On November 26, 2013, the Nasdaq Stock Market filed a proposal to amend its listing rules implementing Rule 10C-1 of the Securities Exchange Act of 1934, governing the independence of compensation committee members. Currently, Nasdaq Listing Rule 5605(d)(2)(A) and IM-5605-6 employ a bright line test for independence that prohibits compensation committee members from accepting directly or indirectly any consulting, advisory or other compensatory fees from the company or any subsidiary subject to certain exceptions.
Based on the potential burden the bright line approach places on companies’ ability to recruit eligible directors, Nasdaq has proposed to replace this rule and its exceptions with a requirement that all compensation received from a company be considered in the independence determination. Separately, Nasdaq has also proposed some minor revisions to the affiliation prong of the compensation committee independence test under Rule 10C-1, which requires that consideration be given in independence determinations to whether a compensation committee member is affiliated with the issuer, a subsidiary of the issuer or an affiliate of a subsidiary of the issuer. All of these changes would align Nasdaq’s approach to compensation committee independence with that employed by the NYSE.
Yesterday, Mike Melbinger blogged a reminder that the Nasdaq has provided a preview of its form of certification (see pg. 16) for listed companies to use when it complies with Nasdaq Rule 5605(d) next year; the Nasdaq will be releasing the final form sometime in early January…
Say-on-Pay: Now 71 Failures – How Does That Compare With My Early Season Poll?
Last month, DFC Global became the 66th company to fail its say-on-pay in ’13 with just 26% support – see the Form !0-Q. DFC Global has failed two years in a row (last year with 25% support). And these five companies became first-time failures – #67-71: Gigoptix with 39% support (Form 8-K); Corinthian Colleges with 48% support (Form 8-K); CytoDyn with 43% support (Form 8-K); Fusion-io with 36% support (Form 8-K) and SWS Group with 48% support (Form 8-K). Thanks to Karla Bos for these as always!
Here are poll results from earlier this year in which readers predicted the number of say-on-pay votes that would fail to garner majority support in ’13 (here are results of 2012’s predictions):
Check out this blog by Davis Polk’s Ning Chiu about how say-on-pay fared – Ning notes that of the 995 equity incentive plans voted on, ISS supported 73%, but ultimately only 8 plans did not pass.
Take Two Video: “Say-on-Pay in 2013”
Here is a 45-second video about the success rates for say-on-pay over the past three years:
Although reading from each side’s perspective in this Bloomberg article leads me to believe that SEC Staffers have no reason to be concerned about being watched for taking a lunch that is too long, it does reveal that there are a number of issues between the SEC’s union and management that bears watching. In fact, bigger issues than the ones identified in the article are under the skin of many Staffers. [And for a walk back in time, check out my blog entitled “The Security at the SEC: A 20-Year Timeline.”]
Here’s an excerpt from the article:
“Despite the fact that most SEC employees are often told that they may take an hour for lunch, technically, we are only entitled to thirty minutes,” wrote Greg Gilman, president of the union, in an e-mail sent to SEC workers last week. “Do not fall into the trap of believing that because you are a ‘professional’ the rules do not apply to you.”
Fueling the union’s angst is a new SEC plan to require the use of security cards that record the times people enter and exit the building in its offices across the country, a move Gilman wrote would “substantially increase surveillance.” He said that data from the system in place at the Washington headquarters is increasingly used in cases against employees accused of skipping out of work.
SEC officials said the worries are overblown. While the security system does keep data on employees’ comings and goings, the agency doesn’t check the information unless there is a reasonable complaint that attendance violations are occurring, said John Nester, an SEC spokesman. Those tips come from both managers and co-workers, he said.
Relations have been tense between the SEC’s management and its union, which represents some 3,000 of the agency’s 4,000 employees. Gilman has also criticized a recent decision by Chairman Mary Jo White to give added retirement and vacation benefits only to managers and has accused the commission of reneging on part of a student-loan repayment program. A Government Accountability Office report in July described agency workers as having “low morale” and a “distrust of management.” Gilman’s Oct. 24 note said the group, part of the National Treasury Employees Union, is seeking the services of a federal mediator to help resolve the matter.
This excerpt balances the tone of this article somewhat:
Not all of White’s interactions with the union have been troubled. In July, she and Gilman issued a joint statement lauding a new collective bargaining agreement they negotiated. The contract, set to go into effect shortly, could help tamp down the lunch controversy: One of its provisions would allow some employees to telecommute for as many as five days a week from home — where presumably there are no time clocks installed.
Will the Sequester Force the SEC to Furlough Staffers?
A few weeks ago, the CFTC announced that it was being forced to implement an administrative furlough of up to 14 days, including three days before January 15th. No word yet on what will happen to the SEC Staff along these lines…
The SEC has announced the agenda & panelists for this Thursday’s proxy advisors roundtable.
Our December Eminders is Posted!
We have posted the December issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
A while back, my good friend Jim Brashear of Zix Corporation sent these thoughts:
At a former employer, we did around a dozen M&A transactions each year. Depending on the scope of the project, we could have dozens of employees involved, in various offices around the globe.
We opted not to require manually-signed NDAs. There are delays and administrative time involved in sending, collecting and filing them. All employees signed a confidentiality agreement when they join the company. It seemed unnecessary to have them sign another confidentiality agreement for particular projects. Separate NDAs also potentially created the impression that information was only subject to confidential treatment if there were a separate NDA. We preferred to reinforce the applicability of the general confidentiality policy (or agreement) Finally, some executives were involved in many, many confidential projects, and it was bothersome to get manually signed NDAs from them each time.
Instead, we opted to send “confidentiality reminders” via email and required the employee to reply and acknowledge the reminder. The reminders stated the particular project was subject to the company’s confidentiality policy (or general confidentiality agreement), reminded the employee not to trade on non-public information about any of the companies involved, and described security procedures for the project. Not every project warranted the same levels of security, so we could tailor the reminders depending on the sensitivity of the project.
Also, we found that there tended to be two groups of disclosed employees. A small group that was aware of the entire scope of the project, the parties involved, and strategic implications – which we called the “full disclosure” group. Another group involved employees who had to do some work related to the project, and were generally aware that there was something unusual going on, but who did not have full visibility into the project – which we called the “limited disclosure” group. We managed the participant lists separately. The limited disclosure participants were not necessarily aware of all of the other employees working on the project. The full disclosure participants were informed about every employee who was disclosed, on either list.
An interesting development has been the emerging debate about whether the growth of the independent board is actually a good thing. In this Cooley alert, Cydney Posner outlines the debate. And former SEC Commissioner Roberta Karmel weighs in with her piece entitled “Is the Independent Director Model Broken?” Finally, Prof. Urska Velikonja weighs in this paper on “The Political Economy of Board Independence.”
Last week, the SEC posted its study on credit rating agency independence…
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:
– SEC Staffer: Significant Majority of Whistleblowers Reporting Internally First
– Director Conflicts: How Often to Monitor
– Is a $1 Billion Whistleblower Award from the SEC Coming?
– Report: Lack of Security in Board Communications
– Are Companies Ignoring the SEC’s Climate Risk Disclosure Guidance?
On Friday, I attended the ABA’s Business Law Fall Section Meeting. For me, the highlight was Corp Fin Director Keith Higgins trying to get the “Dialogue with the Director” session back into a true dialogue mode, throwing out the wild idea of page limits for proxy statements. He merely was suggesting it as a way to get people thinking about how to accomplish one of the goals stated in SEC Chair White’s recent speech on disclosure reform – Keith was not actually advocating it. More on this later.
Keith mentioned that the SEC had a lot of rulemaking going on that was not in the Corp Fin area (see this article about Chair White’s ambitions before the end of the year) – so that it was unlikely that we would see any more Corp Fin rulemaking in ’13 other than the Staff is working hard to implement the Chair’s hope that Reg A+ gets proposed in “the fall.” Keith did say that we might see the outstanding three Dodd-Frank Corp Fin rulemakings (those remaining from the “Gang of 4”) in proposal form sometime in earlyish ’14. Stay tuned.
There was a bit of discussion about Reg D and general solicitation. Here are some notes about that from MoFo’s blog by Anna Pinedo and Ze’-ev Eiger.
And Bonnie Roe of Cohen & Gresser sent me her highlights from the ABA meeting:
1. Keith Higgins said that the 5 factor integration test “feels outmoded” and there is Chair Schapiro’s letter responding to questions from Rep. Issa about what the SEC was doing to assist capital formation which suggests that the 2007 guidance applies to private as well as public offerings (see end of the first full paragraph on p. 8). However, I’m not sure a letter from the Chair and statements by a Corp Fin Director (it was also noted that Meredith had said the 2007 guidance applied more broadly) count as “Commission” guidance. I think everyone likes the idea of the 2007 guidance – it’s figuring out how it applies in the face of Rule 502(a) for private offerings that is the challenge.
2. Some CDIs are due on bad actors. “Affiliated issuer” doesn’t mean affiliate, though we don’t yet know what it includes, and there may be interpretations of when a group holding 20% of the vote includes a bad actor.
3. I didn’t attend the SEC’s Small Business Forum on Thursday but was interested to hear in a committee meeting about a proposal discussed there. AnneMarie Tierney of Second Market suggested a regulation codifying the “4(a)(1-1/2)” exemption to assist option exercises coupled with secondary sales by company officers.
Reg D: The Value of Relationships & More
Much continues to be written about the SEC’s Reg D amendments & proposals as reflected by the numerous memos posted in our “Regulation D” Practice Area. I believe the SEC’s Small Business Forum had record attendance last week because of these new rules. Here’s an interesting blog by MoFo’s Anna Pinedo and Jim Tanenbaum about pre-existing relationships in our social media era and here’s a blog by Anna entitled “Is Any News Article a General Solicitation?” – and in his “Startup Law Blog,” Davis Wright’s Joe Wallin has been blogging regularly about Reg D items…
SEC & DOJ Discuss FCPA Enforcement Trends
Courtesy of Morgan Lewis, here are notes from a recent conference where SEC and DOJ officials talked about FCPA Enforcement trends…
ISS also launched a consultation on longer term changes on some core issues including auditor rotation, equity plans, and independent chairs. Here is a blog by Davis Polk’s Ning Chiu. Once I start getting them, I’ll be posting memos in our “ISS Policies” Practice Area.
Meanwhile, ISS has enhanced its voting platform for its investor clients – the new “ProxyExchange 2.0.” And the SEC has officially calendared its proxy advisors roundtable for December 5th – it’s only 4 hours long (but no agenda nor speakers announced yet).
All Systems Go For COSO?
In FEI’s “Financial Reporting Blog,” the FEI notes that the SEC is emphasizing financial fraud and makes this observation while COSO framework changes are in transition. During the transition period, COSO’s guidance notes that companies that make public assertions about the effectiveness of their internal controls, companies (and auditors) should disclose which version of the COSO framework the company was referencing to – COSO’s ’92 framework or the updated ’13 framework.
Mike continues to post new items daily on his blog – “Mike Gettelman’s 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:
– Rule 506(c): An Exemption or a Safe Harbor?
– A Duty to Disclose More? Food for Thought
– Two Practice Tips
– Combining Form 144 Into Form 4
– More on Forum Selection Bylaws: Proxy Advisors
In my experience, there is no more widely read document than one that reveals how much others in similar situations make. It’s the bling baby. $$$. So folks should be excited to read Equilar’s new study on general counsel pay at Fortune 1000 companies. Here are the key findings:
– How Much – The median total compensation for General Counsels at Fortune 1000 companies was $1,613,654.
– Direct Reporting to CEO – General Counsels who reported directly to the CEO had a median pay of $1,676,098, 33.2% higher than those who do not.
– Impact of Company Size – General Counsel median pay at companies with more than $20 billion in revenue was $2,472,037, while median pay at companies with $10-$20 billion in revenue was $2,134,026.
– Growth Rate – For the 262 General Counsels that participated in both Equilar’s 2013 and 2012 surveys, median total compensation increased 4.9% this year.
– Perks – Nearly three quarters of General Counsels in the survey were eligible to receive perquisites. There was a difference in perquisite eligibility between General Counsels who report to the CEO and those who do not. Of General Counsels who reported to the CEO, 71.6% percent were eligible to receive perquisites, while 76.7% percent of General Counsels who did not report to the CEO were eligible.
– Industry Breakdown – Despite not being a top five industry for highest median total compensation, General Counsels in the Food & Beverage industry had the highest level of perquisite eligibility, at 94.1%.
– Gender Pay Gap – Of the 357 General Counsels disclosed in proxy filings, 295 were male and 67 were female. There was a difference in total compensation between male and female General Counsels, with a median total compensation of $1,683,694 for males and $1,534,629 for females.
Transcript: “Drilling Down – Statistical Sampling for Pay Ratios”
We have posted the transcript for our recent CompensationStandards.com webcast: “Drilling Down – Statistical Sampling for Pay Ratios.”
ISS & Glass Lewis: December Deadlines For Your Peer Group Updates
As Mike Melbinger blogged yesterday on CompensationStandards.com, it’s that time of the year. Here’s a note from Georgeson:
The major proxy advisory firm vote recommendations on “say-on-pay” and other executive compensation proposals are highly influenced by those advisory firms’ selection of the peer groups used to analyze a company’s pay-for-performance relative to its peers. Often the advisory firm-selected peer groups overlap with the peer group that appears in the company’s proxy statement, but there can be substantial differences that may lead to unexpected vote recommendations.
ISS and Glass Lewis consider input from companies as to what companies should appropriately be considered peers for compensation. While many issues influence the advisory firms’ recommendations on say-on-pay votes, the focal point of the analysis is pay-for-performance and peer-group selection plays an integral part in the vote analysis and recommendations. Therefore, Georgeson recommends companies take the opportunity to update these advisory firms on any changes in their selected peer groups.
Glass Lewis
Glass Lewis partners with compensation data provider, Equilar, which generates Equilar Market Peers that are subsequently used to prepare Glass Lewis’ pay-for-performance quantitative analysis. Companies in the Russell 3000 Index can submit their peer groups on Equilar’s website, and here is background on their process. To be included in Equilar’s January calculations, the deadline for updating your peer group is December 31, 2013. The next updates will not be calculated until July 2014.
ISS
The timeframe for Russell 3000 companies with meetings in spring and early summer of 2014 updates began today, November 20, and will end at 5:00 p.m. ET on December 9, 2013. Here is where you can provide peer group feedback.
If a company does not inform ISS of any such changes, ISS will typically use the peer group information as disclosed in the prior year’s proxy statement (i.e., for meetings in 2014, ISS will typically use peers disclosed in 2013). If a company has not made any changes to its peer group since its last proxy statement, no action is necessary.
As you consider submitting information on your peer group changes, please note the following:
– ISS Research will use the information as an input to its peer group formulation for purposes of its pay for performance analysis in the proxy research report, and will not share it with any third party within or outside of ISS prior to the publication of its report.
– The list of peer group companies submitted to ISS should match the list as disclosed in the 2014 proxy statement. Otherwise, ISS may apply additional scrutiny to the variance in the peer groups, as part of its pay for performance analysis.
– The peer group indicated should be the peer group used for benchmarking CEO pay for FY2013. If a company does not use peer group in setting pay for its CEO, it may still be useful for the company to provide ISS with a list of representative peers, provided the list will be disclosed in the 2014 proxy statement. If a company uses a market index or broad survey, then it can indicate to ISS the index or survey used, but ISS will not directly use such information in its peer selection.
Here’s news from this blog by Leonard Street’s David Jenson: In a November 15th letter to Representative Scott Garrett (Chairman of the Subcommittee on Capital Markets and Government-Sponsored Enterprises for the House Financial Services Committee), SEC Chair Mary Jo White described potential changes to the accredited investor definition and factors that will be considered by the SEC in its comprehensive review of the accredited investor definition.
Ms. White’s letter was in response to an October 30th letter from Mr. Garrett that had posed a number of questions relating to the SEC’s plans with respect to its review of the accredited investor definition, which is required by Section 413(b)(2)(A) of the Dodd-Frank Act. The Wall Street Journal has a good article up that provides some additional background and context for this letter and the ongoing back and forth between the SEC and Congress.
In responding to Mr. Garrett’s questions, Ms. White did not offer many specifics, but did indicate that the SEC is considering all aspects of the accredited investor definition. Ms. White’s letter states that the SEC is examining:
– whether the existing net worth and income tests are appropriate measures that should continue to be used (presumably this also includes consideration of whether and how the net worth and income thresholds could or should be adjusted);
– whether financial professionals, such as registered investment advisers, consultants, brokers, traders, portfolio managers, analysts, compliance staff, legal counsel, and regulators should be considered accredited investors without regard to net worth;
– whether individuals with certain educational backgrounds focused on business, economics, and finance should be considered accredited investors without regard to net worth;
– whether an expanded pool of accredited investors would help provide liquidity in private placement investments and thereby reduce the risk profile of those investments;
– whether reliance on a qualified broker or registered investment adviser should enable ordinary investors to participate in private placements; and
– whether reducing the pool of accredited investors would harm U.S. GDP.
It appears that Ms. White agrees in principle with several assertions underlying Mr. Garrett’s questions. For example, Ms. White agrees that the inclusion of more financially sophisticated investors in private offerings (regardless of whether the investors are “large or small”) would improve the extent to which private offerings are scrutinized by investors generally. Ms. White is also open to the idea that certain professional certifications and educational backgrounds may be useful proxies for financial sophistication, such as CPA or CFA designations, securities licenses, and degrees in business, finance, accounting, or economics. Ms. White also noted, however, that the SEC has already received comments expressing concern as to whether academic background alone is an appropriate measure for determining accredited investor status.
Ms. White also cautioned that alteration of the accredited investor criteria may not necessarily result in a substantial increase in the pool of accredited investors due to overlap between those who meet the existing tests and those who might meet any new or changed tests. The letter concludes by noting that the SEC is in the process of complying with Mr. Garrett’s request that it produce all communications between the SEC and the GAO relating to accredited investor matters over the last 18 months.
Leonard Street’s Steve Quinlivan blogs about three House members wrote this letter to Sen. Harry Reid objecting to the effort in Congress to create a Mexican exemption to the SEC’s resource extraction rules – and Ethan Mark blogs about integration issues under the JOBS Act…
Our New “Description of Securities Disclosure Handbook”
Spanking brand new. This comprehensive “Description of Securities Disclosure Handbook” provides a heap of practical guidance about how to deal with Item 202 of Regulation S-K. This one is a real gem – 18 pages of practical guidance.
Some First-Hand Crowdfunding Experience
In this podcast, Ben Miller of Fundrise describes his thoughts and experience about crowdfunding, including:
– What is Fundrise?
– What is Fundrise’s experience with Reg A and state registration?
– What do you think of the SEC’s crowdfunding proposal?
– What about FINRA’s crowdfunding portal proposal?
With the SEC’s proxy advisor roundtable coming up in a few weeks – December 5th – the debate over the role of those firms is reaching a fever pitch. In this podcast, Sarah Wilson, CEO of the UK’s Manifest, weighs in on the debate over proxy advisor regulation, including:
– What is Manifest? What is the proxy advisor market like in Europe?
– How are proxy advisors regulated right now in Europe?
– What is the proposed global set of best practices for proxy advisors?
– What do you think of the criticism of proxy advisors in the US?
Industry Task Force Makes Capital Formation Recommendations
An industry task force – the “Equity Formation Task Force” – which might well be seen as a successor to the IPO Task Force, recently presented a report to the Treasury Department recommending a few additional measures to facilitate capital formation. As noted in this MoFo blog by Anna Pinedo, the report repeats a number of the recommendations made by other groups, such as calling for the SEC to propose a framework for Section 3(b)(2) (or Regulation A+) offerings as required by the JOBS Act, and a pilot program on wider tick sizes.
Arthur Levitt: On Twitter!
Come check out the longest-serving SEC Chair Arthur Levitt, age 82, on Twitter – his handle is @ArthurLevitt. His tweets are already making news, such as this WSJ piece on how direct data feeds should be used to monitor employee trades. Love this pic of Arthur & a fish he caught…
On Friday, the SEC’s Office of the Whistleblower published its 2nd annual report for its activities of for the past year. The highlights include:
– 3,238 tips recorded over the last year – 8% increase from last year (and as Steve Quinlivan notes, that’s almost 9 complaints a day)
– Nearly $15 million awarded
– The SEC is sitting on $439 million in funds to pay whistleblower awards.
– California tops the list of states where tips are coming from, topping New York from last year
– UK beat China this year as the biggest international source of tips
– Protecting anonymity of whistleblowers is a high priority
– Specifically looking for retaliation cases
SCOTUS Agrees to Revisit “Fraud on the Market” Presumption
Here’s news from this MoFo memo by Jordan Eth and Mark Foster:
The Supreme Court has agreed to revisit the basic premise of Section 10(b) securities class actions that was first articulated in Basic v. Levinson, 485 U.S. 224 (1988). On November 15, 2013, the Court granted a petition for certiorari in Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317 (U.S. Nov. 15, 2013) to consider two questions:
1. Whether the Court should overrule or substantially modify the holding of Basic to the extent that it recognizes a presumption of class-wide reliance derived from the fraud-on-the-market theory.
2. Whether, in a case where the plaintiff invokes the presumption of reliance to seek class certification, the defendant may rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of its stock.
If Basic‘s fraud-on-the-market presumption is overturned, Section 10(b) securities litigation would be radically altered. If the presumption survives in any form, the Court may provide much-needed guidance about the means and timing of rebutting it, a relatively rare occurrence in securities litigation given the lack of precedent from the Court.
In his “D&O Diary Blog,” Kevin LaCroix also discusses this development – and here’s a Sullivan & Cromwell memo and a blog from Lane & Powell’s Doug Greene on the topic…
Transcript: “Tender Offers Under the New Delaware Law”
We have posted the transcript for our recent DealLawyers.com webcast: “Tender Offers Under the New Delaware Law”
This new 11-page article from the New Yorker profiling SEC Chair Mary Jo White is intimate (her favorite band is Fleetwood Mac!) and touches on a number of topics, including the one that drives me a bit crazy, the “revolving door.”
Even More on the “Revolving Door”
I feel like I’ve blogged too much on the “revolving door” – here was my latest – but it continues to be a hot topic. This blog by David Smyth a few months ago reflects my feelings on this topic. And this DealBook column takes the opposite view, noting some proposals that would stymie the revolving door.
And this note that I received from a member also rings true in some cases:
The irony is that I suspect that if anything, the influence is running in the other direction. Every former Staffer I have ever worked with seemed very quick to side with the Staff, and perhaps I’ll say hesitant to take a differing view. Recently I worked with someone with “connections”, and to be honest, I worried that his friendly relations, and his personal interest in maintaining them, made him less aggressive than I personally thought was warranted under the circumstances. Ironic.
Mailed: September-October Issue of “The Corporate Counsel”
We have mailed the September-October Issue of The Corporate Counsel, and it includes pieces on:
– Regulation D Reimagined: Grappling with the New Rule 506 Bad Actor Disqualification Provisions
– Form of Rule 506 Disqualification Event Questionnaire
– Concurrent Rule 506(c) Offerings and Rule 506(b) Offerings–Integration Issues
– Impact of FINRA Rules on Use of General Solicitation
– More on Exclusive Forum Provisions–Upheld in Delaware, Now What?
– New (and Improved) NYSE Quorum/Vote-Counting Standard
– Interactive Data Back in the Spotlight: XBRL as a Weapon?
