As Ning Chiu notes in the Davis Polk blog, the SEC has again decided to delay a decision on the NYSE’s proposal to change the fees paid for proxy distribution, now until October 20, 2013. Ning notes:
In April, the SEC extended its decision and received 4 additional letters. On May 23, the SEC initiated proceedings to decide whether to disapprove the rule change and solicited additional comments, after which it received 14 letters. A final decision was to be made on August 21, but according to the latest notice, the Commission is waiting until October because it needs a longer period to consider the “significant question” as to whether the NYSE has sufficiently justified its proposal.
Companies are required to pay broker-dealers or banks that hold securities in street name reasonable expenses incurred in forwarding proxy materials to beneficial owners. The current reimbursement scheme was adopted in 2002, and the proposed rule change represents recommendations made by the Proxy Fee Advisory Committee as established by the NYSE. Companies represented most of the members on the Committee, and estimated that they pay $200 million annually. The Committee believes that the proposed changes would decrease the overall fees by approximately 4%. As almost all of the brokers use Broadridge for proxy distribution, the Committee based its analysis largely on data provided by Broadridge.
The 60-page SEC order in May presents a detailed explanation of each aspect of the fee breakdown and specific questions raised by the SEC as to the rationale for each change, but ultimately the issue is centered on whether an independent third-party audit is necessary. The NYSE has responded to the points raised by the SEC and noted that the information available is limited since there is no common methodology for tracking these costs and much of it is aggregated with other costs rather than separated, therefore having a third-party review does not make sense. But some of the commenters, including those that would like to better compete with Broadridge, dispute the conclusion that the proposed changes would result in lowering the costs for companies, and claim instead that its own analysis shows an overall increase. Given the SEC’s own controversies regarding cost-benefit analysis, it would likely need to consider those criticisms carefully before ruling on the NYSE proposal.
Canadians Weigh in on the Proxy System
The Canadian Securities Administrators are now seeking feedback about the integrity of the proxy voting infrastructure in Canada, focusing specifically on vote reconciliation and vote confirmation. While the CSA consultation paper requests comments on these specific issues, it also seeks broader comments on the proxy voting system. Comments on the CSA consultation paper are due November 13, 2013.
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:
– Is a CEO’s Divorce the Board’s Business?
– SEC Makes Second Whistleblower Order, Indicating More to Come
– Second Circuit Reaffirms SEC’s Standard for D&O Bar
– Significant Changes Proposed in Lease Accounting
– G4: The Future of Sustainability Reporting
An SEC stop order under 1933 Act Section 8(d) is a rare bird for 1933 Act geeks such as myself. Every law firm associate working on public offerings knows the seemingly pointless exercise of confirming that there are no stop orders on a registration statement being used for an offering, and it seems so pointless because so few stop orders are ever issued. Yesterday, the SEC issued a stop order (pre-effectively) with respect to a registration statement of a company called Counseling International, Inc., based alleged misstatements and omissions regarding the former CEO of the company. This stop order is notable in that it stopped the registration statement prior to it becoming effective, whereas in some cases (as demonstrated in this list of recent stop orders compiled by the SEC) a stop order is sought to suspend the effectiveness of an already effective registration statement. The Counseling International stop order also includes as a remedy that, for a period of five years, the Respondent will not engage in or participate in any unregistered offering of securities conducted in reliance on Rule 506 of Regulation D, including by occupying any position with, ownership of, or relationship to the issuer specified in the recently adopted bad actor disqualification rules.
You might ask yourself, why didn’t the company just withdraw the registration statement rather than face the stop order remedy? The Commission has discretion in determining whether it would grant or deny a request to withdraw a registration statement, so once an investigation is underway it can become very difficult for an issuer with a registration statement pending to avoid the stop order proceeding.
Pay Ratio Rule: Details Emerge
A story in yesterday’s Wall Street Journal revealed more details about the upcoming SEC rulemaking to adopt the CEO pay ratio rule mandated by the Dodd-Frank Act. As Broc noted a few weeks back, the pay ratio rule is expected to be considered by the Commission in the very near future – as early as September. The WSJ article indicates that the rules requirements will be less onerous than what is contemplated by Dodd-Frank, allowing issuers to take the statistical sampling approach to determining median employee pay that some pre-rulemaking commenters had thoughtfully suggested. This is good news in terms of mitigating the potential cost and burden of compliance with the requirement, particularly for companies with large, multinational workforces.
Hear more about the pay ratio rule at our upcoming conferences, in DC and via webcast on September 23 and 24. Check out the agendas and register now!
Just Mailed: The Latest Issue of The Corporate Counsel
We just wrapped up the latest issue of The Corporate Counsel, filled with insight and analysis on the latest developments. This issue addresses:
– The Brave New World – “Private” Offerings Using General Solicitation
– The Compensation Committee–New Exchange Listing Requirements Effective July 1, 2013
– The Staff’s New Rule 144 Pledging CDI–A Follow-Up on Recourse
– Confirmation that Rule 144 One-Year Current Public Information Requirement for Gifts of Control Stock Runs from Donor’s Acquisition
– Alternatives To Registration Chart By Stanley Keller, Jean Harris and Richard Leisner
– D.C. District Court Vacates Resource Extraction Issuer Disclosure Rules
– D.C. Court Weighs in on “Executive Officer” Definition
As we sit here in the middle of the Atlantic hurricane season (luckily with no major hurricanes or superstorms to date), the SEC, FINRA and the CFTC teamed up to provide guidance on business continuity planning for regulated financial firms. The guidance notes that Hurricane/Superstorm Sandy closed the equities and options markets on October 29 and 30, 2012, prompting the regulators to take a hard look at business continuity and disaster planning at regulated firms. The guidance includes useful observations and recommendations on dealing with widespread disruptions, alternative location considerations, vendor relationships, telecommunications services and technology considerations, communication plans, regulatory compliance considerations and testing and review processes.
While this guidance was based on examinations of financial firms and is largely targeted to them, some of the observations and recommendations are relevant to any company looking to implement or tune up its business continuity and disaster planning, especially in light of such a natural disaster with such widespread repercussions as Hurricane/Superstorm Sandy.
Admitting Misconduct in SEC Actions: Here Come the Cases
Broc noted back in June the Commission’s decision that Enforcement’s “settlement without admission” policy would undergo an incremental change, which would apply only to certain cases as determined on a case-by-case basis. It appears that the policy change is now coming to fruition in actual cases with the recent announcement of the SEC’s settlement with Phillip Falcone and Harbinger Capital. David Smyth of Brooks Piece notes in the Cady Bar the Door blog:
Earlier this summer, SEC chair Mary Jo White told a Wall Street Journal conference that the Commission would in some circumstances depart from its longstanding policy of allowing defendants to settle cases without admitting or denying wrongdoing. She didn’t let Labor Day hit before putting the new plan into action.
You may remember that the SEC had alleged in June 2012 that Philip Falcone improperly “borrowed” $113 million from his advisory firm Harbinger Capital Partners to pay his personal taxes, secretly favored certain customer redemption requests at the expense of other investors, and conducted an improper “short squeeze” in bonds issued by a Canadian manufacturing company. You may also remember that the SEC’s staff took a run at settling this matter last month, and the Commissioners rejected the effort by a 3-1 vote. On Monday, the SEC settled its case against Falcone and Harbinger Capital. In doing so, the SEC required the defendants to pay more than $18 million in monetary sanctions and admit wrongdoing. As a technical matter, the consent filed in the Southern District of New York included an annex, all of the facts in which Falcone and Harbinger admitted. Falcone also agreed to be barred from the securities industry for at least five years, though he is not barred from acting as an officer or director of a public company.
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:
– EU Consults on Promoting Long-Term Investment
– New SEC Software Identifies Potential Fraud
– SEC Commissioner Aguilar Weighs In on Diversity
– European Commission Provides Color On EU ‘Action Plan’
– Court Rules Dodd-Frank’s Wells Notice Deadline is Internal
Independent financial regulators met at the White House on Monday to discuss the implementation of the Dodd-Frank Act, and as this Bloomberg article notes, the President conveyed a “sense of urgency” in fully implementing the yet-to-be-adopted Dodd-Frank rules. The participants included the Treasury secretary, Comptroller of the Currency, the Director of the Consumer Financial Protection Bureau,, the Acting Director of the Federal Housing Finance Agency, and the chairs of the Board of Governors of the Federal Reserve System, the CFTC, the FDIC, the NCUA, and the SEC.
In a statement released after the meeting, the White House noted that the topics discussed included progress on implementing Dodd-Frank to date and what remained to be completed, as well as potential improvements to the housing finance system. Not surprisingly, the participants discussed the challenges faced by the current budget environment and the importance of providing adequate funding for independent regulatory agencies to achieve their core missions.
Will this sort of meeting break the logjam on Dodd-Frank rulemaking at the various financial regulators? Maybe not, as the agencies have no doubt already felt the same sense of urgency that the President feels as we begin this fourth year after Dodd-Frank was passed. Much of what is left to be done includes the most difficult aspects of the legislation, and as we discuss in the just mailed May-June issue of The Corporate Counsel, the rulemaking process has never been harder.
FINRA Updates Private Placement Form
With the increased focus on private placements as Rule 506(c) of Regulation D comes online next month, FINRA recently published Regulatory Notice 13-26 to announce updates to FINRA’s Private Placement Form, which is required to be filed pursuant to FINRA Rules 5123 and 5122. The updates to the Form are consistent with FINRA’s efforts to improve member firm due diligence in private placements.
FINRA states that the Form assists FINRA in prioritizing its review of private placement reviews. It notes that firms can respond “unknown” to any of the questions, although we believe answering “unknown” is likely to trigger heightened scrutiny by FINRA, particularly because the questions address basic diligence questions. FINRA’s statistics show that since July 1, 2013, on average, 18% of filers have answered “unknown” to at least one of the six questions: of these, approximately 28% have answered “unknown” to the question regarding SEC, FINRA, or state disciplinary actions or proceedings or criminal complaints within the last 10 years; and approximately 8% have answered “unknown” to the question whether the issuer has independently audited financial statements available for its most recent fiscal year.
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: Impact of Dodd-Frank on Community Banks
– Three Recent Surveys Provide Insights On Corporate Governance
– More on “Director Access to Attorney-Client Privileged Communications”
– Director Access to Attorney-Client Privileged Communications
– “End-User Exception” for Swaps: Governance Action Items for Companies
There continues to be social media developments – both in the corporate finance & corporate governance areas. Although LinkedIn & Twitter both get leveraged by folks in our community, it is at nowhere near the levels of other professions. For example, I have 2500 followers on Twitter – but only a few dozen of them tweet regularly about things in our profession. But still, there are lots of cool things happening, such as this Adidas’s social media policy – in the form of cartoons.
Here are a handful of articles, etc. that you may find interesting:
In this podcast, Vinny Jindal of Stockr describes what his platform can do, including:
– What is Stockr?
– How does it compare to other social media platforms for investors?
– Can companies create a verifiable presence on it (here is the CVS channel and the NetSol channel)?
More on our “Proxy Season Blog”
We continue to post new items regularly on our “Proxy Season 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:
– Proxy Access Proposals in 2013: Anybody Out There?
– The Impact of the ISS Policy Against Pledging
– 10 Trends from the Proxy Season
– The Empowered Shareholder
– Recap of the Proxy Season
I’ve added this Form 8-K from JC Penney to my list of directors who resigned after they have disagreed with the board. This director resignation was big news for the company as hedge fund manager Bill Ackman is the one who left (also see this piece from the New Yorker – and this Money Talks podcast).
I bother to blog about this since it’s fairly rare that a 8-K is filed due to director disagreement – and it’s rare that a board speaks out because it believes the departing director has divulged confidential information as noted in this WSJ article. The company and Ackman have now reached an agreement for him to sell his stake in the company…
The newest board portal vendor with about two years of experience under its belt – Pervasent – has a “flat rate for unlimited users” pricing model that may shake up the industry. In this podcast, Stuart Williams of Pervasent explains how his company’s board portals work, including:
– How is your “Board Papers” different than other board portals?
– What is your pricing?
– How can others within a company use your board portal technology?
Poll: Should Directors Ever Go Public With Disagreements (When They Don’t Quit)?
It is rare that a disagreement with fellow board members is made public, although it does happen when the director resigns as a Form 8-K is required in that situation. Here is an anonymous poll on the topic of director disagreements when the director doesn’t resign:
As noted in this WSJ article, the National Association of Manufacturers, Chamber of Commerce and Business Roundtable have filed a notice of intent to appeal the recent DC District Court ruling that upheld the conflict mineral rules promulgated by the SEC. Initial documents related to the appeal are due on September 12th.
Yesterday, Dr. Mike Piwowar was sworn in as an SEC Commissioner by the SEC’s Los Angeles Regional Office Director.
The GAO’s Report on Conflict Minerals
As noted in this Cooley news brief, the GAO recently published this report on the effectiveness of the SEC’s rules on conflict minerals as required by Section 1502 of Dodd-Frank.
The Importance of Realism in Startups
Even if you have no interest in start-ups or venture capital, this 12-minute video with Mark Suster is worth watching as he describes how he learned from his failures…
Many have long been complaining that the SEC’s rules have caused the length of disclosure documents to become untenable, a sentiment probably best reflected in this speech by SEC Commissioner Gallagher in which he said “proxy statements now resemble law school text books.”
While I agree that the continued layering of more rules has partially been to blame for the ballooning of proxy statements, I feel some of the blame should be shared by those that draft the documents. Too many continue to view the proxy as a compliance document rather than as a way to really reach shareholders and tell a story. In other words, to make the documents “usable.”
In my latest “Take Two Video” about usability for disclosures, I provide specific examples of companies that have reduced their proxy lengths dramatically – while at the same time telling a story and making the disclosure usable, with an end result of significantly improving their say-on-pay results:
Can the SEC’s Rules Use Spring Cleaning? Yes, But…
I do believe the SEC’s rules could use some work (as all rules inevitably need), including rewriting them in plain English – and fixing some broken aspects, such as this problem identified by a member:
I think the rules do make things complicated. The same grant may have to be explained several different times in different ways, so the rules do add to the complexity. I think it’s a function of those tables myself and the strict rules about what goes in what table. If they would just allow people a chart with their different programs and what was awarded under each type of comp, without the need to come to a “total” and without going through all the historical stuff of what’s outstanding etc., that would simplify it a lot. The requirement to explain why they paid you what they did, that definitely complicates things.
I remember doing this the very first year when I went in-house and I realized that I had to repeat the same thing over and over because (a) different tables require the reporting of the same grant and an explanation and (b) people are paid what they are for one or two main reasons (how the business did mostly) – but you have to make it sound as if each component had a separate criteria, so that always required a repeat of the evaluation by type of pay, rather than an explanation of how the performance drive the totality of the pay.
But a rewrite of the rules is a huge undertaking. One that likely would have to be done in waves over many years. Perhaps a decade…
Are Annual Reports Destined for the Dustbin?
I love this blog entitled “Is the Annual Report a Thing of the Past?” by Sharon Merrill’s Maureen Wolff that talks about the use of video and more. Here is Maureen’s central point:
This is probably the best the way to view the report’s value: How does it fit in with all of the other communications that we’re conducting?
Yesterday, the PCAOB proposed a new auditing standard designed to enhance the content of the auditor’s report. Here’s the PCAOB’s proposal, press release, fact sheet and Board Member statements. Gibson Dunn’s Mike Scanlon & Amy Goodman write in this blog:
Today, the PCAOB proposed for public comment two audit standards that, if adopted, would significantly change the audit report model, and dramatically expand the auditor’s responsibilities in reporting on management’s disclosures outside the financial statements. PCAOB Chairman Doty remarked that the proposed standards – running to almost 300 pages – mark a “watershed moment” for auditing in the United States.
The first proposal – The Auditor’s Report on an Audit of Financial Statements – moves well beyond the traditional audit report and would require the following additional statements:
– Disclosure of “critical audit matters” encountered by the auditor during the course of the audit. Critical audit matters are defined in the proposal as those matters that involved the most difficult, subjective, and complex auditor judgments; posed the most difficulty to the auditor in obtaining audit evidence; or posed the most difficulty to the auditor in forming an opinion regarding the financial statements. The proposal states that critical audit matters will be determined based on the facts and circumstances of each audit and it is anticipated that in most audits the auditor would identify critical audit matters. In those limited circumstances where the auditor concludes there are no critical audit matters, the auditor would have to document this conclusion in its workpapers.
– Disclosure of the standards that require the auditor to maintain its independence from the issuer, and identification of the year in which the auditor began its tenure with the company.
– Disclosure of the auditor’s responsibilities for evaluation of information in annual reports filed with the SEC beyond that contained in the financial statements and audit report, and a statement about the results of the auditor’s evaluation. This aspect of the first proposal bootstraps in what is likely to be one of the key flashpoints from the second proposal, discussed below.
The second proposal – The Auditor’s Responsibilities Regarding Other Information in Certain Documents Containing Audited Financial Statements and the Related Auditor’s Report – would take the auditor and issuer into unchartered territory, requiring the auditor to report on “other information” included in annual reports filed with the SEC under the Securities Exchange Act of 1934. The proposal observes that the PCAOB’s current standards require the auditor to “read and consider” information contained in certain filings, but there is no current reporting obligation related to these requirements. The proposal sets out to extend the auditor’s responsibilities for reporting by noting that the other information would include, among other items, the selected financial information, MD&A, exhibits and other information incorporated by reference into the filing.
The proposal then includes specific procedures the auditor would have to apply in evaluating the other information based on relevant audit evidence obtained and conclusions reached during the audit. Once these procedures are applied, the auditor would have to evaluate whether any of the other information contains a material misstatement of fact, or a material inconsistency, with the amounts or information, or the manner of presentation, in the audited financial statements. As noted above, the audit report then has to include a statement as to whether the auditor identified a material inconsistency or a material misstatement of fact in the other information.
The PCAOB’s proposals raise issues that could have significant impacts on the conduct of audits and disclosures required in issuer filings – including, among others, impacts on the auditor-Audit Committee-management relationship, disclosures of matters that are otherwise resolved through the audit process (e.g., significant deficiency v. material weakness determinations, internal investigations, etc.), timing for filings and completion of the audit, and costs. Indeed, PCAOB Members Ferguson, Franzel, and Hanson – although supporting issuance of the proposals – raised numerous questions and concerns regarding various aspects of the proposals. One Board Member also noted that the proposals are likely to lead to roundtables, and even to re-proposals before the adoption of any final standards.
– What is the IAASB?
– How would the new exposure draft dramatically impact the audit report?
– How long might the audit report be if the proposal is adopted?
– What is the process for consideration of this proposal, including the possible timeline?
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:
– Another Day, Another JOBS Act Hearing
– What CEOs Really Think of Their Boards
– Accredited Crowdfunding, Internet Advertising and General Solicitation
– Learning Through Animation: Fraud Assessment Videos
– Second Take on Amgen: Defense Arguments Largely Intact, Even in Overruled Circuits
– You Might Be Surprised By Who Counts (And Who Doesn’t) In California
Last Friday, Kara Stein was sworn in as SEC Commissioner – Mike Piwowar will be sworn in this week. Perhaps due to this, the process of selecting a SEC Commissioner has been in the news lately. Last week, Floyd Norris devoted his NY Times column to the process, comparing recent appointees to some made a few decades ago. Floyd is critical and believes the current process is too political, reflected in the title of his column, “Independent Agencies, Sometimes in Name Only.” Here’s an excerpt:
Of course, members of Congress always had influence, and presidents have sought advice and engaged in horse trading. But Harvey Pitt, who worked on the S.E.C. staff from 1968 to 1978, rising to general counsel, said things had changed by the time he returned as chairman in 2001. By then, he said, presidents were expected to nominate the people chosen by the opposition party’s senior senators, unless there was something clearly wrong with the person.
Mr. Pitt said he thought that began on a more formal basis after the Republicans took control of Congress in 1994, when Bill Clinton was president. Mr. Pitt, who was appointed chairman by President George W. Bush, said that his recommendations and approval were sought by the White House for prospective Republican commissioners, but that while he met with Democratic choices before they were nominated, he did not feel he — or the White House — had much leeway in choosing whether to appoint them.
Now, there is some evidence that the president generally gets to choose the chairmen of independent commissions, but the other majority members are picked on Capitol Hill.
And in this Q&A with departing SEC Commissioner Elisse Walter – published in the Washington Post on Friday – Elisse answers the question of “What did it take to land the position of SEC commissioner?” by answering:
I started thinking about the job in the mid- to late ’80s. I wanted to be one of the ultimate decision makers. I never thought it was a realistic possibility. But in the early 2000s, I thought I should try to do this. I called everyone I knew, either because they occupied the position or because they knew something about how Capitol Hill works. The recommendations for commissioner slots mostly originate from Capitol Hill, and the president does the nominating. But I didn’t get the job.
Then there is the follow-up question of “Six years later, when you were working at FINRA, you finally got nominated as an SEC commissioner. How did that happen?” with an answer of:
Sen. Jack Reed called [FINRA’s then-chief executive] Mary Schapiro. A Democratic seat on the commission had opened up and he asked Mary for a recommendation. She gave him my name. You need a rabbi to get you through the process. When the right people are willing to sign on and support you, it just happens. I remember early on in my tenure, a group of business-school students asked me: “How do you become a commissioner?” I think the answer is serendipity. There isn’t a career path.
More on the “Revolving Door”
Recently, the Washington Post ran this lengthy article exploring Promontory Financial Group, the consulting firm where former SEC Chair Mary Schapiro landed. The piece takes potshots at Promontory because of the numerous former regulators that work there. I’m still adamant that the so-called revolving door is not what it seems – and that most regulators are true to their mission when they work within the government.
In what other industry are people not supposed to never leave their jobs? Once you work for the government, you’re stuck for life?
Tom Kim, who recently departed as Corp Fin’s Chief Counsel, has joined Sidley Austin in its DC office…
The InVU Platform
In this podcast, Agnies Watson of Computershare discusses a new platform – InVU – for corporate secretaries and IROs, including:
– Why did you launch InVU?
– What can it do that other platforms can’t?
– Any surprises since you launched?
