Oh boy. This is a hard one for me to swallow. I’ve been eagerly waiting for the SEC to modernize its guidance about how social media can be leveraged to enhance disclosures to investors. The latest guidance is from ’08, well before the golden age of social media. I know the SEC purposely didn’t mention the terms “Twitter” or “Facebook” in the ’08 guidance in an effort to accommodate new technologies – but it sorely needs to be updated (the guidance also didn’t mention “search engine optimization” but that’s another story). Since the guidance was issued, the SEC has had its hands full with a financial crisis and two major Acts of Congress. So I can understand why there has been no progress in this area.
Anyways, we now have this – news that the SEC’s Enforcement Staff has issued a Wells notice to Netflix and its CEO Reed Hastings over a Facebook post about the aggregate number of hours people were viewing content from the company. This has the potential to set back the use of social media to give investors more information about investment opportunities by a factor of five. And since more disclosure is better for the marketplace, it’s truly a sad thing. Getting more information available via social media already was an uphill battle, as legions of lawyers have been telling clients “no” without bothering to figure out what “Twitter” and other social media channels really are. Many of the lawyers I have talked to about this also blame a lack of clarity in the SEC’s guidance.
I’m not a fan of the SEC using enforcement for policy-making purposes by going after high profile companies or executives to make a point in the disclosure area. And here is the kicker: Netflix is one of the only high profile companies that is friendly to retail investors. They accept retail investor questions on their conference calls via email and make the analysts wait on the call until all the emailed questions are dealt with.
Should the SEC Chase Netflix for an Alleged Regulation FD Violation Over a Facebook Post?
Of course not. And not just for the reasons set forth above about the big picture of what this means for the world of disclosure. When I asked for folks to email me their thoughts on this Bloomberg article entitled “Netflix CEO Hastings Faces SEC Action Over Facebook Post,” the overwhelming response was that the SEC was out of bounds. Many reactions were along the lines of this blog by Darrick Mix of Duane Morris regarding questions of materiality and sufficient public disclosure.
On the materiality issue, one member noted: “It is debatable that hours viewed is remotely material because you can’t draw a line between how many hours people watch Netflix to how much money Netflix brings in. The Netflix subscription fee is fixed regardless of how much subscribers use the service. Hours viewed is a measure of customer engagement in the service. If anything, more hours viewed increases Netflix’s costs slightly. Netflix explained this in their Q4 ’11 conference call in January 2012.”
Another member mused whether the old ubiquitous McDonald’s signs – “over 99 billion served” – would have been actionable for the SEC if Reg FD had existed then, noting that catch-phrase arguably contained more material information. More hamburgers means more revenue and more profit, unlike Netflix’s flat fee structure.
Steps Netflix Could Have Taken to Possibly Fix This…
Let me start this analysis by asking if you were surprised to see that 8% of respondents to NIRI’s latest “use of corporate websites” survey planned to use their site as a recognized channel of distribution? NIRI’s press release characterized this result as “just 8%” – but I was shocked it was that high. I am only aware of Google and Microsoft having announced that they use their sites as recognized channels. Is anyone aware of other companies already doing so?
Netflix has never taken that crucial step of issuing a short press release telling investors to look to Hastings’ Facebook account for important investor information. If I correctly understand what Netflix is saying in the wake of the SEC’s action, they still say that they don’t use Facebook for that purpose – even though they also seem to say that they could if they wanted to because Hastings’ Facebook posts provide broad, non-exclusionary distribution (ie. his FB account is well followed by the media and they report what he posts quickly). I’d agree that Hastings generates more media coverage with his Facebook posts than the average company does with their news releases – but that it’s still unclear under the SEC’s ’08 guidance what that means for the company.
Anyways, here is more food for thought:
1. Hastings is using the “subscription” option that Facebook offers. That allows anyone on Facebook to subscribe to his public status updates and receive them in real time – in theory. In practice, his updates don’t come through in real time to public subscribers who are not also his friends, which is something Facebook can fix.
2. You don’t need a Facebook account to view Hastings’ public Facebook updates, but this is not handled as well as it could be by Facebook. If you go to his Facebook page without being logged into Facebook, you won’t see the previous post.
3. Netflix has done a poor job of making investors aware of its CEO’s Facebook account. There should be a link to it in his bio and on the IR homepage (this kind of thing is true for almost all companies). Ironically, the Wells Notice has now made the account very public through an SEC filing.
4. Hastings’ Facebook posts generate a lot of media publicity. There are many journalists and bloggers who are both friends and subscribers. He has 240k subscribers, more than I’m sure subscribe to the SEC’s NFLX feed on Edgar or that view the NFLX Yahoo Finance page on a daily basis. He has a pattern of posting things like hours viewed, commenting on competitors like HBO and even noting subscriber number milestones. Many investors subscribe to his public updates because they’re interesting and help them understand the company.
The Bottom Line: The SEC Needs to Regulate IR Web Pages (And More)
The state of affairs for IR web pages for many companies is atrocious. And I argue that this is where the SEC should spend its resources rather than chase a CEO who likes to inform investors. For starters, there needs to be bare minimums about how companies display information – and what they post.
When I interviewed a number of in-house folks to put together this checklist about making the social media business case for investor & analyst engagement, it was shocking how little they knew about what was happening on their IR web pages. One Fortune 100 company had Facebook and Twitter links on the bottom of their IR web page – but when you clicked on them, they were dead. What does that tell investors?
Too many companies still blindly outsource their IR web pages to third-party providers – without realizing what those third-parties are doing. Did you know that one of these major providers use robots so that the Wayback Machine can’t archive what the IR web pages look like over time? This could be problematic if a company wanted to prove it made a disclosure on its IR web page on a certain date. Conversely, it could hurt the SEC if it wanted to prove that the disclosure wasn’t there. Given that the Wayback Machine is essentially the “Edgar” of online disclosures, should companies be permitted to “shred” their records like this?
This is just one of many examples illustrating how it’s still the Wild West on the Internet – and the fix isn’t to pretend that things on the Internet should be the same as it was before. It’s simply not and there are grand opportunities to better educate investors about a company’s prospects. The SEC needs to evolve and regulate more broadly. Get away from the hyperfocus on the disclosures it forces to be filed on Edgar. Focus more on what investors actually bother to read. Don’t punish the companies that want to reach investors in the manner that today’s investors consume information. Rather, lead the way so that companies can get on the social media bandwagon and stop hiding behind the excuse of Reg FD.
In this podcast, Dave Lynn and Marty Dunn engage in a lively discussion of the latest developments in securities laws, corporate governance, and pop culture. Topics include:
– Special/Accelerated Dividends in Light of the Fiscal Cliff
– Ozzy: With or Without Black Sabbath
– Rule 10b5-1 Plans Under Scrutiny
SEC Approves Nasdaq’s Revised Deficiency Disclosure Listing Standard
As I blogged before, Nasdaq-listed companies will now have to disclose details when they don’t comply with a listing standard – and Nasdaq will have the authority to make that disclosure for you if you don’t make the disclosure. Here is the SEC’s order approving the revised Nasdaq rule a few days ago.
NYSE Proposes That Companies Provide Notices Through Web-Based System
As noted in this Sullivan & Cromwell memo, the NYSE has proposed changes to the Listed Company Manual that would require most notices to the NYSE by listed companies to be made electronically through egovdirect.com, the NYSE’s web portal, or by email, rather than by telephone, fax, telegram or otherwise. Notice of material corporate events or statements regarding rumors during or shortly before market hours would still require telephone notice to the NYSE at least ten minutes prior to release.
Ning Chiu of Davis Polk provides this news from her blog:
ISS has released a detailed set of FAQs on how it will select a company’s peer group for purposes of conducting its pay-for-performance analysis. ISS uses this peer group to measure a company’s total shareholder return and CEO pay in deciding how to recommend for the say-on-pay vote.
The FAQs provide information on how ISS will select 14-24 peers from the company’s own GICS code, as well as the GICS code of the peers named in the subject company’s proxy statement. Subject to size constraints based on revenues or assets and market value, ISS describes the order in which peers will be selected from the potential universe of companies that will come up based on those GICS codes. Other questions address the use of size parameters, which are clearly key to the selection process, the GICS industry groups (financial services) where assets will be used instead of revenue, and what happens if a company discloses using more than one peer group.
In addition, by December 21st a company can inform ISS of any changes to its peer group since the 2012 disclosures, as a source of input into the ISS peer group selection.
While more information is always useful, this is unlikely to mean that companies will be able to proactively figure out the ISS peer group themselves given the complexity of GICS, the number of potential companies that ISS can choose from under this method and the use of what they term “manual judgment” in the selection process. It appears that again companies will not know who they are being measured against until they receive the ISS report.
For those companies that may have faced a say-on-pay issue last year because of perceived faulty peer groups used by ISS, note that in back-testing this new method against their analysis applied in 2012, ISS indicates that more than 95% of companies would have received the same pay-for-performance analysis.
Everybody Into the Pool! SEC’s General Counsel and Trading & Markets Director to Leave
How Common Are All These SEC Departures After an Election?
I got crushed in the wake of this news by queries from members about whether this mass exodus is typical (guess I should be tapped for the director of the SEC Historical Society someday). For starters, I can’t recall three senior Staffers announcing departures within a 48 hour span. That certainly is unique (although it’s not unusual for turnover among Division Directors under a new SEC Chair). This tweet of mine was quite popular yesterday:
If the SEC’s remaining Division Directors quit tomorrow (eg. Enforcement, IM), can we hold our class outside?
So why are people leaving before the new SEC Chair settles in? It’s just a guess – but the change in the nature of working at the SEC might well be a part of it. The SEC is constantly blasted in the press, harassed by Congress and treated like dirt by the courts. And compared to private practice, the pay is a fraction. What would you do?
The other question I fielded was whether it was unusual for a SEC Chair to step down after a Presidential election. The answer is certainly not.
Here is the math: Elisse will be the 30th SEC Chair. Backing out the first Chair – Joe Kennedy – because his appointment was tied to the statute creating the SEC, there are 29 Chairs that have been appointed and 16 of those have been confirmed within 12 months of a Presidential election. That’s 55% of the time (and I didn’t even account for new Chairs because someone stepped down due to death, illness or controversy). And it’s even more pronounced of a trend if you just analyze the last 50 years – 12 out of 17 Chairs during that period were confirmed within 12 months of an election – for a whopping 71%. Here’s a list of the SEC Chairs if you want to do the math yourself.
Learn more about the intricacies of the SEC during our webcast today: “How the SEC Really Works.”
Yesterday, the SEC announced that Meredith Cross would be leaving as Corp Fin Director at the end of the year. During her three and a half year tenure, Meredith accomplished an amazing array of rulemaking – having had to navigate both Dodd-Frank and the JOBS Act. I worked under Meredith during her earlier stint in Corp Fin and can attest to her remarkable acumen and practical approach to solving problems. As gleaned from our list, Meredith served at the 16th Director of the Division – and is only the second woman in that position. So who’s next? That is a tough one to guess…
Iran & Syria Sanctions: Corp Fin Issues 7 CDIs
Yesterday, Corp Fin issued 7 Compliance & Disclosure Interpretations relating to Section 13(r) of the ’34 Act, which was created by the Iran Threat Reduction and Syria Human Rights Act of 2012.
Webcast: “How the SEC Really Works”
Tune in tomorrow for the webcast – “How the SEC Really Works” – to navigate the lore – and detect the myths – of how the SEC works. There are many more Offices and Divisions than most realize. Join SEC Secretary Betsy Murphy and a group of experts that have worked at high levels within the SEC – Latham & Watkin’s Alex Cohen (former Deputy Chief of Staff for SEC Chair Chris Cox) and Hunton & Williams Scott Kimpel (former Counsel to Commissioner Troy Paredes).
Among the topics of this program are:
– What the SEC Commissioners actually do and how they fit into the SEC’s org chart
– Overview of the Sunshine Act, which bears on how the Commission meets – and how to communicate with SEC Commissioners
– How Enforcement cases are deliberated
– How rulemakings come together, from kernel of an idea to proposal to adoption
– What are the Offices of General Counsel, Secretary, Legislative Affairs, Public Affairs, etc.
As noted in this WSJ article, the SEC brought administrative proceedings against the foreign affiliates of five auditors yesterday – the five biggest firms – alleging they refused to hand over documents sought in investigations of alleged accounting frauds at 9 Chinese companies.
This issue is not new. Auditor have refused to turn over the work papers of their foreign affiliates to the SEC for decades. Meanwhile, the markets have become much more global with many foreign companies now seeking cash and capital from the US capital markets, based upon audited financial statements audited by foreign affiliates of the Big 4. Yet the auditors have steadfastly refused to grant access to foreign work papers when questions about a lack of proper auditing have been raised. As a result, Sarbanes-Oxley included a Section 106 to remedy this problem. And now Section 106 is being used…
Meanwhile, in what is by far the largest settlement in the current wave of securities litigation involving Chinese companies, Ernst &Young, which served as the auditor for Sino-Forest, has agreed to pay $117 million to settle the securities suit that investors filed in Ontario against the accounting firm, as noted in the “D&O Diary Blog.”
Europe Seems to Be Moving Forward with Audit Firm Rotation
As noted in Jim Hamilton’s blog, a European Commission Official recently told a PCAOB Roundtable that the EU is moving forward with legislation mandating auditor rotation.
HP, Autonomy and IFRS vs US GAAP
Here’s some insight from Lynn Turner: “There has been much discussion of HP’s Autonomy transaction since the HP announcement of last week. The former Autonomy management has said the disagreement is apparently due to HP, and its experts, not adequately considering the differences in International and US Accounting standards. That seems to be unlikely as HP said their information was being supplied to both the US’s SEC and UK regulators who will be reviewing it.
Here is an article that discusses the two different accounting standards. As the article notes, IFRS is very, very general with little – if any – guidance. It has in essence been such a poor standard, that it may result in companies not following its basic principles as written and intended. If adopted for US reporting by the SEC, this is a prime example of what US investors can expect in financial statements using International Accounting Standards – unreliable information.”
As noted in this WSJ article, roughly half of the 1000 foreign companies listed on a US exchange still submit filings using U.S. standards. The SEC allows US-listed foreign companies to use IFRS standards for 5 years.
The Battle Over Access to Pre-IPO Correspondence: Are Response Letters Part of Your Disclosure Stream?
Recently, this Market Watch article concluded it was unlikely the SEC would release its pre-IPO correspondence with issuers prior to an offering’s effective date. Some investors have argued that Corp Fin comment letters would assist them in their investment analysis – perhaps misunderstanding the nature of the comment letter process.
That said, companies may need to start considering their responses to comments as part of their public disclosure record – and thus be more careful about what they say in response to a comment…
More Examples of How “Journalism” Has Fallen Off a Cliff
Recently, I decried the state of reporting by the mass media. A while back, I got a chuckle out of this Businessweek article entitled “Facebook Fought SEC to Keep Mobile Risks Hidden Before IPO” because the reporters read so much more into the Corp Fin comment process than might really be there. And this Cooley news brief and Bloomberg article about Manchester U’s IPO comments provide more in the way of a cautionary tale about how you respond to comments…
But this crappy Business Insider article really takes the cake, even going so far to claim that long-time Corp Fin Assistant Director Barbara Jacobs is a Professor for PLI. Just because you speak on a panel doesn’t make you a “Professor”…
Yesterday, the SEC delayed approving the NYSE’s and Nasdaq’s listing standards relating to compensation committees and advisors. Action was due by today – but now has been deferred until January 13, 2013. The delay shouldn’t impact what companies disclose in proxy statements next year – unless the SEC decides to not go forward, which is highly unlikely given there were only 14 comment letters on this round of proposals.
Meanwhile, we have posted a sample compensation consultant questionnaire to help you assess what you need to disclose. This sample is posted in Word in our “Compensation Consultant” Practice Area on CompensationStandards.com. Also remember there was a sample questionnaire included in the July-August issue of The Corporate Counsel.
Don’t forget this “Quick Survey on Compensation Consultant Conflicts Disclosure.” Please take a moment to participate – all responses are anonymous as always…
Rule 10b5-1 Trading Plans Under Scrutiny Once Again
I was gonna gin up something on the recent WSJ article entitled “Executives’ Good Luck in Trading Own Stock” – but Kevin LaCroix has done such a great job that you should just read his piece in the “D&O Diary Blog.”
Court Orders Expedited Schedule for Conflict Minerals Challenge
On Wednesday, the D.C. Circuit Court ordered an expedited briefing schedule for the conflicts minerals case as noted in this Cooley news brief. The order specifically states that any “extension of the briefing schedule may result in the case not being calendared this term.” In addition, Amnesty International’s motion to intervene was granted.
Mailed: September-October Issue of “The Corporate Executive”
We have mailed the September-October Issue of The Corporate Executive, and it includes pieces on:
– Revisiting (or Visiting) Hedging and Pledging Policies
– Checklist: How to Avoid Being Named in a Proxy Disclosure/Say-on-Pay Lawsuit
– Proposed Regs Under Section 83
– IRS Provides Sample Section 83(b) Election Notice
Over on his “Proxy Disclosure Blog” on CompensationStandards.com, Mark Borges has been analyzing the latest proxy statements and commenting upon their compensation consultant conflicts disclosures. As hopefully you know, new 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. To attempt to get a handle on what folks are planning to do, I have posted this “Quick Survey on Compensation Consultant Conflicts Disclosure.” Please take a moment to participate – all responses are anonymous as always…
The SEC’s Latest Clawback Court Victory
Kevin LaCroix’s blog recently covered the latest court decision over a SEC clawback under Section 304 of Sarbanes-Oxley: SEC v. Baker and Gluk. Here is a note on the opinion from Brink Dickerson of Troutman Sanders:
Baker is a succinct, well-written opinion from a conservative District Court – the Western District of Texas in Austin. It involves the clawback of executive compensation under SOX 304 from executives who were not the cause the underlying restatement, and, like Jenkins in Arizona, the court rejects the defendants’ claims that there had to be misconduct on their part. As importantly, the court also rejects claims that Section 304 is unconstitutional and is barred by the Civil Asset Forfeiture Reform Act, arguments that the court in Jenkins did not reach. With there now being two solid decisions finding against the misconduct argument, I think that it is settled for good.
I’ve added one more company to our failed say-on-pay list for 2012 on CompensationStandards.com as DFC Global failed with 25% support. One of only 7 of the 61 failures so far this year have the honor of 25% support or below. I missed this one until now since the results were in the 10-Q for 9/30 rather than an 8-K. Hat tip to Karla Bos of ING Funds for keeping me updated.
Related to failures #59 and 60 in recent weeks, notice that the PMFG Chair, who is the retired CEO and on the comp committee, lost the vote also for his own re-election to the board. This, along with Oracle’s compensation committee members losing their re-election vote if you exclude the CEO Ellison’s shares, should be sending a chill to directors. Hat tip to Fred Whittlesey for pointing this out!
Hmm, where do I begin? I did take pains to be correct in my blog yesterday about Commissioner Walter’s ascension to serve as Chair of the SEC. I rarely am wrong in this blog and proud of that fact. But yet, I blew it when I called Elisse an “Acting” Chair – even though loosely she will be. Let me explain.
Shortly, after the SEC’s “Schapiro is stepping down” press release came out, the White House issued this statement that Elisse would be “designated” as Chair. Even though I recognized that as ambiguous, I took that to mean she would be tapped as Chair and even tweeted so. Then I started seeing prominent publications (eg. WSJ) note that Elisse would be temporary and serve on an interim basis.
So I backed off my tweet in subsequent tweets – and I originally blogged yesterday that Elisse would serve as “Acting Chair.” This certainly would not be unprecedented as Laura Unger served as Acting Chair for six months in ’01 and Cynthia Glassman for three in ’05. So it’s not unusual for a sitting Commissioner to serve in that capacity.
But it’s now clear that Elisse will be serving simply as the Chair; not in an “Acting” capacity. However, the White House has mentioned that the President intends to nominate a long-term successor before Elisse’s term ends in December 2013. So unless Elisse is tapped for that, her term as Chair will be only a year or less (here’s a Reuters article with details about Elisse’s career). Capiche?
Learn more about what exactly a SEC Commissioner does – and much more – in next week’s webcast: “How the SEC Really Works.”
Does It Matter Whether Someone Serves as Short-Term Chair vs. Acting Chair?
Okay, is this all a lesson in semantics? Or is there substance over form? I don’t think it matters in terms of substance. Maybe it’s designed to give Elisse greater clout to get through some of the rulemakings that the SEC has been pushing. Until a fifth Commissioner is appointed to break the potential 2-2 political gridlock, that might not matter much.
Where it does matter is on the SEC’s historical list of who has served as a Chair. Apparently, Acting Chairs don’t cut it – so Laura Unger is not considered the first woman to serve as SEC Chair. That honor goes to Mary Schapiro. And of course, “Chair” looks better on a resume compared to “Acting Chair”…
A Former Corp Fin Staffer Takes the Helm!
For me, Elisse’s rise is notable for her background. Elisse served as Corp Fin’s Deputy Director (back when the Division only had one) in the late ’80s. From my research, she is only the second SEC Chair to have served in Corp Fin – with former Director Manny Cohen being the other in the late ’60s. That is awesome!
Poll: Who Will Become the Next Longer-Term SEC Chair?
Please guess who will be tapped to serve as SEC Chair after Elisse’s term expires in 2013:
Given the number of rumors about SEC Chair Mary Schapiro departing over the past few months (see last week’s rumor – here are the latest rumors about a successor), it’s no surprise that the Chair announced yesterday that she was stepping down on December 14th. Even though most mass media articles have gotten it wrong, Commissioner Elisse Walter will serve as Chair until a “longer term” successor is found – her appointment doesn’t require Senate approval because it previously confirmed her as a Commissioner. [Note that I made corrections to this blog in midday – explanation to follow tomorrow about Elisse’s status.]…
Does this mean that rulemaking will cease? No. Might it slow down? Likely, particularly given the 2-2 split among the four remaining Commissioners along party lines…
Funny Errors: Inside SEC Filings – And On The SEC’s Site Too
Recently, I blogged about some pretty funny errors made in SEC filings. But as Keith Bishop blogs – in an entry entitled “The SEC’s Form 10-K: ‘In Endless Error Hurled‘” – sometimes even the forms themselves have minor errors.
And a member recently pointed out this “helpful information” that is listed on right side of the SEC’s “Company Search” page related to Edgar:
“The SEC does not require companies that are raising less than $1 million under Rule 504 of Regulation D to be “registered” with the SEC, but these companies are required to file a Form D with the SEC. The Form D serves as a brief notice that provides information about the company and the offering.”
Clearly, this bullet was not drafted by someone in Corp Fin as the member who noticed this snafu wrote this note to me:
When did companies have to start registering with the SEC under the ’33 Act? Here I thought it was the offers and sales that had to be registered. And, does this mean that companies raising more than $1 million under, for example, Rule 506 have to be “registered” with the SEC. I don’t think so.
