At yesterday’s Open Meeting, a divided Commission adopted the conflict mineral disclosure rules required by Section 1502 of the Dodd-Frank Act. The final rules are described in a fact sheet and the adopting release including the final rules has already been posted (we’re posting memos in our “Conflict Minerals” Practice Area). The general contours of the final rules are similar to the proposed rules and are consistent with the statutory direction from the Dodd-Frank Act, however the Commission did make some notable adjustments in the final rules in response to comments, including:
1. The conflict mineral disclosures (including, if necessary, the Conflict Minerals Report) won’t be channeled into the existing periodic reporting regime (i.e. Form 10-K) as was proposed, and will rather now be provided in a new Form SD, with “SD” standing for “specialized disclosure.” (The SEC has been referring to the Dodd-Frank mine safety, conflict minerals and resource extraction disclosure provisions collectively as “specialized corporate disclosure.”)
2. The Form SD will be deemed “filed,” but there won’t be any separate CEO/CFO certifications involved. At the Open Meeting, the Staff downplayed the “furnished” versus “filed” distinction which wasn’t adopted with respect to the conflict mineral disclosures.
3. A new outcome is contemplated under the rules, at least on a temporary basis – “DRC Conflict Undeterminable.” For a two-year period (four years for smaller reporting companies), if an issuer is unable to determine whether the minerals in its products originated in the covered countries (the Democratic Republic of the Congo and adjoining countries) or finance or benefited armed groups in those countries, then the company provides specified disclosures in the Conflict Minerals Report but doesn’t have to obtain an independent private sector audit.
4. The SEC has made a number of accommodations in the case of minerals that come from recycled or scrap sources.
5. The SEC provided useful guidance in interpreting the term “contracting to manufacture,” by specifically carving out situations where a company is not deemed to have influence over the manufacturing of the product.
Application of conflict mineral disclosure rules to companies seems pretty complicated, however check out the flowchart on page 33 of the adopting release – it does a nice job of laying out the various disclosure outcomes. Also, as companies are considering whether these rules apply to them, it is important to consider the lack of any di minimis standard in the statute or rule, and just how ubiquitous the four minerals (tantalum, tin, gold or tungsten) in products and manufacturing processes. All public reporting companies, including foreign issuers and smaller reporting companies, will be subject to the rules, and whether any disclosure will be required at all turns on whether the minerals are “necessary to the functionality or production” of a product that the subject company manufactured or contracted to be manufactured.
There was a lot of discussion at the Open Meeting about the costs involved with compliance, with estimates in the range of $3 billion to $4 billion!
Companies must comply with the final rule for the calendar year beginning January 1, 2013, with the first reports due May 31, 2014. All conflict mineral reporting will be on a calendar year basis and the Form SD will be required annually on May 31st.
More Form SD: The SEC Also Adopts Resource Extraction Payment Rules
The SEC also adopted the final rules requiring disclosure of payments by resource extraction issuers as directed by Section 1504 of the Dodd-Frank Act. The final rules are described in a fact sheet and the adopting release including the final rules has already been posted. This rulemaking was also a source of contention for the Commission (albeit a much smaller Commission, because two Commissioners were recused), and in the end the SEC did make a few tweaks to the proposals in response to commenters. Like the conflict minerals disclosures, the required disclosures about payments be resource extraction issuers are filed on Form SD (rather than on Form 10-K as proposed), in an exhibit that is electronically tagged using XBRL. These rules likewise apply to domestic and foreign issuers, as well as smaller reporting companies (and include payments made by a subsidiary or another entity that the issuer controls). A de minimis threshold for disclosure was established at $100,000, rather than based on some notion of materiality as some had hoped.
Resource extraction issuers will need to comply with these new rules for fiscal years ending after September 30, 2013. For the first report, the SEC has said that most resource extraction issuers can provide a partial report disclosing only those payments made after September 30, 2013, and then thereafter reports covering the full fiscal year will be required no later than 150 days after the end of the fiscal year.
The Second Deal Cube Tourney: Round One; 7th Match
As noted in these rules (and keep sending more pics for the next tourney), please vote for two of the following four cubes below:
Yesterday, the SEC removed from today’s Open Meeting agenda the consideration of rules to eliminate the prohibition against general solicitation and general advertising in offerings conducted pursuant to Rule 506 of Regulation D and Rule 144A, as mandated by Section 201(a) of the JOBS Act. In a separate notice, the SEC indicates that it will now consider whether to propose rule changes under Title II of the JOBS Act on Wednesday, August 29th. The new notice clarifies that the changes to Rules 506 and 144A will be proposed, rather than published as interim final rules. I would expect that, given all of the fireworks over the last couple of weeks, there will be a short comment period with the expectation of moving to final rules relatively quickly, perhaps by the end of the year.
Remaining on the calendar for today’s Open Meeting, unfortunately, are the final rules implementing the conflict minerals and resource extraction disclosure provisions of Dodd-Frank.
Payday at the SEC: The First Dodd-Frank Whistleblower Award
The SEC announced that it has paid its first financial award to a whistleblower who provided “documents and other significant information that allowed the SEC’s investigation to move at an accelerated pace and prevent the fraud from ensnaring additional victims.” The anonymous whistleblower will receive at least $50,000 (30% of the amount collected by the SEC), and the award will continue to go up as the SEC is able to collect more in disgorgement and penalties in the case. This first whistleblower award comes a year after the SEC’s whistleblower rules under the Dodd-Frank Act were effective.
The Second Deal Cube Tourney: Round One; 6th Match
As noted in these rules (and keep sending more pics for the next tourney), please vote for two of the following four cubes below:
I have been hearing from the financial printers for a while now about an odd automated EDGAR screening criteria which looks to see whether a registration statement filing is “duplicative” of another registration statement filing that the issuer has made, and sometimes when duplication is detected, the new filing is suspended until someone at the SEC can override the suspension and allow the filing to be accepted and disseminated. As this recent Weil Gotshal & Manges LLP alert notes, this process can be particularly problematic when an issuer is renewing its automatic shelf registration statement (which must be done periodically because the SEC’s rules provide that the registration statement expires every three years), because the delay in acceptance of the purportedly duplicative filing can mean a delay in the effectiveness of the automatic shelf registration statement, which can of course wreak havoc on the marketing and pricing of a transaction taking place around the time of the shelf filing.
When filings are made during ordinary business hours this is usually not a big problem, because the printers can work with the Staff to override the suspension. However, if the issuer is filing outside of the SEC’s hours (e.g., at night or first thing in the morning) in anticipation of a transaction with tight timing, there is a risk that the Staff might not be reachable to do the manual override. The Weil alert notes that the Corp Fin EDGAR Staff may be reached in the morning beginning at 7:30 am to address this issue, but in any event it seems best to avoid the potential disruption altogether by filing the new shelf registration statement when there is plenty of time to deal with EDGAR’s peculiarities.
We understand that the Staff in Corp Fin is aware of this issue and is looking into fixing the glitch with respect to automatic shelf registration statements, although it is not clear at this point when and if a repair will be implemented.
All Eyes on the Commission Tomorrow for Dodd-Frank and JOBS Rulemaking
If you had told me last winter that the SEC’s consideration of final rules implementing the Dodd-Frank Act conflict minerals provision would have been overshadowed by a debate about the removal of the general solicitation ban in Rule 506 offerings, I would have never believed you. But that is where we find ourselves as the Commission is set to consider tomorrow final rules for the remaining “specialized corporate disclosure” provisions of the Dodd-Frank Act, along with what at this point would appear to be proposed rules to implement Title II of the JOBS Act. I don’t want to get anywhere near the “debate” that is ongoing about the timing of the SEC’s JOBS Act rulemaking and in particular the implementation of Title II, but suffice it to say that whatever happens tomorrow will give us plenty to talk about on our upcoming webcast “JOBS Act Update: Where Are We Now” which will take place on Wednesday, September 5th from 2:00 – 3:00 pm eastern.
The Second Deal Cube Tourney: Round One; 5th Match
As noted in these rules (and keep sending more pics for the next tourney), please vote for two of the following four cubes below:
A recent study by the Investor Responsibility Research Center Institute and GMI Ratings found that only five percent of corporate directors receiving majority withhold votes are removed from boards, however approximately fifty percent are unseated at companies with majority voting standards. The study looks at the causes of withhold/against votes for directors, finding that fifty percent of withhold votes are attributable to corporate specific issues, and more than seventy-five percent of withhold votes can be attributed to six main factors: (1) poison pill adoption without shareholder approval; (2) failed attendance; (3) related party transactions; (4) overboarding; (5) company-specific compensation concerns; and (6) discontent regarding board oversight of a company’s affairs. The remaining portion are very much situational, where the circumstances leading to discontent with directors vary widely.
Our New “Related Party Transactions Disclosures Handbook”
As noted in this study posted in our “Audit Fees” Practice Area, Audit Analytics found that for 2011 the ratio of non-audit fees over revenue was the lowest calculated for the ten years analyzed and the same ratio of audit fees was the lowest since 2004. Here is a summary of Audit Analytics’ findings:
– Non Audit Fees as Compared to Audit Fees: In 2002, non-audit fees represented 51% of the total fees paid by research population, but after three years of steady decline non-audit fees appear to have leveled off at about 20% of total fees. To some extent, the drop in non-audit fees as compared to audit fees is attributable to the Auditor Independence Rules adopted by the SEC in 2001, which precluded the principal independent accountant from performing certain non-audit services to ensure auditor independence when performing the independent audit.
– Non-Audit Fees as a Percentage of Revenue: After six consecutive years of decreases in the cost of non-audit fees as a percentage of their revenue, accelerated filers experienced a slight uptick in 2009, but the uptick was due to a decrease in revenues instead of an increase in fees. After the 2009 uptick, both 2010 and 2011 experienced decreases. The 2011 figure was the lowest value calculated for the ten years under review: $121 of non-audit fees for every million dollars in revenue.
– Audit Fees as a Percentage of Revenue: The ratio of audit fees over revenue peaked in 2005, when the average amount of audit fees paid per $1 million of revenue was $597. After three consecutive years of decline the figure increased slightly in 2009, but as with non-audit fees, the uptick is due to a decrease in revenues instead of an increase in fees. Both 2010 and 2011 experienced decreases and during 2011 experienced the lowest value since 2004: $466 of audit fees for every million dollars in revenue. The fees declined despite the extra work demanded of the auditors during the same period when more and more companies were required to obtain auditor attestations pursuant to SOX 404(b).
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:
– FINRA Proposes Corporate Financing Rule Changes for Deferred Comp Arrangements
– Study: Securities Class Action Filings Involving Accounting Allegations Increase
– Chamber of Commerce Goes After Glass Lewis
– FINRA Rule 2111 Becomes Effective July 9th
– Tips for SEC’s New Confidential Submission Process
The Second Deal Cube Tourney: Round One; 3rd Match
As noted in these rules (and keep sending more pics for the next tourney), please vote for two of the following four cubes below:
“Indeed, in my own experience as a counselor to boards, many an audit committee has wondered, with regret, why didn’t the auditors tell us about this?”
The standard is subject to SEC approval and, if approved, would be effective for audits of fiscal periods beginning after December 15, 2012. Note this is the first auditing standard adopted by the PCAOB subsequent to the JOBS Act – and therefore, the SEC must separately determine whether it will apply to audits of emerging growth companies (as noted by Cooley’s Cydney Posner in this news brief).
Congressional Pressure Ahead of the SEC’s Open Commission Meeting Next Week
Next week, Dave will be manning the blog while I am on vaca. So he’ll get to enjoy the fireworks during the SEC’s August 22nd open Commission meeting. Jim Hamilton blogs about this letter to the SEC from three Senators about those proceedings…
The Second Deal Cube Tourney: Round One; 2nd Match
As noted in these rules (and keep sending more pics for the next tourney), please vote for two of the following four cubes below:
The excitement in the air is palpable as we commence our second deal cube tourney. As noted in these rules (and keep sending more pics for the next tourney), please vote for two of the following four cubes below:
– How long did it take to draft the report?
– What are the main lessons from it?
– How can boards use this report?
– Any surprises in putting it together?
– Long term, what should boards look like?
Nasdaq OMX Listing Center’s New Reference Library
Recently, Nasdaq OMX launched a beta version of its new Reference Library which is powered by an advanced search engine that can look through hundreds of FAQs, staff interpretation letters and Listing Council decisions using filters and keywords. There also are two new guides: Initial Listing Guide and Continued Listing Guide (which replace older guides on the same topics). Check it out and provide them with feedback!
We have posted the survey results regarding typical practices for company executives and HSR filing fees, repeated below:
1. Does your company require executives to comply with HSR filing requirements upon acquiring company shares:
– Yes, and they have been for a while – 39%
– Yes, but only recently because of this enforcement action – 16%
– No – 45%
2. If the answer to #1 above is “yes,” who pays the HSR filing fee:
– Executive with no reimbursement by the company – 40%
– Executive with full reimbursement by the company – 20%
– Executive with partial reimbursement by the company – 0%
– Company – 40%
3. If the executive pays HSR filing fee but is partially reimbursed by the company, in what manner is the reimbursement:
– Specified percentage – 0%
– Specified dollar amount – 50%
– Specified Formula – 50%
Please take a moment to participate in this “Quick Survey on Insider Trading Policies: Pledges & Margin Accounts” (remember the recent attention on margin accounts used by insiders thanks to the Green Mountain Coffee chair’s margin call) and “Quick Survey on Proxy Solicitors.”
SEC Approves Nasdaq Rule Change for Independent Directors
On July 19th, the SEC approved a proposed change to Nasdaq’s rules regarding membership on a listed company’s audit, compensation and/or nominations committee. Nasdaq sought to modify an exception to its Rule 5605, which allows a non-independent director to serve on such committees “under exceptional and limited circumstances” for up to two years. The amendment provides an exception allowing a non-independent director to serve on a company’s audit, compensation and/or nominations committee, where the director has a family member serving as a non-executive employee of the company, so long as the listed company’s board concludes that the director’s membership on the relevant committee is “required by the best interest of the company and its shareholders.”
The True Meaning of the Olympics
Here is an excerpt from the end of this fine column by the Washington Post’s Mike Wise:
The second is of a woman who finished her 100-meter heat in less than 15 seconds after eight years of convincing her family and her nation that it was okay for a Muslim woman to leave the house and run as fast as her conviction would take her. Just four reporters, all of us from different countries, were standing there underneath the stadium, straddling a hip-high barrier separating the athletes and journalists, and I don’t think any of us was waiting for her when she walked up to us.
“My taxi driver throw me out on the street when I told him I was training for Olympics,” said Tahmina Kohistani, Afghanistan’s only woman at the Games, in the halting English she had learned through mail-order language courses. “He said, ‘Get behind the man. You are disgrace to Muslim women.’ My coach fought other men outside the stadium where I train because they do not think I should run. But my country will remember me forever one day. They will see I am the right one and other girls will watch me and I will tell them, ‘Come, run with me. Run with me, Tahmina.’ ”
About 25 minutes later, after we heard the most harrowing journey anyone could have taken to run 100 meters at the Games, one of the male reporters began weeping. He finally said, “You’re a hero. You’re a hero to your country and women everywhere.” Beneath her hijab, Tahmina sheepishly said, “Thank you,” and began to cry. We were all choked up and didn’t know what else to say.
As I type this now, I still don’t know what to say, except that I knew in that very moment, for one of the few times in my job, I was in the presence of a greatness and a courage as real and inspiring as anything I’ve ever seen in sports or life.
“Hey, who was that?” a colleague of mine from the United States asked.
I opened my mouth, but I couldn’t talk. I just walked a few steps away, turned away from him, and started crying — for a woman who finished 31st in the world in her event. A minute later, when he came to see if I was okay, he asked again, “Who was that?”
I swallowed hard and said, “That’s why I came here.”
On Friday, the SEC’s Office of the Whistleblower posted this friendly video (along with this transcript) featuring Chief Sean McKessy that goes through the steps it takes when it receives a whistleblower tip. Sort of an evaluation checklist. For the most part, it provides comfort to the potential whistleblower – until you get to this phrase near the end of the video: “SEC enforcement actions can take years to be finalized.” That is a true statement that may scare off a few folks…
The SEC’s Consolidated Audit Trail: Too Little & Too Late
Last month, the SEC approved a new rule that requires the securities exchanges and FINRA to establish a market-wide consolidated audit trail that will significantly enhance regulators’ ability to monitor and analyze trading activity. Here’s some commentary from Lynn Turner about this rulemaking:
Here are statements from two SEC Commissioners who opposed the recent SEC rulemaking as being too little (Aguilar and Walter) and it certainly has occurred too late. The third statement is from the SEC Chairman who supported the rule. It was the first time I recall one of the Democratic Commissioners voting against the Chair.
Some things worth noting in these statements includes:
1. In 1980, over three decades ago, the SEC itself issued a report saying it needed a comprehensive market surveillance system. Yet today, absolutely no such system exists and trading blow ups are becoming a regular event.
2. One of the Commissioners aptly states: “…it will likely take several more years before any consolidated audit trail system is finally in place..” The Commissioner goes on to point out that the system is years away, but will be based on the rule just adopted which the Commissioner comments: “…the rule we consider today is disappointingly weak…” The Commissioner goes on to state somewhat shockingly:
“the adopting release eliminates the requirement to report orders with a unique order identifier throughout the order’s entire life cycle with a more general requirement that the repository be able to link together all life cycle events for the same order. Further, the rule replaces the use of unique customer identifiers, which could enhance the ability of regulators to reliably and efficiently identify the beneficial owner of the account originating an order, with a less effective identification of the account holder–which, in some cases, would only reveal the entity named on the account rather than the actual individuals controlling it. In short, the rule’s flexibility may well result in less timely, complete and accurate information and therefore less effective market oversight.”
3. The data to be provided is not due to the SEC until 8 am the next morning. By that time the trades will all be over with, and in the instances of the Flash Crash, the Facebook IPO, and now the Knightmare on Wall Street, will have been old history. The SEC will be waiting overnight, losing sleep, while the data comes in so they can figure out what went wrong the day before, and why people lost money. So while the trading firms can develop extremely complex algorithms (some of which obviously do not work as intended), and do thousands of trades in a nano second, it was felt the SEC needed to give them until the next (years, years from now) to report their trade data.
As a result, it is likely there will be more, maybe even many more trading losses to be sustained by investors, before a proactive SEC steps in to ensure orderly, fair markets. In the meantime, the US capital markets are beginning to look and feel a little like the “casino” a former SEC Commissioner used to describe the London AIM markets.
Failure to Seek Shareholder Approval Lawsuit: Simon Property Group Sued by Pension Fund
I just blogged this on CompensationStandards.com’s “The Advisors’ Blog“:
Simon Property Group Inc. (SPG) directors were accused in a lawsuit by an investor of improperly increasing Chief Executive Officer David Simon’s compensation last year without seeking shareholder approval. The board of the largest U.S. shopping-mall owner wrongfully authorized a compensation package for Simon that provided $1.25 million annual salary, a cash bonus of double his salary, and $120 million in special stock awards as an incentive to stay with the company through 2019, a Louisiana pension fund claimed in the suit, filed yesterday in Delaware Chancery Court.
The $120 million retention award “is not tied to the company’s performance and instead guarantees enormous payments to Simon simply if he stays employed by the company” for seven more years, the fund alleged. Simon, based in Indianapolis, raised its dividend and increased its full-year forecast for funds from operations last month, citing increased demand for space from retailers at regional malls and outlet centers. Earlier this year, Simon bought a 29 percent stake in European shopping-center operator Klepierre SA and formed a venture with Rio de Janeiro-based BR Malls Participacoes SA (BRML3) to develop outlet centers in Brazil. Les Morris, a spokesman for Simon Property Group, said by e-mail that the suit is “meritless” and the company will defend itself against its claims.
The suit comes more than two months after Simon officials disclosed that 73 percent of the Simon shares voted at the company’s annual meeting opposed the granting of the retention award to the company’s chief executive.
Say-On-Pay Vote
Simon officials sought to defend the CEO’s compensation plan prior to the so-called “say-on-pay” vote, noting that total stockholder returns for the past 10 years were 597 percent compared with 58 percent for the S&P 500. Simon had been one of the company’s top executives during that period. Simon, son of the company’s co-founder, has been CEO since 1995 and chairman since 2007. The Louisiana Municipal Police Employees Retirement System, a Simon shareholder, accused the company’s directors of exceeding their authority by amending the company’s stock- incentive plan, created in 1998, without seeking shareholders’ approval.
The plan allowed the board to change its terms unilaterally unless shareholder approval was “required by law, regulation of listing requirement,” the pension fund said.
Tax Implications
Since changes to executives’ performance goals under the plan implicate tax laws, the board was required to have investors vote of them, the pension fund said. The investors filed a so-called derivative suit against Simon’s board, which would return any recovery from insurance covering the company’s officers and directors to the company’s coffers. The case is Louisiana Municipal Police Employees Retirement System v. Bergstein, CA No. 7764, Delaware Chancery Court (Wilmington).
The first deal cube tourney is over and we have a winner! This fine Black Jack Table submitted by none other than James Bond! Fitting ending for a riveting Olympics in London! The reality is that the winner was submitted anonymously, as some of the deal cubes were submitted that way and I affixed a name to them for fun.
We will kick off our second tourney in a week or so. I still have room for five more cubes for the third tourney – so if you have something that you want to see in bright lights, please email a picture to me. Thanks to all that submitted cubes for the first tourney – there were many upsets along the way based on how I had seeded the cubes. I will share some of that information soon enough…
I’m still looking for the oldest cube known to mankind. Right now, it’s this 1969 cube from Arthur Katz. Check out the simplicity of the cube – and see if you can remember the underwriters!
Blue Ribbon Report on Federal Sentencing Guidelines
– What was the process for preparing the report?
– What are the major lessons in the report?
– Any surprises when putting the report together?
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:
– Recent SEC Staff Guidance on Shareholder Proposals
– For Glass Lewis, More Proxy Clout Means More Heat
– Chart: Votes on Proxy Access Proposals
– Roosters Come Home for Chesapeake Energy
– Mid-Proxy Season Voting Review
