Yesterday, President Obama named Mary Jo White as the new SEC Chair. Mary Jo served for nearly a decade as the US Attorney for the Southern District of New York, the first woman to hold that post – and more recently has served as the head of Debevoise & Plimpton’s litigation practice. It’s been a while since a “cop” has been the SEC Chair (maybe ever, as this NPR piece says she is the first former prosecutor to be the Chair) so it should be interesting to see how her tenure might differ from recent Chairs. The confirmation hearings could be interesting due to revolving door concerns, as noted in this article – but also see this article that praises her from all corners. Note that Mary Jo is married to Cravath’s John White, who was Corp Fin Director not all that long ago…
When Mary Jo is confirmed, Elisse will go back to her Commissioner job. During her short tenure, Elisse began to lay out her priorities, as noted in this article and this article.
By the way, former SEC General Counsel Dan Goelzer – who was a founding member of the PCAOB (and a long-serving member) – is rejoining Baker & McKenzie in Washington.
The SEC at a Crossroads: Can Things Be Turned Around?
This January-February issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Billion Dollar Companies: Not Too Big for Hostile Shareholder Activism
– News from the SEC: Tender Offer Funding Conditions & Dual Track Processes
– Runaway MAC Carve-Outs
– Delaware Enjoins “Don’t Ask, Don’t Waive” Standstill Provision & Holds Not Per Se Unenforceable (But Use & Effect Should Be Disclosed)
If you’re not yet a subscriber, try a 2013 no-risk trial to get a non-blurred version of this issue on a complimentary basis.
As the Chamber’s lawsuit against the SEC’s conflict minerals rulemaking remains pending – with briefs being filed recently – companies need to continue gearing up for compliance. We continue to post many resources in our “Conflict Minerals” Practice Area, including this Checklist for Step One…
Court Rules for CFTC & Against ICI & the Chamber of Commerce
Speaking of Chamber lawsuits, the US District Court for DC delivered this decision last month arising from the Chamber of Commerce and Investment Companies Institute (the trade organization for the mutual fund business) suing the CFTC to stop Dodd-Frank rulemaking involving commodity pool operators. The decision has been appealed, along with a motion for expedited consideration of the appeal.
Meanwhile, as noted in this Reuters article, House Oversight Chair Darrell Issa and Rep. McHenry have written to the PCAOB as part of its probe into whether sufficient cost-benefit analysis is being conducted by the PCAOB…
In a recent speech, Craig Lewis, the SEC’s Chief Economist and Director of its Division of Risk, Strategy and Financial Innovation, described an initiative to develop an “Accounting Quality Model.” According to Mr. Lewis, the model will seek “to provide a set of quantitative analytics that could be used across the SEC to assess the degree to which registrants’ financial statements appear anomalous.”
The model will be designed to identify possible instances of “earnings management,” though Mr. Lewis is quick to say that earnings management (as he defines it) is not necessarily indicative of fraud but may reflect permissible applications of GAAP. Without delving too much into the technicalities, the model will identify “total accruals” (difference between cash flow and income before extraordinary items), and then seek to determine, based on a large set of factors, which of those accruals are discretionary and which are non-discretionary. If the discretionary accruals are out of line compared to peer companies, then the company may be flagged for further analysis.
Mr. Lewis indicates that the model’s analytics can be used for various purposes, including informing the Division of Corporation Finance’s filing review process, use by the Enforcement Division to focus its investigative process, and evaluating claims by tipsters. For most companies, this new model is unlikely to have much impact. But the fact that the Commission staff is developing this model illustrates the SEC’s continuing efforts to enhance its ability to carry out its regulatory objectives by “integrat[ing] rigorous data analytics into the core mission of the SEC.”
One of the greater challenges last proxy season was ISS rolling out an updated governance ratings service – GRId 2.0 – in the late stages of the proxy season. Last week, ISS sent out the letter below to companies explaining how GRId is changing – including its name – along with a timeline of the new QuickScore launch (it seems there is potential for another “midst of the proxy season” surprise; I’ll ask Pat about this during tomorrow’s webcast):
Most public companies in established markets worldwide are familiar with Institutional Shareholder Services (ISS) and the corporate governance research and proxy voting services we provide to global investors. One of those services is our Governance Risk Indicators (GRId) database, which was designed to assess companies’ governance practices, assigning low, medium and high risk concern levels across practices related to board, executive compensation/remuneration, audit and shareholder rights.
Effective late February/early March 2013, ISS will replace GRId with ISS Governance QuickScore™, which is the first in a suite of ISS QuickScore solutions designed to identify risk within portfolio companies. The ISS Governance QuickScore, which identifies governance risk within a company, will be made available to institutional investors and companies in late February.
Although similar to GRId in concept, ISS Governance QuickScore™ differs in the following ways:
– Methodology – ISS Governance QuickScore uses a quantitatively-driven methodology that looks for correlations between governance factors and key financial metrics, with a secondary policy-based overlay that aligns the qualitative aspect of governance with ISS policy. The methodology is based on best practices across various governance factors, with the number of factors applied varying by region. Details regarding regional factors will be included in a forthcoming technical document.
– Scoring – Moving away from GRId’s color-coded concern levels, ISS Governance QuickScore uses a numeric, decile-based score that indicates a company’s rank relative to region. Companies will still be assessed on four independent dimensions: board, compensation/remuneration, shareholder rights, and audit, and will also receive an overall Governance QuickScore and assessment. In the latter half of the year, scores relative to industry sector will be introduced.
– Coverage – Initially, ISS QuickScore coverage will encompass 4,100 companies in 25 markets, including the largest 3000 U.S. companies by market cap, the largest 250 Canadian companies by market cap and UK, Europe, Japan and Asia Pacific companies in the MSCI-EAFE index.
Companies within this QuickScore coverage universe will have access to ISS’ free data verification site, beginning Monday January 28. At that time, companies can begin to review the data ISS has collected on the QuickScore factors. Note that during this period, only the governance profile for your company will be available for review until Governance QuickScores are published in late February/early March. If you need a log-in ID to the free data verification site, please email us.
– Today through January 25 – GRId data and concern levels remain in effect and are displayed through all current distribution channels.
– January 28 – Data review and verification site opens for companies to review their data against the Governance QuickScore factors. GRId data and concern levels are unavailable.
– February 15 – Data review and verification site closes (although the site will open again and remain open after QuickScores are calculated and released in late February/early March)
– Late Feb/early Mar – ISS Governance QuickScore launches. Governance QuickScores are applied to all 4,100 companies in the coverage universe. GRId is retired. We anticipate a Governance QuickScore launch date on or around February 25, but will confirm/update that date in subsequent communications.
For all covered companies, the ISS Governance QuickScore will be displayed on ISS’ proxy research reports beginning with the late February/early March launch.
Over the coming weeks, you will receive a series of informative communications providing additional details about ISS Governance QuickScore that should answer most of your questions. Look for communications next week that will include access to the ISS Governance QuickScore Technical Document, FAQs and sample reports. If you still have questions after receiving these materials next week, you can email us.
Starting in late February/early March, GRId subscribers will see their current GRId view within ICS’ Governance Analytics platform replaced with modeling and analytical tools based on the new ISS Governance QuickScore methodology.
ISS Updates P4P Methodology Whitepaper
Hat tip to Ed Hauder of Exequity for notifying us of this development: ISS recently posted its whitepaper detailing its pay for performance (P4P) methodology:
The Evaluating Pay for Performance white paper provides an overview of ISS’ approach in evaluating Pay for Performance alignment. Originally published prior to the 2012 proxy season [Note: a revised version of the whitepaper was published in February 2012], the document incorporates further updates for 2013 that describe ISS’ new peer selection methodology and approach to measuring realizable pay.
Webcast: “Pat McGurn’s Forecast for 2013 Proxy Season: Wild and Woolly”
Tune in tomorrow for the always entertaining webcast – “Pat McGurn’s Forecast for 2013 Proxy Season: Wild and Woolly” – Pat McGurn of ISS and the proxy season expert, will recap what transpired during the 2012 proxy season and what to expect for 2013. Please print off these “Course Materials” in advance.
Despite the Presidential Election now far behind us, interest in disclosure of political spending continues to be very high by a group of investors. Recently, I blogged about how the number of comments on the rulemaking petition seeking political spending disclosures is now up to 320,000. I also blogged about the likelihood of the SEC proposing rules in this area by sometime in April, as blogged about by Prof. Lucian Bebchuk. The prospect of a rulemaking drew great interest in the media, with over 20 newspapers carrying the story a few weeks back (here is a list of links to those stories). And on “The Mentor Blog,” I noted New York State Comptroller has filed a Section 220 books & records lawsuit in Delaware against Qualcomm a few weeks ago. So investors are pressing for more disclosure on numerous fronts.
Now, the Chamber of Commerce has fired back by submitting this 30-page comment letter on the rulemaking petition. As noted by Ning Chiu in this blog, the Chamber’s response sounds the alarm by noting that: “A number of recent Commission regulations have been set aside by the courts for failing to satisfy this standard–the Commission should not waste precious public resources on a rulemaking exercise that is similarly doomed to failure.” Perhaps some of the Chamber’s concerns would be addressed if the DISCLOSE Act (“Disclosure of Information on Spending on Campaigns Leads to Open and Secure Elections Act of 2013”) were enacted. Rep. Chris Van Hollen (D-MD) reintroduced the bill – HR 148 – just after the New Year. This battle likely has just begun (although the war has spanned decades)…
Here’s an example illustrating the methods being used to attract so many comment letters on this petition. Credo uses this page to facilitate the submission of a form comment letter. Online campaigning continues to grow as I have predicted for years…although I thought it would happen in the annual shareholder meeting context…
Political Spending: What Can You Do Now? Our Checklists & Samples
Corp Fin Updates Financial Reporting Manual (Again)
On Friday, Corp Fin indicated that it has updated its Financial Reporting Manual for for issues related to significance testing for related businesses, auditor responsibility for cumulative period from inception amounts, PCAOB requirements for auditors of non-issuer financial statements, and other changes.
Recently departed Corp Fin Director Meredith Cross has decided to return to her old firm, WilmerHale. I’m sure they are very glad to have her back.
And the latest “next SEC Chair” rumors are circulating – although there is a good chance that Elisse Walter may keep the job in my opinion – with Mary Jo White, the former US attorney in Manhattan being reported as under consideration. My own poll of who might be tapped as the next Chair resulted in CII’s Ann Yerger getting the most votes (sadly, the poll results have vanished along with the web polling software I was using). I’m sure we will hear many more rumors as Elisse is likely to stay in the job at least through most of this year…
Meanwhile, the debate over crowdfunding continues. See this Huffington Post piece entitled “JOBS Act Rule Poses Early Test of SEC Chairman Walter’s Leadership.”
Draft Recommendations: Advisory Committee on Small and Emerging Companies
Recently, the Advisory Committee on Small and Emerging Companies posted its recommendations in draft form, including a number of interesting items (eg. setting up of a stock exchange for small companies). There will be a public meeting of the Advisory Committee on February 1st…
How to Do Board Succession Planning
In this podcast, Kris Veaco of the Veaco Group runs down some frequently-asked questions about how to conduct board succession, including:
– Why should boards be thinking about their own composition and succession planning?
– What are some ways boards go about this?
– Who does this work, the board itself?
– How are the results used?
Yesterday, the SEC finalized the NYSE & Nasdaq listing standards related to compensation committees and their advisors (here’s the NYSE order & Nasdaq order). Last Friday, both exchanges amended their listing standards, as noted in this blog. Here are the effectiveness timetables, as noted in this Cooley news brief:
– NYSE companies will have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the new standards for compensation committee director independence. All other provisions will become effective on July 1, 2013 for NYSE companies (e.g., provisions relating to the authority of a compensation committee to retain and fund compensation consultants, legal counsel and other compensation advisers and the responsibility of the committee to consider independence factors before selecting or receiving advice from these advisers).
– Nasdaq companies will be required to establish the committee’s authority and responsibility under Rule 5605(d)(3) in the committee charter, resolutions or other board action by July 1, 2013. Nasdaq companies will have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the remaining provisions (including a mandatory charter amendment to establish the authority noted above).
IASB, FASB Chairs Address Possible IFRS Option in US
In FEI’s “Financial Reporting Blog,” there is news about the latest thinking on the use of IFRS from the Chairs of the IASB and FASB…
More on “The Mentor Blog”
I 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’s Enforcement Going to Trial More Frequently: Consequences?
– History Speaks: First LLC Registered with the SEC
– The SEC’s Role in Enforcing the Federal Securities Laws
– How Much Information Should you Give VCs for Due Diligence?
– Sample: Audit Committee Evaluation of Auditor (& It’s PCAOB Inspection)
As with the end of every calendar year, lists are made and analyzed. This Reuters article counts the number of settlements by the SEC’s Enforcement Division. Meanwhile, this National Law Journal article penned by Enforcement Director Rob Khuzami and Deputy Director George Canellos supports their legacy. The article starts like this:
In his December 3, 2012, column, “SEC enforcement: What has gone wrong?,” Columbia Law School professor John C. Coffee Jr. makes a series of claims about U.S. Securities and Exchange Commission enforcement cases. These claims are inaccurate and paint a distorted picture of an enforcement program that has achieved record results in recent years. As a solution to the problems he sees, Coffee proposes that the SEC outsource its biggest cases to private contingency-fee lawyers — a suggestion that ignores critical differences between the SEC’s goals as a regulator and those of a litigant seeking monetary damages.
Finally, it’s worth noting this Reuters article entitled “SEC probes Ernst & Young over audit client lobbying.”
SEC Approves NYSE’s “Methods for Providing Notice” Amendment
The SEC has just approved an amendment to the NYSE rules regarding the method for providing notices to the NYSE of matters or events where timely notification is essential for investors to take certain actions. Currently, the Manual provides for various methods of notice. Now, the NYSE is providing, in Section 204.00, a new, uniform method of notification through a web-based communication system – either a web portal (egovdirect.com ) or an email address – specified by the NYSE in a prominent position on its website.
The new method will be applicable to notices regarding the following events:
– Closing of transfer books;
– Notice of dividend action or action relating to a stock distribution;
– Meetings of shareholders, notice of the fixing of a date for the taking of a record of shareholders or for the closing of transfer books;
– Redemption of listed securities;
– Notice of corporate action which will result in, or which looks toward, either the partial or full call for redemption of a listed security; notice of dates set in connection with the calling of any meeting of shareholders; and
– Notice by transfer agents of the number of shares outstanding at the end of each calendar quarter.
In emergencies, such as technical problems at the NYSE or the company, companies will be able to provide notifications by telephone and confirm by fax. In addition, where a material event or a statement dealing with a rumor that requires immediate release is made shortly before the opening or during market hours, companies must notify the NYSE using the telephone alert procedures set forth in Section 202.06(B). Under those procedures, the company must give ten minutes notice to its NYSE representative by telephone (along with transmission of the written text) prior to release of the announcement; under the new rule, the written text must now be transmitted using the web-based communication system.
For the remaining notification provisions in the Manual that do not direct companies to follow the new notification methods, companies may use the methods provided for in Section 204.00 or any other reasonable method. (In these other events, more flexibility is permitted because, while the NYSE needs to be informed promptly, the NYSE believes that a company’s failure to notify the NYSE immediately would not significantly disadvantage investors.)
The NYSE is also making some technical, clarifying and conforming changes to the “Guide to Requirements for Submitting Data to the Exchange.” Finally, the number of hard copies of proxy materials required to be provided to the NYSE is being reduced from six to three.
Webcast: “The Latest Developments: Your Upcoming Proxy Disclosures –
What You Need to Do Now!”
Tune in tomorrow for CompensationStandards.com’s webcast – “The Latest Developments: Your Upcoming Proxy Disclosures – What You Need to Do Now!” – to hear Mark Borges of Compensia, Alan Dye of Hogan Lovells and Section16.net, Robbi Fox of Exequity, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn discuss all the latest guidance about how to overhaul your upcoming disclosures including these topics:
– Overview of key lessons from the 2012 proxy season
– The rise of the proxy summary
– Developments with CD&A and executive summaries – including realized/realizable pay
– The impact of the compensation committee and advisor independence rules in 2013
– Hedging and pledging policies in the wake of the 2013 ISS policy change
– Engagement strategies for 2013
– Compensation and governance shareholder proposals
Over the past year, I have blogged about a number of comprehensive Handbooks that we have posted on the site. Many members have asked if we have housed the Handbooks in one spot – and indeed we have. There is a “Handbooks” Practice Area, listed alphabetically among the hundreds of Practice Areas on the left side of our home page. And there are many more Handbooks than I blogged about last year. Take a gander…
Where to List: NYSE or Nasdaq?
I love to note when new securities law blogs emerge and “The Securities Edge” by Gunster’s David Scileppi & his colleagues looks very promising. For example, here is a recent entry on a common topic – which stock exchange should a company list upon…
Webcast: “The ‘Former’ Corp Fin Staff Speaks”
Tune in tomorrow for the webcast – “The ‘Former’ Corp Fin Staff Speaks” – to hear former Senior Staffers from the SEC’s Division of Corporation Finance Brian Breheny of Skadden Arps, Marty Dunn of O’Melveny & Myers, Linda Griggs of Morgan Lewis and Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster weigh in on what you need to be doing for the upcoming proxy season including tackling these topics:
1. Status of conflict minerals & resource extraction rulemakings
2. Status of IFRS
3. Proxy access proposals
4. Cybersecurity disclosures
5. Corp Fin’s new Office of Disclosure Standards and possible impact on comments
6. Status of COSO’s internal controls project
7. Other shareholder proposals
8. Iran & Syria disclosures
9. Comment responses as part of your disclosure stream
10. Mandatory auditor rotation & other PCAOB rulemakings
.
– Broc Romanek
With the SEC staring at yesterday’s deadline for its extension to approve the NYSE & Nasdaq proposals to comply with Rule 10C-1 under the Exchange Act comes this news from Davis Polk’s Ning Chiu on Friday:
Both the NYSE and Nasdaq have filed further amendments to their proposed listing standards on compensation committees and their advisers. The amendments copy directly from the exception in Item 407(e)(3)(iii) of Regulation S-K with respect to the proxy disclosure rules for compensation consultants.
The amendments clarify that a compensation committee is not required to conduct the independence assessment of an adviser whose role is limited to (a) consulting on any broad-based plan that does not discriminate in scope, terms, or operation, in favor of executive officers or directors, and that is available generally to all salaried employees or (b) providing information that either is not customized or that is customized based on parameters that are not developed by the adviser, and about which the adviser does not provide advice.
The SEC enhanced proxy disclosure rules in December 2009 permitted these exceptions in response to commentators who suggested that broad-based, non-discriminatory plans and the provision of information, such as surveys, that are not customized, should not be treated as compensation consulting services that would raise conflict of interest concerns.
The NYSE amendment also added language indicating that nothing in the section requiring a compensation committee to consider the specific adviser independence factors is intended to limit compensation committees from selecting or receiving advice from any adviser that they prefer, including ones that are not independent. NASDAQ already had a similar statement.
My ten cents: Given that the SEC’s deadline to act was yesterday – and a statement is in both the exchange’s latest amendments saying they don’t consent to an additional extension for the SEC to act – maybe the SEC will approve the amendments today or soon enough. Since a portion of the new rules will be effective July 1st, they have to give companies time to comply…
FINRA Releases Interim Form for Crowdfunding Portals
Here’s something blogged on Friday by Vanessa Schoenthaler in the “100 F Street” Blog:
Last week, FINRA announced that it would begin accepting information on a voluntary basis from prospective crowdfunding portals. FINRA will use the information to better understand the funding portal community and to develop specific funding portal rules.
Prospective crowdfunding portals are encouraged to submit an Interim Form for Funding Portals (“IFFP”) as well as any additional information or documentation that might be helpful to FINRA at: fundingportals@finra.org. FINRA will treat the information submitted on a confidential basis.
The IFFP covers general business information, ownership structure, sources of funding , information about management, compensation and a prospective crowdfunding portal’s business model.
Once the SEC and FINRA adopt final crowdfunding portal rules any prospective funding portals that file an IFFP will still have to file an application to become a FINRA member.
Mailed: November-December Issue of The Corporate Counsel
We recently mailed the November-December issue of The Corporate Counsel that includes pieces on:
– Say-on-Pay Arrives for Smaller Reporting Companies: Compliance Tips
- D&O Questionnaire Changes
- Hedging and Pledging Policies
- An Update on Say-on-Pay 2.0 Proxy Litigation
- Complying with the New Iran Sanctions Periodic Reporting Disclosure: New Staff CDIs Offer Guidance
- Affiliate-Donor’s Form 144–Staff Says Affiliate Should Include Aggregated Donee Sales in Table II
- Effective Date of the Audit Letter
- Our SEC Rulemaking Status Chart
- New Auditing Standard Adopted: No Changes to the Audit Committee Report Yet
Act Now: Get this issue rushed to when you try a 2013 No-Risk Trial today.
As you know, a new SEC rule (Item 407(e)(3)(iv) of Regulation S-K) requires disclosure if a conflict of interest has arisen in connection with the work of a compensation consultant (whether selected by management or the compensation committee). To satisfy this disclosure requirement, companies will need to conduct a conflicts of interest assessment. This raises the question of whether companies will include voluntary disclosure (so-called “negative disclosure”) in their proxy statement when a determination of “no conflict” has been made. Here are the results from our recent survey regarding what companies are preparing to do:
1. For our next proxy statement, when it comes to the newly required conflicts of interest disclosure about compensation consultants (ie., Item 407(e)(3)(iv) of Regulation S-K), assuming that no conflict of interest is identified, our company:
– Has made a decision, at least at the staff level, whether to make voluntary negative disclosure (eg., as an anticipatory “best practice” or simply to signal to the SEC Staff and our shareholders that we were aware of the new disclosure requirement) – 62%
– Hasn’t yet figured out whether it will make any voluntary negative disclosure – 35%
– I hadn’t realized that there is a new conflicts of interest disclosure (and assessment) requirement! – 3%
2. For those of you who know which approach your company will take, our company intends to:
– Only provide disclosure if a conflict of interest is identified – and not provide any voluntary negative disclosure – 25%
– Provide voluntary disclosure that a conflicts of interest assessment was conducted and that no conflict of interest was identified – 67%
– Provide voluntary negative disclosure that works through one or more of the six non-exclusive factors supporting a “no conflict of interest” conclusion – 8%
Please take a moment to participate in our “Quick Survey on Internal Audit” and “Quick Survey on Shareholder Engagement.”
SCOTUS Oral Argument: Gabelli v. SEC
On Tuesday, the Supreme Court heard oral arguments in Gabelli v. SEC, a case about the SEC seeking civil penalties after exceeding the usual time limit for fraud investigations. Here are articles about how the hearing went:
As noted in this Reuters article, the SEC is being investigated by a House committee for spending on outside consultants during its efforts to streamline the agency.
Conflict Minerals Navigation Checks
In this podcast, Lawrence Heim of The Elm Consulting Group International explains CM CheckPoint (sm), a new rapid and highly cost-effective conflict minerals program assessment method/deliverable facilitated on-site
– What should companies who have already initiated conflict minerals programs be doing now in terms of benchmarking their efforts?
– What is the “CM CheckPoint”?
– How does it stack up to the alternatives?
– What are the reactions from clients so far?
