in our “SEC Enforcement” Practice Area, the new guidance identifies a non-exhaustive list of four factors that the SEC may consider in determining the proper forum for an enforcement action – with the guidance noting that the Enforcement will continue to prefer administrative hearings as the venue for resolving novel or complex issues.
SEC Receives At Least One Audit Independence Query Daily
This WSJ article has a catchy title of “SEC Receives At Least One Audit Independence Query Daily” to demonstrate how busy the SEC’s Office of Chief Accountant is when it comes to auditor independence. Here’s an excerpt from the article:
Auditor independence is a hot-button issue for the Securities and Exchange Commission’s enforcement unit. “Independence is an issue that we are very focused on, and will continue to stay focused on,” Michael Maloney, chief accountant at the SEC’s Division of Enforcement said at a Baruch College conference in New York last week.
Outside of enforcement, the SEC gets about 400 auditor-independence questions a year, or about one a day, says the agency’s chief accountant, James Schnurr. Last year, the SEC settled two cases against auditors over alleged violations. Ernst & Young LLP paid more than $4 million to settle allegations that it lobbied on behalf of audit clients. KPMG LLP paid $8.2 million to settle allegations that it provided prohibited extra services to audit clients. In their settlements, the firms neither admitted or denied the allegations.
Randi & Me
Randi Morrison is in town for the Society’s annual meeting with the Corp Fin Staff and we had a little sight-seeing fun last night:
Daniel Gallagher, a Republican member of the Securities and Exchange Commission, is preparing to step down after nearly four years at the agency, according to people familiar with the matter. Mr. Gallagher has notified the White House of his plans to leave the five-member agency as soon as a successor is confirmed by the Senate, people familiar with the matter said. His announcement was a surprise, as his SEC tenure won’t officially come to a close until the end of 2017.
The departure will likely coincide with the resignation later this year of Luis Aguilar, a Democrat, who is planning to step down soon after nearly seven years at the agency, people familiar with his thinking said.
The White House has already begun vetting candidates to succeed Mr. Aguilar, who would like to remain at the agency long enough to help complete long-awaited rules designed to boost executive-compensation disclosures, a person familiar with his thinking said.
A Look at the SEC’s Politics
I have blogged numerous times about the battle over waivers at the Commissioner level – not to mention battles over many other things. Check out this recent article entitled “How partisan politics have poisoned the SEC”…
The Role of In-House Lawyers
This article from “The Atlantic” is about how the in-house lawyer can be serve as more than a naysayer. Having been in-house, I can tell you that it’s no fun being a naysayer – but that is a role that is critical for the in-house lawyer to play. Not all the time of course. But periodically. Otherwise, the company gets into a lot of trouble as there is no one to check egos, etc…
Yesterday, the newly-formed “Campaign for Accountability” (CfA) sued the SEC in the US District Court for DC for failing to act on the rulemaking petition submitted last year by the Citizens for Responsibility and Ethics in Washington (CREW). Interestingly, this lawsuit is not filed by the folks behind the much more popular rulemaking petition on this topic, the one submitted by Harvard Professor Lucian Bebchuk in 2011 that attracted more than 1 million comments in support (although CREW submitted this letter last month supporting that older petition).
The complaint is worth reading for a number of reasons:
– It opens with the parade of horrors wrought by the Citizens United decision by SCOTUS
– Talks about how institutional investors want to see this type of disclosure
– Goes into the history of shareholder proposals on this topic
– Reveals a number of discrepancies between companies who have voluntarily adopted disclosure policies in this area and what companies are actually doing (Counts #22-26)
– Mentions that political contributions disclosure showed up on the SEC’s Reg Flex Agenda in ’13. (Counts #28-29) Apparently, they believe that list of potential rulemakings is more than aspirational, which I have contended before…
Investors Seek More “Usable” Director Attribute Disclosure (+ Diversity Disclosures)
Speaking of rulemaking petitions, here’s a new one recently submitted by a group of 9 public pension funds that seeks the SEC to include a board matrix or chart in proxy statements, as well as including a nominee’s gender, race and ethnicity – thus taking the board attribute disclosures elicited by Item 407(c)(2)(v) a step further…
Dodd-Frank Rollback: Senator Shelby’s Discussion Draft
Here’s news from this blurb from Goodwin Procter (note that it appears this bill impacts only financial institutions; not other types of public companies):
On May 12, Senator Richard Shelby, the Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, announced that the Committee had released a draft of “The Financial Regulatory Improvement Act of 2015.” The Committee also issued a section-by-section summary. Senator Shelby said, “this discussion draft is a working document intended to initiate a conversation with all members of the Committee who are interested in reaching a bipartisan agreement to improve access to credit and to reduce the level of risk in our financial system. I look forward to engaging with members of the Committee on specific proposals in the discussion draft.” Democrats on the Banking Committee, including the senior Democrat, Sherrod Brown, have agreed to some changes that provide regulation relief for small banks and credit unions but in public statements have opposed broader changes in the draft bill. Senate Republicans require a few Democratic votes in order to reach the 60 necessary to go to a full vote. Observers expect discussions about the bill to continue for several months, with significant changes to the draft before the bill is brought on for a full vote.
Also note – per this blog – that a House Subcommittee will hold Round 2 of its hearings on a group of capital formation bills…
Aretha! Going Strong at 73
I was lucky enough to see Aretha Franklin & her 30-piece orchestra last night. Like watching royalty. Sounds great at 73!
Sounding a death knell for the more-than-decade long effort to fully “converge” International Financial Reporting Standards with U.S. Generally Accepted Accounting Principles, James Schnurr, the chief accountant of the Securities and Exchange Commission, said that he probably won’t recommend that the SEC should mandate IFRS or that U.S. companies should have the choice of preparing their financials under those standards.
Speaking at the 14th annual Baruch College Financial Reporting Conference in New York City, Schnurr said that “there is virtually no support to have the SEC mandate IFRS for all registrants.” Further, he said, “there is little support for the SEC to provide an option allowing [U.S. public] companies to prepare their financial statements under IFRS.” Since 2007, the commission has permitted foreign private issuers in the United States to report their financials under IFRS without reconciling them to U.S. GAAP. (Under the pre-2007 regime of reconciliation, foreign issuers had to identify and quantify the material differences they reported under IFRS in terms of U.S. GAAP.)
However, he added, “there does seem to be continued support for the objective of a single set of high-quality globally accepted accounting standards.” The chief accountant stressed that the U.S. Financial Accounting Standards Board and the International Accounting Standards Board continue to communicate and keep each other’s views very much in mind when each considers its own actions.
Schnurr bemoaned the current emphasis on the deterioration of relations between FASB and IASB. “The conversation seems to quickly transition to convergence, or the lack thereof, often with an adversarial, U.S. GAAP vs. IFRS, tone. Conversations on this topic typically highlight the differences and shortfalls in the efforts towards convergence in an attempt to suggest that the two sets of standards will never be able to achieve uniformity,” he said.
PCAOB Issues “Audit Committee Dialogue”
Last week, the PCAOB issued this “Dialogue” report – addressed to audit committees – that highlights key areas of recurring concern in PCAOB inspections of large auditors as well as certain emerging risks to the audit. As noted in this Cooley blog, the report also provides targeted questions that committee members may ask their auditors on each topic.
Delaware Senate Passes Fee-Shifting Bill (Now on to the House)
Lawmakers in the Delaware Senate voted 16-5 on Tuesday to approve legislation that would ban corporations from adopting bylaws that impose corporate legal costs on shareholders who file unsuccessful lawsuits. The fee-shifting legislation has been controversial, attracting opposition from the U.S. Chamber of Commerce. The Chamber says the legislation protects frivolous shareholder litigation and threatens Delaware’s business-friendly image. “Companies that incorporate in Delaware have valued the state’s clear and fair corporate law principles,” said Lisa A. Rickard, president of the U.S. Chamber Institute for Legal Reform. “But they are increasingly becoming victims of ‘extortion through litigation.'” More than nine of every 10 corporate mergers or acquisitions are challenged in court.
The Delaware State Chamber of Commerce remained neutral on the legislation, which is sponsored by Delaware Sen. Bryan Townsend, a Newark Democrat and a practicing corporate lawyer at Morris James in Wilmington. In May 2014, the Delaware Supreme Court upheld a bylaw adopted by a private non-stock corporation, ATP Tour Inc., that shifted legal costs onto the loser in shareholder litigation. Delaware lawyers, concerned that stock corporations could seek similar bylaws, recommended that the General Assembly change the law to ban such bylaws.
The legislation now heads to the Delaware House of Representatives.
Meanwhile, here’s two blogs by Allen Matkins’ Keith Bishop:
NYSE Proposes Shareholder Approval “Share Issuances” Exemption for New Companies
Recently, the NYSE proposed amendments to Sections 312.03(b) & 312.04 of the NYSE Listed Company Manual to exempt “Early Stage Companies” from having to obtain shareholder approval before issuing shares for cash to related parties, affiliates of related parties or entities in which a related party has a substantial interest since these companies frequently have to rely on private placements to their founders or other significant existing shareholders or their executive officers or directors for capital-raising…
Nasdaq’s New FAQ on Net Share Settled Convertible Securities
This Gibson Dunn blog is about a new Nasdaq FAQ – here’s an excerpt:
While the FAQ speaks specifically to flexible settlement provisions where an issuer can settle conversions through cash, shares or a combination of both, a NASDAQ representative has told us that NASDAQ’s new position is equally applicable where net share settlement is mandatory. In addition, we understand from NASDAQ that its position is the same, regardless of how the issuer ultimately elects to settle conversions where the securities provide for flexible net share settlement. Issuers will still need to assess whether other provisions of NASDAQ’s shareholder approval rules may be applicable to a particular offering (for example, if the transaction might result in a change of control) or whether other terms of the convertible securities might implicate the 20% Rule (for example, certain conversion price adjustment provisions, any make-whole provisions, or provisions requiring additional cash payments to investors at the time of conversion such as payments for forgone future interest).
The New York Stock Exchange (“NYSE”) historically has taken a similar view that net share settled or flexible net share settled convertible securities should be viewed as being issued with a conversion price below the greater of book or market value. We understand based on a discussion with a representative of the NYSE that the NYSE has also expressly revised its position on this issue to be consistent with NASDAQ.
We view NASDAQ’s and the NYSE’s new position as a very welcome and pragmatic change, which should enhance the ability of smaller issuers to issue net share settled or flexible net share settled convertible securities and access the convertible securities market.
Tune into today’s CompensationStandards.com webcast – “P4P: What Now After the SEC’s Proposal” – featuring Compensia’s Mark Borges, Deloitte Consulting’s Mike Kesner, Morrison & Foerster’s Dave Lynn & Gibson Dunn’s Ron Mueller to learn everything you need to know about the SEC’s new proposal. And we’re posting memos in our “Pay-for-Performance” Practice Area on CompensationStandards.com.
Recently, I got turned on to “MuckRock,” a free site that tracks the progress of FOIA requests at government agencies. The site went live five years ago, the brainchild of a recent college grad (here’s an interview with the founder). Here’s the page that lists the progress of FOIA requests at the SEC – and here’s an example of a FOIA request to the SEC from MuckRock…
Poll: Will You Participate in Commenting on SEC’s P4P Proposal?
Comments on the SEC’s pay-for-performance proposal are due on July 6th. Here’s a poll regarding your level of participation in the comment process on the SEC’s pay-for-performance proposal:
survey service
By the way, I went to the Wizards-Hawks playoff game on Saturday, where Paul Pierce worked his magic – here’s a 1-minute video of that moment from inside the stadium:
I love being human. I am sometimes wrong, that’s for sure. And by reading this follow-up to one of my blogs by David Smyth about “Does SEC Enforcement Treat Bigger Companies Differently?,” I can honestly say that I was wrong. I am not as close to the SEC enforcement process as David and his arguments that their might be some bite to the study by Jonas Heese makes sense on its face. Here’s an excerpt from David’s blog (and here’s another blog about this study):
I have two thoughts about Heese’s claims. As Vincent Vega once said, “That’s a bold statement.” The facts are the facts, and if the SEC is less likely to beat up on labor-intensive firms, that tendency must be attributable to something. But I am extremely skeptical that it is related to presidential election years or the locations of corporate headquarters relative to the districts of senior congressmen. Believe me, Senators and Members of Congress who serve on the SEC’s oversight committees can be quite overbearing and can distract from the Enforcement Division’s mission. But the vast majority of those distractions come in the form of low-value information requests that are tedious and hard to respond to. As for outside pressure not to investigate a particular person or company, though, while the SEC’s record isn’t perfect, my experience was that the Commission was pretty insulated.
But . . . investigating cases and seeing them through to the end is hard. And if the SEC is looking at a particular set of facts that requires the agency to rely on strained interpretations of the laws and regulations under its jurisdiction, it’s easier to bring those cases against defendants who are not as well funded and less likely to mount serious defenses. If a large hedge fund and a smaller defendant are engaged in similar conduct the SEC finds questionable, that smaller defendant is a softer target. I honestly hate to say it. And I never write publicly about the matters in which I serve as defense counsel. But I have seen – and am currently seeing – intense focus by the Enforcement Division in areas where the SEC’s authority is quite weak, but the costs of litigating are financially and emotionally prohibitive. This is obviously a purely anecdotal “analysis”, but it’s not nothing either. I suspect Heese is actually onto something with his facts but has latched onto simplistic causes that may not match up.
Meanwhile, in this blog, Kevin LaCroix tackles the issue of D&O coverage for when the SEC issues a subpoena – and whether that constitutes a claim.
In the News: Politician Criticism of Buybacks
Last year, I blogged about a flurry of articles in the media criticizing the zany pace of buybacks (and last month, I blogged about BlackRock’s letters to CEOs about them). As noted in this article, the topic is now becoming a political hot potato as Senator Tammy Baldwin has sent this letter to the SEC “about the adequacy of the SEC’s rules governing repurchases on the open market.” In addition, SEC Commissioner Stein delivered this speech, noting that the SEC should be evaluating whether action in this area is warranted…
Activism & Buybacks: Seeking Board Seats to Apply Pressure
This DealBook article describes how a former Goldman banker who was placed in General Motors by the Obama Administration as part of the bailout has now put himself up for a seat on the GM board, as part of a campaign from four hedge funds to persuade the company to buy back at least $8 billion worth of shares by next year. This Form 8-K from GM files a “Notice of Director Nomination.” Also see this blog – entitled “At GM, The Year’s Most Interesting Activist Project” – from “The Activist Investor”…
Spanking brand new. By popular demand, this comprehensive “Regulation D Handbook” covers how to engage an independent auditor, from the factors to be considered and engagement letter issues. This one is a real gem – 101 pages of practical guidance – and its posted in our “Regulation D” Practice Area.
Political Contributions Disclosure: Required by Executive Order?
With the million-plus commentators supporting the rulemaking petition for political contribution spending seeming to have no effect on the prospects of the SEC wading in on this issue comes this news from this blog:
At least 70 of the top 100 companies in the U.S. would be covered by a proposed executive order to require federal contractors to disclose their political spending, according to an analysis released by Public Citizen. The liberal watchdog group and other supporters of regulating money in politics have called on President Barack Obama to issue an order requiring government contractors to disclose their spending to influence elections, including money funneled through nonprofit organizations such as the U.S. Chamber of Commerce and others, which don’t disclose their donors.
If Obama were to issue such an order, it would reach at least 70 percent of the Fortune 100 companies, according to a Public Citizen analysis released April 27. The group reviewed government contracts held by the 100 largest companies in the U.S.—as ranked by Fortune Magazine for 2014—and found that 70 of the companies had federal contracts totaling $100,000 or more from April 2014 to April 2015. Obama administration officials have acknowledged considering such an order, but have given no indication that it will be issued.
White House spokesman Josh Earnest said earlier this month that the Obama administration has no specific plans to push for stronger campaign finance laws as the 2016 presidential election campaign gears up, with predictions of record spending from super political action committees (PACs) and other outside organizations not formally linked to candidates or political parties.
The companies identified in the Public Citizen study as holding government contracts represent a wide variety of industries, including car manufacturing, defense, technology, energy and banking. The individual companies with contracts include Apple Inc., AT&T Inc., Bank of America Corp., Boeing Co., Exxon Mobil Corp., General Motors Co. and more. Nine of the top 10 companies on the Fortune 100 list were identified as government contractors, with the retail giant Wal-Mart Stores Inc. as the only exception. “Because the federal government buys everything from toothbrushes to nuclear missiles, it is no surprise that most large companies are significant government contractors,” Weissman said in the Public Citizen statement.
The Public Citizen study looked at contracts signed within the last year and aggregated totals to establish whether a company had received more than $100,000 in contracts. Public Citizen added that the 30 companies in the top 100 that didn’t have $100,000 in government contracts came disproportionately from the insurance industry.
Here’s an excerpt from this blog by Kevin LaCroix:
In the face of increasing investor activism, companies have adopted a number of defensive measures. Among these measures are a particular type of provision found in many corporate borrowers loan agreements – requiring the company to repay loans before they are due if a majority of the board is ousted – that are drawing increasing scrutiny. As these types of provisions have become more common, they have also attracted litigation. The boards of nearly a dozen companies have been hit with lawsuits alleging that the directors violated their fiduciary duties by allowing their companies to enter into credit agreements with these provisions. Developments in these cases may have implications for corporate boards. At a minimum the number of lawsuits that have been filed against corporate boards may have implications for D&O insurance underwriters.
