Yesterday, the SEC – by a 3-2 vote – held an open Commission meeting in which it proposed pay ratio rules. The proposed rule doesn’t specify any required calculation methodologies for identifying the median employee in terms of total compensation for all employees – so companies would have flexibility (eg. can use statistical sampling) – and companies would then disclose their methodology. Have it your way!
The proposing release is fairly open-ended – so it’ll be interesting to see if that makes folks happier or uncomfortable. Flexibility is the name of the game since what you can do – which you can’t do with NEO comp – is use reasonable estimates to come up with the 402 number for the “median employee” (although there won’t be much to calculate for the median employee at most companies since they don’t get paid a dozen different ways like many CEOs). For the statistical sampling section, drop by your friendly statistician to understand it. But that should not be much of a challenge as companies conduct statistical sampling for a whole host of issues.
There’s a 60-day comment period. The proposing release specifically says there’s a transition period once final rules are adopted, allowing companies to “omit” the first year. So if the rules become effective in 2014 (which is the most realistic timeframe), then you are first required to comply in the 2016 proxy season with 2015 fiscal year information.
– What This Means – There is still time to register for our upcoming pair of executive pay conferences – which starts next Monday, September 23rd – to hear what Keith Higgins, the Director for the Division of Corporation Finance, says about these proposed rules, as well as catch a “how to implement pay disparity rules” workshop that is part of the last panel on Tuesday, September 24th. If you can’t make it to Washington DC to catch the program in person, you can still watch it by video webcast, either live or by archive. Register now.
Registration for Attendance in DC – Walk-Ups Only After 9/19: Starting at 8 pm eastern tonight, you will no longer be able to register to attend in Washington through this site (however, you still will be capable of registering online to watch by video at any time). After this cutoff, you can still register to attend in DC – you just need to bring payment with you to the conference and register in-person.
SEC Goes After 23 Firms for Reg M Short Selling Violations Before Offerings
A few days ago, the SEC issued this press release announcing enforcement actions against 23 firms for improperly participating in public stock offerings after selling short those same stocks – as noted in this Reuters article, 22 of the firms settled – one has not. At the same time, the SEC’s National Examination Program and OCIE simultaneously issued a risk alert to highlight risks to firms from non-compliance with Rule 105 of Regulation M, including highlighting that in 40 settled actions finding Rule 105 violations since ’10, the SEC has collected disgorgement, penalties and interest in excess of $42 million.
More Threats of a Government Shutdown? Egads…
In case you haven’t been following the national news, there is yet another threat of a federal government shutdown that would shut down the SEC, etc. There have been so many threats and close calls, I’ve started to treat them as “crying wolf” – see this blog from April 2011. Anyways, the new D-Day is October 1st…
A member sent on this Bloomberg article about how Washington DC really works…
As you may recall, when the say-on-pay rules were first implemented in 2011, a number of companies forgot to file the subsequent Form 8-K/A under Item 5.07 disclosing the company’s determination regarding say-on-frequency. (The 8-K/A is due no later than 150 days after the annual meeting, but in no event later than 60 days prior to the deadline for submission of shareholder proposals under Rule 14a-8.) This oversight resulted in, among other things, companies either losing S-3 eligibility for one year or seeking a waiver letter from the SEC Staff.
As this proxy season was the first that smaller reporting companies were required to include say-on-frequency in their proxy statements, here is your friendly reminder for those companies of this 8-K/A filing obligation so that they can avoid the negative consequences that come with missing this required filing. Here is an excerpt from the November-December 2012 issue of The Corporate Counsel:
Timely Reporting of the Issuer’s Ultimate Frequency Determination–S-3 Eligibility. As we have discussed (see, e.g., our March-April 2012 issue at pg 10), a number of issuers failed to timely report (under Form 8-K Item 5.07), within 150 days after the Say-on-Frequency vote, the issuer’s decision as to the frequency of future Say-on-Pay votes. The Staff ended up being relatively understanding when processing Form S-3 eligibility waivers arising from this situation, but that accommodating stance may not be repeated in 2013 for SRCs conducting their first Say-on-Frequency vote. Form S-3 eligibility may be especially important for SRCs, including the General Instruction I.B.6 limited primary shelf eligibility adopted in 2007 for issuers with a public float under $75 million.
We now think the best course for SRCs (and other issuers conducting their Say-on-Frequency vote for the first time) would be to determine up front that the frequency favored by shareholders will be adopted by the SRC as its Say-on-Pay frequency, so that the frequency that is adopted by the SRC can be disclosed in the Item 5.07 Form 8-K reporting the annual meeting voting results within four business days of the meeting. This approach obviously avoids the risk of neglecting to file the Form 8-K amendment within 150 days of the triggering event.
Miss the “More on Reg D Offerings Today” Spreecast? Catch It Now
The technology held up during yesterday’s spreecast on Regulation D – except I had feedback from my microphone this time but luckily I barely spoke. The archive is now available if you care to watch – nearly 400 views!
This September-October issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Forum Selection Bylaws: The New Frontier
– Checklist: Shareholder Outreach Following M&A Transaction Announcements
– Lock-Ups: When Can They Give Rise to “Affiliate” Status & Potentially Implicate Rule 13e-3?
– Delaware Law: Amended to Provide for Ratification & Validation of Defective Corporate Acts
– A Dozen Take-Aways: In Re: Trados
Come participate in the spreecast – “More on Reg D Offerings Today” – at 2 pm eastern today! During it, Leonard Street’s Stephen Quinlivan, Cohen Gresser’s Bonnie Roe & Davis Wright’s Joe Wallin will provide color commentary that supplements last week’s Reg D webcast – think of it as network analysis after a Presidential debate. To access the spreecast, go here at 2 pm eastern. [Note last week’s Alan Dye spreecast has had over 500 views; a new spreecast has been calendared for September 30th: “PCAOB’s Audit Report Proposals: A Big Sleeper?“]
Here are FAQs about how spreecasts work – but the upshot is you have to register for Spreecast first (although it’s possible to watch without registering if you close a prompt). Simply sign up by using an email address by clicking the “Or sign up via email” link in the upper right hand side of the site (it’s in small print under the “Connect with Facebook” logo).
Here is David Jenson’s analysis of comment letters on the latest Reg D proposals. And Keith Bishop wrote this blog yesterday entitled “Congress Wants To Ban Felons While California Doesn’t Want To Ask.” And this blog has funny lyrics for a song entitled “The 506(c) Seed Financing Blues.”
SEC to Focus on Private Fund Adviser Compliance Procedures in Rule 506(c) Offerings
Here’s an excerpt from this blog by Morrison & Foerster’s Jay Baris:
With general solicitation and general advertising on the horizon, private fund advisers should review their policies and procedures to determine whether they are reasonably designed to prevent the use of fraudulent or misleading advertisements, said Norm Champ, the Director of the SEC’s Division of Investment Management, in remarks today before the Practicing Law Institute in New York. This review is especially important, he said, if the funds intend to engage in general solicitation. Hedge fund sponsors should also confirm that their practices for verifying accredited investor status meet the new requirements that apply to Rule 506(c) offerings.
Hats Off to the “NACD Directorship 2020”!
I’m weary of those that profess to be governance experts but they simply complain about changes from the status quo and offer no solutions to the numerous problems that still plague us. That’s one reason why I would like to congratulate the NACD for putting together a real – and comprehensive – effort to make meaningful change. Learn more in this blog…
As long rumored, late on Friday, the SEC calendared an open Commission meeting for this Wednesday, September 18th to consider proposing the pay ratio rules as required by Section 953(b) of Dodd-Frank. We will be providing full coverage as always.
– What This Means – There will be a lot of last minute registrations for our upcoming pair of executive pay conferences – which are being held the following week in DC and by video webcast. The keynote on Monday, September 23rd is Keith Higgins, the Director for the Division of Corporation Finance – amid 20 panels on pay disclosures in a single day. And there is a “how to implement pay disparity rules” workshop that is part of the last panel on Tuesday, September 24th. Register now.
Although the conference hotel is sold out, occasionally there will be an opening if someone cancels – so try them first. Otherwise, we have a back-up hotel nearby. Mention the conference if you talk to either to obtain a discount.
Executive Officer Determinations: Who is Our “Chief Financial Bear”?
Can a company cook up unique titles for their officers? Sure. For example, see the titles of the Build-a-Bear officers on page 42 of the company’s Form 10-K (eg. Chief Bearrister = General Counsel).
Before I dive into Twitter’s “tweet-heard-around the world,” let me deal with this head-turner that came first. Last week, I was bemused by this Fox Business reporter’s take of a Twitter spokeperson’s response in an email of “…” (known as an “ellipsis”) as somehow confirming an IPO due to the logic that Twitter had previously refused to respond to questions about it. Here are four questions that came to mind:
1. What Does “…” Mean? – Since I use “…” at the end of my blog on a daily basis, you would think I know what it means. As it turns out, my use of it – in the context that I use it – seems to be spot on according to this blog. I asked a friend and he thought it means fill in the blanks with whatever forms the basis of your reality.
2. Is This Today’s Equivalent of “No Comment”? – As lauded in footnote 17 of the Basic case: “To be actionable, of course, a statement must also be misleading. Silence, absent a duty to disclose, is not misleading under Rule 10b-5. “No comment” statements are generally the functional equivalent of silence.” It may be the death of wit – but companies may want to stick to more traditional responses so as to avoid any perceived (whether justifiable or not) ambiguity or meaning in their responses.
3. Did the Journalist Ask the Proper Question? – As I read the article, the question wasn’t “Is Twitter doing an IPO in 2014?” – but rather if anyone at the company can chat about the IPO rumors? Thus, however the response may be interpreted, it wasn’t answering the question of whether there will be an IPO.
4. A Brilliant Law School Exam Question? – Definitely…
Some members asked if this tweet was permissible. As I blogged last year, a handful of companies relied on Rule 135 to announce a confidential IPO submission soon after the JOBS Act was enacted.
Although Rule 135 notices typically contain more content than the maximum of 140 characters that make up a single tweet, Rule 135 only requires a legend “to the effect that it does not constitute an offer of any securities for sale.”
The rest of Rule 135 simply lays out the type of information permitted in a Rule 135 notice – it doesn’t require all of that limited information. And I don’t find Twitter’s tweet to be misleading – it seems to provide all the facts that a Rule 135 notice would need to convey. Professor Davidoff analyzes this too in his DealBook column – and Professor Rodrigues also does so in the Conglomerate Blog. Any different opinions?
Miss the “Being Alan Dye” Spreecast? Catch It Now
The technology held up during yesterday’s spreecast with Alan Dye – except I had my microphone jacked up too high (lesson learned for next time). The archive is now available if you care to watch – already over 350 views!
Poll: Does Dot-Dot-Dot Mean “No Comment” to You?
Here is an anonymous poll on the topic of whether you think that a response of dot-dot-dot is the equivalent of no comment:
Come participate in the first spreecast in our field at 4 pm eastern today! During “Being Alan Dye,” Alan and I will be on video during which I will interview him (and you will have the chance to type in your input during the program). I expect the spreecast will last only 15 minutes – it should be fun! To access the spreecast, go here at 4 pm eastern.
Here are FAQs about how it works – but the upshot is you have to register for Spreecast first (although it’s possible to watch without registering if you close a prompt). Simply sign up by using an email address by clicking the “Or sign up via email” link in the upper right hand side of the site (it’s in small print under the “Connect with Facebook” logo).
Here’s the other spreecast that I have calendared: “More on Reg D Offerings Today.” It will be held this Tuesday, September 17th at 2 pm est – and it will include reactions to this week’s popular Reg D webcast, as well as cover topics that weren’t addressed…
More on “It’s Here: Crowdsourcing Offerings Through Mobile Phones & Tablets”
A few years ago, I blogged about a start-up named “Loyal3” which allows companies to create “Customer Stock Ownership Plans” through on an app. I hadn’t heard much since then so I wasn’t sure if the concept caught on – but the WSJ just ran an article identifying a Luxembourg company – Globant SA – as the first to use the platform for an IPO.
Someone was kind enough to dig around in Edgar to see if any customer stock ownership plans had been filed so far – and they came up with two (see Topic #6695 in our Q&A Forum). So it doesn’t look like a mad rush to use Loyal3 – but there is some movement…
Applying Forfeiture Estimates to Stock Plan Expense
We recently mailed the September-October Issue of The Corporate Executive and it includes pieces on:
– Applying Forfeiture Estimates to Stock Plan Expense
– Planning for FICA Obligations for Retirement-Eligible Employees
– Traps for the Unwary: Important Considerations and Common Mistakes in Estimating Future Forfeitures
– Plaintiffs Achieve Victories in Litigation Over Stock Plan Proposals
Act Now: Get the “rest of 2013 for free” when you try a 2014 No-Risk Trial today.
I keep hearing the theme song from the “Mary Tyler Moore” show in my head. “You can have a town, why don’t you take it, you’re gonna make it after all.”
Apparently, someone took the liberty of submitting this comment on the political contribution disclosure rulemaking petition using my name. Yes, me. Not Charlie Sheen or Ashton Kutcher (or someone from the SEC as I recently blogged about). My very own imposter (although I like to think of it as an impersonator)!
Actually, it’s surprising that this kind of thing doesn’t happen more often – or maybe it does? To submit a comment on a rulemaking, there is no real verification process – nor should there be in my opinion – since anyone can input false identification information easily enough. The closest thing to verification is that an e-mail address is required to be inputted – but there is no way for the SEC’s system to be able to distinguish e-mail addresses from persons claiming to be others.
And so, there you have it. My career highlight without me lifting a finger…
Not that I want to scare off my mysterious unknown friend – but one member sent in a note that perhaps this is a violation of 18 U.S.C. Section 1519:
“Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.”
Corp Fin Issues Rule 144 Interpretive Letter: Credit for Canadian Reporting!
Corp Fin doesn’t issue interpretive letters in the Rule 144 arena that often anymore. Yesterday, Corp Fin issued its first Rule 144 interpretive letter this year – this new one states the view that Rule 144 is available for the sale of securities of certain Canadian companies, notwithstanding the fact that those companies previously had been shells, within the meaning of Rule 144(i). Corp Fin gives credit to Canadian reporting!
Webcast: “The Use of Social Media in Deals”
Tune in tomorrow for the DealLawyers.com webcast – “The Use of Social Media in Deals” – to learn from K&L Gates’ Mary Korby; Kekst and Company’s Lissa Perlman and K&L Gates’ Cedric Powell about how social media is being used in deals and what that means for regulatory purposes, including:
– What are common examples of social media use in deals?
– How should social media communications be treated for SEC filing purposes? For Rule 425?
– What types of activities are permissible? Which are not?
– What is the best way to leverage social media in deals?
In response to a question posted in our Q&A Forum, I have posted several questionnaires that you can use both internally and for third-parties in our “Conflict Minerals” Practice Area. Meanwhile, the Elm Group alerted me to:
– Comments from EU Commissioner for Trade Karel De Gucht provide a six-point framework for the EU’s conflict minerals directive still under development.
– NGOs Enough and Responsible Sourcing Network, along with Socially-Reponsible Investment firms, published their expectations and specific recommendations for SEC filings on conflict minerals.
– A NY Times article exposing flaws in CSR audit practices – and a LinkedIn discussion explores the potential foreshadowing for conflict minerals audits.
Also see the answers in response to Topic #7765 in our “Q&A Forum” for some practical advice about how to handle the questionnaires (remember you can search by key word or topic number with the search tool in our Forum)…
A preliminary statement of issues filed by the National Association of Manufacturers, the Chamber of Commerce and the Business Roundtable on August 13 provided a glimpse of the arguments that will be made in their appeal of the district court decision to uphold the SEC conflict mineral rules, which we previously discussed here.
The appellants plan to address several areas where they believe the Commission erred in its conclusions and acted in an arbitrary and capricious manner. This includes the SEC’s conclusion that it lacked authority to adopt a de minimis exception, interpreting the statutory language “did originate” to mean “reason to believe, and including non-manufacturers who contract for the manufacture of products. In addition, the appellants intend to question the merits of providing a shorter transition period for larger companies, since larger companies will have to depend on smaller companies to comply with the rule. The adequacy of the economic analysis and free speech arguments also will be made.
Meanwhile, Ning blogs that a group of 44 investors, including many socially responsible funds, recently sent a letter to Chair White urging the SEC to defend the resource extraction rules that were struck down by the courts. However, the SEC stated that it won’t appeal (as the deadline for appealing was crossed) – the SEC intends to rewrite the rules instead.
Today, Conflict Minerals; Tomorrow, Conflict Wood and Conflict Water?
Loving this news brief from Cooley’s Cydney Posner: According to this article in Compliance Week, “New Breed of Regulations Won’t End With Conflict Minerals,” the Dodd-Frank provisions regarding conflict minerals and related SEC regulations may well just be the beginning of an onslaught of social-activist-driven legislation related to foreign conflicts and sustainability. (Legislation? Congress? Huh? ) Of course Congress is not the only source of legislation; state and international legislators also step in from time to time. Moreover, companies are often pressured by activists directly or indirectly to take action or cease certain conduct.
Below are some of the potential “problem materials” identified in the article that may hit the radar of legislators or regulators:
– ‘Blood Diamonds’: The sale of “blood diamonds” to finance violent rebel groups, particularly in Africa, was the impetus for development of the “Kimberley Process,” which provides conflict-free certifications intended to eliminate the use of blood diamonds. The Clean Diamond Trade Act, signed into law by President Bush in 2003, provided for U.S. participation in the Kimberley Process. However, the article reports that there have been “growing complaints… that the Kimberl[e]y Process is failing in its effort, [and, as a result,] additional regulations might lurk in the future.”
– ‘Death Metal’: Tin mined in Indonesia, particularly the Bangka Island region, “is controversial, not just because of ongoing human rights concerns, but for environmental reasons as well.” Military and police violence in the area “have long been concerns for human rights groups.” In addition, environmental protestors have targeted a number of electronics manufacturers regarding damage done to tropical rainforests from tin mining in the country.
– Palm Oil: Producers of palm oil, which is produced in Indonesia and elsewhere, are also under the gun for “environmental destruction and the abuse of human rights,” including alleged widespread child labor, human trafficking, violence against workers and slavery. Palm oil and its derivatives are found in many products, including cooking oil, soap, lipstick and fuel.
– Wood: According to the article, sustainability issues, such as biodiversity and deforestation, are becoming more prevalent in connection with the use of wood: “[w]here companies get their wood, and how they ensure that proper reforestation programs are in place, is a growing concern.” Furniture manufacturers have been under pressure from activists to bolster use of certified timber and avoid illegal logging.
– Cobalt: The article speculates that cobalt may eventually be added to the list of the four conflict minerals currently regulated under Dodd-Frank. Apparently, the DRC is the largest producer of the world’s cobalt supply, and the Enough Project, concerned regarding unsafe working conditions and child labor, estimates that 60% of that production comes from illegal mines. Cobalt is used as a blue pigment in many paints and is widely used as a component of lithium ion batteries, in tool construction and for artificial joints and limbs.
– Dirty Water: According to a commentator cited in the article, “‘[a] lot of people are talking about water footprints; it is not only about carbon footprints anymore…. Water is the reason for several wars around the world. There isn’t a lot of public reporting about that yet because companies really need to think about it before they announce all the problems they are causing with their water use.'”The article also suggests that, in addition, numerous other physical commodities could easily become subject to this type of regulation, including cotton, leather and some food items.
Poor sourcing practices may also lead to future legislation. For example, poor factory conditions, as illustrated by recent reports of harsh working conditions, including employee suicides in China and the fire at and collapse of a garment factory in Bangladesh, are of grave concern The article reports that “many retailers agreed to sign onto a legally binding European accord that requires retailers fund fire safety and building improvements at the Bangladesh factories they employ. A non-legally-binding effort spearheaded in the U.S. for its companies has been less successful…. Although federal legislation to force an EU type of agreement is unlikely, expect to see shareholder activists push a similar agenda.”
The article speculates that we may also see rules for public companies regarding human trafficking and slavery, based perhaps on the California Transparency in Supply Chains Act, which requires many companies doing business in California to disclose efforts they have taken to eradicate human trafficking and slavery from their direct supply chains for tangible goods offered for sale. The law applies to retail sellers and manufacturers with annual worldwide gross receipts exceeding $100 million that do business in California.
The article suggests that, in light of “the lengthy list of supply chain issues that could eventually spur new regulations, companies may want to leverage their ongoing conflict minerals efforts to gear up for what is to come.” That doesn’t mean, as one commentator noted, buying “a new technology solution for all upcoming legislation…. Instead, especially larger companies, should look to maintain a broader compliance perspective, and conflict minerals demands ‘should be seen as part of the bigger change in the regulatory environment.'” Companies may want to focus on these issues from a larger perspective as questions of risk management.
Tune in tomorrow for the 75-minute webcast – “Reg D Offerings: What Is Happening Now” – to hear WilmerHale’s Meredith Cross, Morrison & Foerster’s Dave Lynn, Calfee’s John Jenkins, Western Reserve Partners’ Dave Mariano and SecondMarket’s Annemarie Tierney analyze the SEC’s new rules and how market practice will likely develop in their wake.
SEC Brings First Reg FD Case In Nearly Two Years
On Friday, the SEC brought this enforcement case against the former investor relations head of First Solar, after he indicated in phone conversations with some analysts and investors that the company was unlikely to receive a much-anticipated loan guarantee from the Department of Energy. When First Solar broadly disclosed this material information in a press release the next morning, its stock price dropped 6%.
As noted by Davis Polk’s Ning Chiu in this blog, the SEC decided not to bring any action against First Solar because of the company’s “extraordinary cooperation.” The SEC determined that, prior to this violation, the company “cultivated an environment of compliance through the use of a disclosure committee that focused on compliance with Regulation FD.” The SEC’s press release noted that the company immediately discovered the selective disclosure and promptly issued a press release the next morning – and reported the misconduct to the SEC. The company also undertook remedial actions, including conducting additional Regulation FD training. The former IRO agreed to pay $50,000 to settle the SEC’s charges (see this Dick Johnson blog entitled “Reg FD: Does $50,000 get your attention?“).
SEC Issues Second Wave of Whistleblower Program Awards
As noted in this memo posted in our “Whistleblowers” Practice Area, the SEC recently announced that it expects to pay a combined $125,000 (which is 15 percent of monetary sanctions collected) to three whistleblowers who helped the SEC and DOJ stop the CEO of a sham hedge fund.
Meanwhile, this Courthouse News Service article notes that a SEC attorney in the New York regional office has sued the agency, alleging that the Commission retaliated against her after she complained that a supervisor blocked efforts to investigate investment managers.
As noted in this memo, this November, in Lawson v. FMR LLC, the Supreme Court will hear argument on whether “whistleblowers” employed by a privately held contractor or subcontractor of a publicly traded company are protected from retaliation by Sarbanes-Oxley. The Court granted certiorari to review the judgment of the U.S. Court of Appeals for the First Circuit in a case involving two self-proclaimed whistleblowers employed by private contractors performing services for publicly traded mutual funds.
As you know, I like to try out new ways to communicate – and so I am launching a series of spreecasts. It’s a cool new communication platform – you will be able to watch the speakers on video – while also being able to chat with others and ask questions of the speakers. Here are FAQs about how it works – but the upshot is you have to register for Spreecast first (although it is possible to watch without registering if you close a prompt). Simply sign up by using an email address by clicking the “Or sign up via email” link in the upper right hand side of the site (it’s in small print under the “Connect with Facebook” logo).
Reminder: Act Now for “End-User Exception” for Swaps Activities
Here is a reminder from this Gibson Dunn blog that starting on Monday, new CFTC rules will take effect for non-financial companies that use swaps to hedge or mitigate commercial risk. These rules will require the clearing of interest rate swaps and credit default index swaps unless an exception is available. One such exception is the “end-user exception,” and public companies planning to rely on this exception must take certain governance steps. These include obtaining approval from the board of directors or an appropriate committee to enter into swaps exempt from clearing.
Last week, Helen of Troy became the 59th company to fail its say-on-pay in ’13 – see the Form 8-K – with only 12% support, the 2nd lowest level this year.
And then we have Capstone Turbine who appears to be the 60th company with only 48% support – although its Form 8-K doesn’t quite characterize it either way, as it just provides the share data. However, the company’s proxy statement (pg. 2) states that abstentions have the effect of an against vote.
Thanks to Karla Bos of ING for the heads up on these!
