Tomorrow, the Senate Committee on Banking, Housing and Urban Affairs will take up the nominations of Kara Stein and Michael Piwowar to the Commission in an executive session. It has been unclear as to how quickly the Senate would act on these nominations, which were advanced by the Administration back in May. Once these nominations make it of the Committee, the full Senate can then consider them. At the same meeting, the Committee will consider extending Mary Jo White’s term so that it would expire on June 5, 2019.
Meanwhile, in the House last week, Rep. Michael Fitzpatrick (R-PA) re-introduced a bill that would change the definition of “accelerated filer” so that more companies could qualify for the SOX Section 404(b) relief available to non-accelerated filers. H.R. 2629, the Fostering Innovation Act, which was first introduced last year, would increase the market capitalization component of the accelerated filer definition from $75 to $250 million, while also adding in a maximum revenue measure of $100 million in annual revenue. The GAO also recently issued a report recommending an SEC requirement that non-accelerated filers disclose if they have received and auditor’s attestation on internal control, even if they qualify for the Section 404(b) exemption.
FINRA Authorizes Crowdfunding Rule Proposal
At a meeting of its Board of Governors last week, FINRA was authorized to publish a Regulatory Notice to solicit comment on proposed rules and related forms governing funding portals pursuant to Title III of the JOBS Act. The proposed rules address, among other things, the membership application process for funding portals, fraud and manipulation, just and equitable principles of trade, communications with the public, supervision and anti-money laundering. FINRA expects to publish this Regulatory Notice when the SEC proposes its Title III rules. It is unclear whether this FINRA action should be construed as indicating that SEC action on Title III rules might be imminent.
FINRA has also moved forward with a rule proposal to make Rule 144A transactions subject to dissemination under FINRA rules, now that the SEC rules have been amended to eliminate general solicitation concerns.
Transcript: “Proxy Season Post-Mortem: The Latest Compensation Disclosures”
We have posted the transcript for our recent CompensationStandards.com webcast: “Proxy Season Post-Mortem: The Latest Compensation Disclosures.”
Earlier this week, Broc blogged about a bill that was unanimously approved by the House Financial Services Committee and which targets the PCAOB’s ability to adopt rules mandating auditor rotation. That bill, H.R. 1564, the “Audit Integrity and Job Protection Act,” passed in the House on Monday evening by a vote of 321-62. The bill would prohibit the PCAOB from requiring companies to use specific auditors or require the use of different auditors on a rotating basis. The bill now will be taken up by the Senate Committee on Banking, Housing, and Urban Affairs. In addition to seeking to prevent the PCAOB from adopting mandatory auditor rotation rules, the bill would direct the GAO to revisit a 2003 study of the potential effects, including costs and benefits, of mandatory audit firm rotation.
For the life of me, I can’t figure out what sort of job protection this bill is providing, as implied by its title. Much like the JOBS Act (which included its own swipe at mandatory auditor rotation), this bill doesn’t really seem to have much to do with preserving jobs, other than perhaps for lobbyists.
NYSE Proposes 1-Year Transition Period for Internal Audit Function
From Jay Knight of Bass, Berry & Sims: Last week, the NYSE filed a proposal with the SEC to amend Section 303A.00 of its Listed Company Manual to provide a one-year transition period to comply with the internal audit requirement of Section 303A.07(c) for companies listing in connection with an IPO, as new registrants or a carve-out or spin-off. Section 303A.07(c) requires that listed companies – which are subject to Section 303A.07 – must have an internal audit function to provide management and the audit committee with ongoing assessments of their risk management and internal control processes. Companies may choose to outsource this function to a third party other than its independent auditor. The proposal should take effect within 45 days of the date of publication in the Federal Register (or a longer period as the SEC may designate up to 90 days).
Earlier this year, Nasdaq proposed a rule that would have required Nasdaq-listed companies to establish and maintain an internal audit function, similar to the present NYSE requirement. However, Nasdaq withdrew that proposal citing comments from issuers and to allow more time to consider the issue. The NYSE highlights the different exchange standards in its rule proposal when it states: “Moreover, given that any company which would be able to avail itself of the proposed transition could list on Nasdaq without ever having to comply with an internal audit requirement, the Exchange believes that investors would be at least as well protected by having these companies listed on the [NYSE], where they would be subject to such a requirement after the transition period.”
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:
– Should Startups Announce Their Funding?
– EU Touts Regulatory Pressure in Improving Board Gender Balance
– Does the Media Provide Certain Investors With News Seconds Faster?
– Moving On Up: The Art of Becoming a Director
– Response to “Inside Straight: Stop The Audit Letter Lunacy!”
– Inside Straight: Stop The Audit Letter Lunacy!
– Indemnify Me, Maybe
July 4th fireworks came a week late to 100 F Street yesterday, as the SEC adopted the changes to Rule 506 of Regulation D mandated by Title II of the JOBS Act, in what was sometimes a contentious open meeting. The changes to Rule 506–permitting the use of general solicitation and general advertising in a Rule 506 offering provided that the issuer takes reasonable steps to verify that purchasers are accredited investors–were over a year late, and generated a good bit of comment and criticism.
Ultimately, the Commission adopted the Rule 506 changes largely as proposed, noting that the determination of the reasonableness of the steps taken to verify that an investor is an accredited is an objective assessment by the issuer, based on the facts and circumstances of each purchaser and transaction. However, the Commission decided to provide in Regulation D a non-exclusive list of methods that the issuer could use to verify the accredited investor status of individuals, including reviewing copies of any IRS form that reports the income of the purchaser (along with a written representation that the purchaser will likely continue to earn that amount), reviewing bank statements, brokerage statements, CDs, tax assessments, appraisal reports and consumer reports with respect to net worth, or by receiving a written confirmation that a specified third party has taken reasonable steps to verify a purchaser’s accredited investor status, including a registered broker-dealer, SEC-registered investment adviser, licensed attorney or CPA.
The SEC also made the parallel changes to Rule 144A that were proposed last year, eliminating references to “offer” and “offeree,” and thus requiring only that the securities are sold to a QIB or to a purchaser that the seller and any person acting on behalf of the seller reasonably believe is a QIB in a Rule 144A transaction. Form D was also amended to add a separate checkbox for the new paragraph (c) of Rule 506.
The Commission helpfully reaffirmed in the adopting release that Title II of the JOBS Act did not represent a Congressional intent to eliminate the existing “reasonable belief” standard in Rule 501(a) or for Rule 506 offerings (thus the accredited investor determination is not subject to an absolute standard). The Commission also reiterated the interpretive guidance that the effect of Title II is “to permit private funds to engage in general solicitation in compliance with new Rule 506(c) without losing either of the exclusions [3(c)(1) and 3(c)(7) under the Investment Company Act.”
Commissioner Aguilar opposed the adoption of the amendments, noting in his statement that the process for adopting the amendments and the amendments “come at the expense of investors and place investors at greater risk.”
The amendments are effective 60 days after publication in the Federal Register. The SEC provided Fact Sheets for each piece of yesterday’s rulemaking package: the Rule 506 changes, the Regulation D proposal and the bad actor rules.
More Regulation D Changes Proposed
The SEC also proposed several changes to Regulation D that would help the Commission monitor the impact of Title II on the offering market and the offering practices which develop under the rule. This proposal addresses some of the concerns of commenter raised regarding the Rule 506 proposal. Under these proposals, issuers relying on Rule 506(c) to engage in general solicitation in connection with the offering would have to file a Form D 15 calendar days before commencing the offering, and file an update to the Form D information within 30 days of completing the offering. Additional information would also be required in the Form D about the issuer and the offering. If an issuer fails to file a Form D, the issuer and the issuer’s affiliates would be disqualified from using the Rule 506 exemption in any new offering for one year beginning after the required filings are made. Finally, these proposals would require that legends and cautionary statements be included on any written general solicitation material (including special rules for private funds), and that written general solicitation materials be submitted to the SEC, while the guidance in Securities Act Rule 156 would be extended to private funds. This proposal is out for a 60-day comment period.
A Blast from the Past: The Rule 506 Bad Actor Disqualification Provisions
As part of the overall package of rulemaking yesterday, the SEC followed the suggestion of some commenters on the Title II rules and adopted the Dodd-Frank Act mandated bad actor disqualification provisions. As noted by Anna Pinedo in this Morrison & Foerster blog, the final rules were largely adopted as proposed, except for modifications to the categories of persons covered; modifications to the types of actions that are covered; and modifications to the actions that are covered. The Commissioners unanimously approved these amendments, which were originally proposed back in May 2011.
Another thing that the Commissioners could all agree on yesterday was their praise for Gerry Laporte, who will be retiring from his position as Chief of Corp Fin’s Office of Small Business Policy. During the course of the open meeting, Gerry’s contributions over the years for small businesses and investors were repeatedly recognized.
Here are the latest survey results about lead directors:
1. Our board has a term limit for the Lead/Presiding Director:
– Yes – 20%
– No – 80%
2. The term limit length is:
– 2 years or less – 17%
– 3 years or less – 13%
– 5 years or less – 9%
– Only limited by director’s age – 61%
3. We rotate the Lead/Presiding Director role among independent directors:
– Yes – 26%
– No – 74%
4. When we rotate the role, we do it:
– More frequently than annually – 4%
– Annually – 4%
– No set schedule – 92%
5. Our Lead/Presiding Director receives additional director compensation:
– Yes – 84%
– No – 16%
6. In addition to having a Lead/Presiding Director, we have a non-independent board chair who is not the CEO:
– Yes – 11%
– No – 89%
Please take a moment to participate in this “Quick Survey on Exclusive Forum Bylaws,” “Quick Survey on Annual Meeting Conduct,” and “Quick Survey on Loan Prohibitions & Cashless Exercises.”
Understanding Hedge Fund Governance
Professor Houman Shadab recently published the first comprehensive academic analysis about the governance practices of hedge funds. Here is an excerpt:
“Hedge fund investors are not being systematically ripped off by managers. …. Investors have hedge fund managers on a much shorter leash than managers of public corporations and other types of investment funds. … The oversight role played by hedge fund directors is not substantial. Hedge fund investors are often better off with less transparency, higher fees, and less access to their capital. …. When the stock of public corporations rises by 1%, median CEO compensation rises by $200k, but for hedge fund managers, that number is $2 million.”
Liquidnet’s Approach to ATMs, Stock Buybacks & 10b5-1 Plans
In this podcast, Nicole Olson of Liquidnet explains how Liquidnet helps companies with their at-the-market offerings, stock buybacks and Rule 10b5-1 plans, including:
– For how long has Liquidnet been assisting companies with ATMs, buybacks and 10b5-1 sales?
– How does the matchmaking work between institutional buyers and companies raising capital with ATMs?
– What kind of companies are the best fit for an ATM and for Liquidnet?
– How do the buybacks work? Are companies obligated to exclusively work through Liquidnet?
– What precautions are built into your 10b5-1 plans to avoid negative media publicity?
Your time is too valuable to waste during a prime networking opportunity like a conference. Plan ahead to maximize your conference experience – and have more fun to boot! Below is my ten cents in this “Take Two Video” about “How to Attend Conferences.” I’m going to take my own advice and meet 10 new people during the Society of Corporate Secretaries Annual Conference that kicks off tomorrow:
One topic at the conference surely will be whether to adopt an exclusive forum bylaw now – here is a “Quick Survey of Exclusive Forum Bylaws” for you to weigh in anonymously…
California’s Department of Corporations Renamed: “Department of Business Oversight”
As noted in this blog by Keith Bishop, the California Department of Corporations and the Department of Financial Institutions have “merged” to form the Department of Business Oversight in accordance with the Governor’s reorganization of state departments.
Following up on yesterday’s blog about “Does Congress or the PCAOB Oversee the Auditors?,” the House passed a bill last night that would bar the PCAOB from mandating auditor rotation, as noted in FEI’s blog.
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:
– Shareholder Proposals: Leadership Changes
– Proxy Access Proposal Barely Passes at Verizon
– Law Mandates CalPERS/CalSTRS Support Shareholder Proposals Supporting Religious Minorities
– Audit Committee Disclosure Trends
– European Commission Moves on ESG Reporting
Here’s a note from Lynn Turner: “Congress established the PCAOB to oversee and regulate the auditing profession. Now Congress is stepping in and limiting what the PCAOB can do. It perhaps is becoming clear the large audit firms have more clout with their checkbooks with Congress than does the PCAOB. Members of the PCOAB do not appear to have publicly pushed back against such efforts by Congress this year – or last year when limits were imposed on the PCAOB by the JOBS Act.
This story below how the GAO will be asked to study mandatory auditor rotation once again. However, the last study by the GAO was in fact not a study, but more of a survey of auditors and management of the companies they audit. There was limited surveying done of investors.”
The House Financial Services Committee passed 52-0 a bill that would prohibit the PCOAB from dictating which auditor a company is audited by or requiring companies to adhere to mandatory auditor rotation. Republican and Democratic members of the committee agreed that mandating public companies to company with audit firm rotation was not good policy. The PCAOB, which Congress created in the 2002 Sarbanes-Oxley Act, floated the mandatory auditor rotation idea in an August 2011 concept release on auditor independence. The rotation is still under review, and the PCAOB has not issued a specific proposal for implementing it.
During today’s mark-up session, the committee agreed to an amendment offered by ranking member Maxine Waters to require the GAO to study the issue once again, including a cost-benefit analysis of mandatory rotation of auditors.
Study: How Auditors Miss Signs of Fraud
As noted in this Reuters article, this new study of 87 SEC enforcement actions against auditors over 13 years found that most common accounting mistakes involved failing to question documents which appeared to be fake and a lack of professional skepticism. Here’s the related press release.
Webcast: “Post-Closing Claims: What Really Happens”
Tune in tomorrow for the DealLawyers.com webcast – “Post-Closing Claims: What Really Happens” – to hear Goodwin Procter’s Larry Chu and Shareholder Representative Service’s Paul Koenig analyze what truly happens in deals – including practice tips to make your post-closing claim process go as smoothly as possible. Here are Course Materials to print out in advance…
As noted in this Morrison & Foerster blog, the SEC has calendared an open Commission meeting for next Wednesday to finally adopt rules relating to Title II of the JOBS Act, which should facilitate the ability to conduct Rule 506 offerings as they include the elimination of the general solicitation bar for Reg D and Rule 144A offerings as well as other changes to Reg D (including the “bad actor” disqualification), Form D and Rule 156. Note that this doesn’t include the crowdfunding rules in Title III of Dodd-Frank…
New Type of Myanmar Disclosure Requirements Starts Monday
Hat tip to the Society of Corporate Secretaries for pointing out this NY Times article that describes a new annual disclosure requirement for US companies that invest a certain amount or way in Myanmar. This disclosure is not made through SEC filings – but rather through a report that eventually is made public on an embassy website. Bizarre stuff…
The Society’s alert also notes that there is a bipartisan bill pending in the House to require companies to disclose activities in North Korea: H.R. 1771: “North Korea Sanctions Enforcement Act of 2013.”
The SEC’s loooong losing streak in major cases continues. Yesterday, Judge John Bates of the US District Court for DC vacated the SEC’s resource extraction rules and remanded the case back to the SEC (just before he leaves for another job). This case was brought jointly by the Chamber and the American Petroleum Institute. Oxfam America had joined the SEC as a defendant to defend the rule.
Either the SEC will appeal or it will conduct new rulemaking which takes into account the Judge’s twin concerns of public disclosure of individual payments to foreign governments and lack of an exemption for countries that have laws that bar disclosure of payment information. If the agency goes the rulemaking route, it may simply revise its existing rules or go through an entirely new rulemaking process (bear in mind the SEC has a new Chair and two new Commissioners coming in). Either way, the deadline of reporting payments starting October 1st is bound to be substantially delayed. The SEC can’t simply drop the rulemaking since adopting a rule is mandated by Dodd-Frank.
This does not bode well for the future of the conflict minerals rules, since a similar case is pending before the same court with a decision expected soon (oral argument took place two days ago in that case, as noted in this article). Nor does it bode well for federal agencies in general trying to promulgate rules, even though the Chamber lost one of these “cost-benefit analysis” cases against the CFTC last week…
Yesterday, the SEC issued a press release to announce these three new initiatives:
– “Financial Reporting and Audit Task Force” dedicated to detecting fraudulent or improper financial reporting.
– “Microcap Fraud Task Force” targeting abusive trading and fraudulent conduct in securities issued by microcap companies, including social media & website use.
– “Center for Risk and Quantitative Analytics” employing quantitative data and analysis to profile high-risk behaviors and transactions and support initiatives to detect misconduct.
Happy 4th! Stay Hydrated My Friends…
Looking forward to the “most interesting woman in the world” campaign! My favorite fact: “He once had an awkward moment, just to see how it feels.”
Inspired by the recent 80th anniversary of the ’33 Act, I put together this short video about this first piece of legislation to regulate deals, including a look at the quartet that drafted the law:
50th Anniversary! Special Study of Securities Markets
It’s been 50 years since the Special Study was conducted by the SEC in 1963 – a study often referred to as the most important in the SEC’s history. Learn more about the study from the SEC Historical Society by perusing the numerous papers collected from that era (scroll down to 1963)…
How To Make a Better Phone Calls in Business
Many of us are led through online demos or other calls from those that have something useful to offer – but the demos or calls often meander and don’t match our needs (even though the product or service might). This blog from Mark Suster provides great tips to those leading those calls. You should read the entire blog – but at least read this excerpt:
1. Prepare! Write your set of bullet points on paper before the call. Write out the reason you’re calling, your key points and “the ask” in advance and your time allotment so you can always refer back and make sure you’re tracking to your plan.
2. You can start informally with banter – If I’m calling somebody I know a bit I usually try to start with a little friendly banter. If I know they like a sports team that might be a good start. If I saw their company in the press, heard that they saw somebody at an event that I know, they live in a town where a storm just rolled through – whatever. I think trying to humanize the call from the outset is good. When you jump straight into “sales pitch mode” it feels a bit strange.
Two things to watch for: 1) if you’re trying banter to build rapport but not “feeling it” then quickly shift to business. Some people just aren’t “chit chatters” and prefer to get on with things. I find that kinda boring, but I know some people are just wired that way. 2) some callers take this banter too far It starts to border on disrespectful of the person’s time or wasteful of your 15 minutes. Don’t be that person.
How long you go for is really a judgment call because there’s no right answer. If it’s somebody that I know really well and I confirm that they’re not rushing to do something else I might even take 10-15 minutes just to “catch up.” If it’s a general acquaintance it’s probably more like 3-4 minutes. If it’s a first time call you might try to keep the banter at 2 minutes or less.
So even if the person you called is really chatty don’t be undisciplined and let them talk too long. You have limited time on the call, presumably you called for a reason and you’re chewing up your valuable clock.
3. Let them know why you’re calling – When you’re ready to pivot the conversation your next line should be some derivative of, “listen, the reason I’m calling is … blah, blah, blah” 25% of people or less actually do this. They just talk and I’m not really sure why they called.
If you’re calling for a reason, the sooner the recipient knows the sooner they can help. If the clock runs out they’re not going to be able to help. Even if you don’t have a single “ask” I recommend saying something like, “listen, I’m going to make this call short. I don’t have anything I’m asking for, I was just hoping to get 10 minutes of your time to tell you what we’re up to so that the next chance we get to meet down the line you’ve got more of an understanding.”
4. Don’t hang yourself – One of the other big mistakes callers make is going “off to the races” talking about their business without getting any feedback from the recipient of the call. This is bad enough in person but I promise you if you do it over the phone the recipient will start to tune out. If you listen closely you’ll probably even hear the tapping of a keyboard. You can talk for a bit but then seek feedback and make sure the other person is “with you.” When I used to do a lot of recruiting we used to call it “hanging yourself” because people who talk for long periods of time without seeking feedback are generally not self-aware or good at human interaction. Don’t be that person.
5. Ask questions – The best trick for creating a two-way conversation is to ask questions. You can do this too early in the call and you can’t be an interview factory, but polite questions relevant to your topic are appropriate. It will help ensure that you don’t do all the talking. Plus, when you listen you learn more anyways.
6. Know what “the ask” is – If you’re set up a call with somebody then know in advance why you’re calling and what you plan to ask for. Don’t ask for four things or you’ll get none. Don’t ask for big favors unless you have a tight relationship. Don’t assume that this will be the one and only time you’ll ever talk to the person. If you cultivate a good long-term relationship through patience, persistence and reciprocity there will be many more occasions. So by all means have an “ask” but make it: obvious, easy for them to achieve and of a limited number – preferably one.
7. Stick to your budgeted time – maybe less – When you think of your relationship with the individual as a relationship you’ll build over time and over many calls, discussions, chats at conferences or whatever you’ll realize you need to be known for being respectful of other’s time. If you’re known as the person who’s always long winded you’re less likely to get the next few calls on the calendar. Less is better, I promise.
In this blog, Steve Quinlivan provides the latest in crowdfunding – including more Congressional testimony. Meanwhile, in our “Crowdfunding” Practice Area, I have posted this PowerPoint that goes over the state of play for crowdfunding from Kelley Drye’s Jeanne Solomon, Matthew Zucker and Maura Gallagher.
The Sequester is Real (Even If It Fell from the National News)
Still no word on how the sequester might impact the SEC, but I can tell you from living inside the Beltway that the sequester is real and starting to take effect. Many of my neighbors and friends have received furlough notices from federal agencies and will not be working one day every two-week pay period. Their workload will remain the same of course – but they are not allowed to work on their furloughed day off, even if they want to! Learn more about how the sequester is impacting us in this David Cay Johnston piece. And today’s Washington Post ran this article about the sequester…
Our July Eminders is Posted!
We have posted the July issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
