Last week, two more companies failed to gain majority support for their say-on-pay, although one of the companies failed for the second time this year – further obscuring how to count how many failures there have been so far. In this Form 8-K, Synaptics reports that it received 44% in support. And then there’s this news from Ted Allen of ISS:
Hemispherx Biopharma, a micro-cap biotech firm based in Philadelphia, has failed to win majority support (based on votes present) for its executive compensation practices for the second time. The company, which restated its 2009 results, conducted its 2011 annual meeting on Oct. 13 after holding its 2010 meeting in March 2011. Hemispherx is the first issuer with a failed Dodd-Frank Act advisory vote to face shareholders again.
At the most recent meeting, as reported in this Form 8-K, the company said it received 44.1 percent support for its pay practices, while there was 37 percent opposition and 18.9 percent in abstentions. The company pointed out that there was “very little stockholder voting on this resolution, with only 20.7% of the outstanding shares eligible voted.”
The company’s CEO, William A. Carter, received a 72 percent base salary increase in 2012, according to the proxy statement, while the company has posted negative one-, three-, and five-year total shareholder returns. In its proxy statement, the company pointed out that the CEO agreed to a 50 percent reduction in base salary during the first five months of 2009. At the same time, the CEO’s 2010 salary and fees still represent a significant increase from the 2008 level, according to the ISS report on the company.
The company also said that its compensation committee had acted “to better align the compensation options with our stockholders’ interests in supporting long-term value creation.” Hemispherx pointed out that it renewed expired stock option grants for a 10-year term at the same exercise price of the original option grants, rather than at current market price, and the company said that future non-executive employee compensation could include company stock.
While Hemispherx shareholders used the advisory vote again to express concerns over pay, most of them did not withhold support from directors. The directors all were reelected by more than a 8-1 margin. Some institutional investors have said they may take a “red card/yellow card” approach and withhold support from directors in 2012 if companies fail to adequately address significant opposition during 2011 advisory votes.
A list of the Form 8-Ks filed by the “failed” companies is posted in CompensationStandards.com’s “Say-on-Pay” Practice Area.
Course Materials Now Available: Over 50 Sets of Talking Points!
For the many of you that have registered for our Conferences coming up in just one week, we have posted the Course Materials (attendees will receive a special ID/PW later today via email to access them; but copies will be available in San Fran). The Course Materials are better than ever before – with over 50 sets of freshly written talking points comprising 200 pages of practical guidance. Our expert speakers certainly have gone the extra mile this year!
For those seeking CLE credit, here’s a list of states in which credit is available for watching the Conferences live in San Francisco and by video webcast. Note that the list is broken out for each of the Conferences – and note two states are listed as “pending” (check back to determine if the Conferences are approved in those states).
Act Now: As happens so often, there is now a mad rush for folks to register for these Conferences that begin on Tuesday, November 1st. With an aggregate of over 50 panels (including the “19th Annual NASPP Conference“), if these Conferences don’t help get you prepared for the upcoming proxy season, nothing will. You can either register for the three days of the “19th Annual NASPP Conference” (in San Francisco) – or the two days of the “6th Annual Proxy Disclosure Conference” & “8th Annual Executive Compensation Conference” (in San Francisco or by video webcast, or a combination of both). Register Now.
Say-on-Pay in the UK
In this CompensationStandards.com podcast, Euan Fergusson of White & Case and Tony Gilbert of the Hay Group discuss how say-on-pay has fared in the United Kingdom, including:
– How did say-on-pay start in the UK?
– How does the UK say-on-pay regime differ in the UK compared to the US?
– What have been the most recent say-on-pay developments in the UK?
As noted in this Bloomberg article, on Friday, the Senate finally confirmed SEC Commissioner Luis Aguilar’s reappointment and Dan Gallagher’s initial appointment; both unanimously despite the six-month delay from when President Obama nominated them. Here’s Chair Schapiro’s statement.
SEC to Hold Revenue Recognition Roundtable
On Friday, the SEC announced it will hold a roundtable to consider financial statement measurements (and associated disclosures) that incorporate judgments about future events on November 8th, with comments being collected from the public until December 8th. This is the inaugural roundtable in the SEC Chief Accountant’s Financial Reporting Series. Here’s the roundtable’s briefing paper – and here’s more info about what the Financial Reporting Series is all about…
ETFs: Under the SEC Spotlight
It’s worth reading this testimony by SEC IM Director Eileen Rominger – she testified before a Senate Banking subcommittee last week – about ETFs as the SEC engages in a general review of these financial products. ETFs have been widely criticized as turning the stock markets into more of a casino than they already were…
Back in February, I blogged about how Nasdaq’s Directors Desk database had been hacked. In this Reuters article, it is reported that an ongoing investigation has found that the hacking was worse than originally reported. Here is an excerpt from that article:
Hackers who infiltrated the Nasdaq’s computer systems last year installed malicious software that allowed them to spy on the directors of publicly held companies, according to two people familiar with an investigation into the matter. The new details showed the cyber attack was more serious than previously thought, as Nasdaq OMX Group had said in February that there was no evidence the hackers accessed customer information.
It was not known what information the hackers might have stolen. The investigation into the attack, involving the FBI and National Security Agency, is ongoing. “God knows exactly what they have done. The long term impact of such attack is still unknown,” said Tom Kellermann, a well-known cyber security expert with years of experience protecting central banks and other high-profile financial institutions from attack.
Smaller Companies: House Financial Services Subcommittee Passes Five Bills
As noted in this press release, the House Financial Services Capital Markets and Government Sponsored Enterprises Subcommittee passed five bills recently to ease the regulatory burden on smaller companies. The bills are:
– HR 2167, the Private Company Flexibility and Growth Act, introduced by Rep. David Schweikert
– HR 2940, the Access to Capital for Job Creators Act, introduced by Rep. Kevin McCarthy
– HR 2930, the Entrepreneur Access to Capital Act, introduced by Rep. Patrick McHenry
– The Small Company Job Growth and Regulatory Relief Act, introduced by Rep. Stephen Fincher
– HR 1965, introduced by Rep. Jim Himes
GOP Candidates Seek to Kill Dodd-Frank (and Even Sarbanes-Oxley in Some Cases)
A member sent this in: Republican presidential candidates have been calling for a repeal of the entire Dodd-Frank Act. Former Massachusetts Gov. Mitt Romney and Texas Gov. Rick Perry both have called for repeal, according to The New York Times. Rep. Michele Bachmann of Minnesota regularly points out that she introduced the first Dodd-Frank repeal bill this year. Former Gov. Jon Huntsman of Utah said he would go one step further and repeal the entire Sarbanes-Oxley Act, the NY Times reported.
Meanwhile, this “Globe & Mail” article is entitled “A desperate Obama kicks Sarbanes-Oxley halfway to the curb.”
Senate Legislation Would Expand Unfunded Mandates Reform Act to Bring SEC and CFTC Within Its Embrace
As Jim Hamilton blogged back in August: “Legislation introduced by Senator Rob Portman (R-OH) would strengthen the Unfunded Mandates Reform Act of 1995 by bringing the SEC, CFTC and other independent federal agencies within its mandate. UMRA was a bipartisan effort to prevent Congress and federal regulators from blindly imposing major economic burdens on the private sector and on state, local and tribal governments without weighing the costs and benefits, said Senator Portman. Signed by President Bill Clinton in 1995, the Unfunded Mandates Reform Act was bipartisan legislation that basically says that regulators have to evaluate a regulation’s cost and find less costly alternatives before adopting a major rule.”
As we all begin to plan for another wild proxy season, I wonder how many are planning for the potential of major disruptions at their annual shareholder meetings as Occupy Wall Street-type protests quickly spread to avenues that we never dreamed of. Are you planning for protests at your annual meeting? How about one of your board meetings? Your CEO’s house? Your CEO’s golf game? Or when your CEO lands in the corporate jet at the airport? Or any of these for one – or more – of your directors?
I truly believe that some of these things could happen this proxy season. Here are a few stories that lend credence to my belief:
1. Protestors in general are getting bolder and fairly savvy. Earlier this week, a trio posed as golfers to allow themselves to approach House Speaker John Boehner during his golf game at California’s Pelican Hill Resort. Here’s a video of that confrontation.
2. Protestors already have targeted the homes and offices of those they want to make a statement about during the “Billionaires Walking Tour” in Manhattan a few weeks ago, as noted in this article.
3. A friend recently described to me how he attended a bankers conference in Newport Beach last month where protestors actually spent the night at the ritzy conference hotel and then stormed through the doors of the conference the following day, carrying signs, etc. Here’s the only media mention of this episode that I could find.
4. Check out this new site – OccupytheBoardRoom.org – which lists 200 CEOs and asks the public to send in their personal horror stories (loss of job, etc.) so they can be hand-delivered to the executive. All the messages, videos, etc. received will eventually be posted according to the site.
The Coming Protests: What You Should Be Doing Now
Yes, these risks mean that you should revisit your security plans. But it also is a red flag that should prompt you to start thinking about what all this anger towards the Top 1% really means (see this Bloomberg article about income inequality and its meaning for the economy). It looks like the protests have staying power even if there are no well-defined unifying goals. As the upcoming proxy season forces pay packages back into the limelight, the growing anger likely will turn to CEOs and those that pay them.
What can you do? For starters, compensation committees and their advisors should be doing an internal look to counterbalance the heavy use of peer group benchmarking. Peer group benchmarking is a practice that continues to be a primary cause of runaway CEO pay levels – and one that continues to be the crutch for many directors who don’t want to have the hard conversation with CEOs about the Lake Wobegon excesses that boards have inadvertently caused over the past two decades.
Conducting this exercise now is particularly important with the SEC’s pay disparity ratio rulemaking on the horizon. If a company’s board hasn’t even bothered to see what types of ratios they might need to disclose in the not-so-distant future – and determine if any adjustments to pay levels are warranted now ahead of forced disclosure – it only has itself to blame when the SEC’s rulemaking takes effect and shareholders, stakeholders and the general public have a negative reaction to what it ultimately discloses.
And as we’ve repeatedly warned, it’s just a matter of time before the plaintiff’s bar successfully challenges boards who continue to rely heavily on peer surveys given the widespread evidence that they have been tainted when so many boards strive to pay their CEOs in the top quartile, year in and year out. When the excesses caused by peer group surveys is front page news – as it was a few weeks ago in the Washington Post – the cat clearly is out of the bag on this one! We have resources about how to conduct an internal pay look in our “Internal Pay Equity” Practice Area on CompensationStandards.com.
The SEC’s Conflict Minerals Roundtable
On Tuesday, the SEC held its conflict minerals roundtable – and then extended the comment period for its related proposal through November 1st to obtain any additional comments that the roundtable provoked. Here’s archived video from the roundtable – and a Shearman & Sterling memo, Cooley alert and Gibson Dunn memo capturing some notes from the proceedings.
Meanwhile, a group of 11 Senators wrote a letter to the SEC, urging the agency to quickly adopt rules, as noted in this Reuters article. Also see this Cooley alert for other interesting views on this topic…
As it often has in recent years, Corp Fin issued a Staff Legal Bulletin relating to shareholder proposals. This year’s installment covers these topics:
1. Guidance on introducing brokers and who constitutes a “record” holder under Rule 14a-8(b)(2)(i) for purposes of verifying whether a beneficial owner is eligible to submit a proposal under Rule 14a-8 (reversing the Staff’s prior position in Hain Celestial back in ’08 – going forward, for purposes of Rule 14a-8(b)(2)(i), only DTC participants will be considered record holders)
2. Tips for proponents so they can avoid common errors when submitting proof of ownership
3. Guidance on how to submit revised proposals
4. Guidance on how to withdraw no-action requests when there are multiple proponents
In addition, the Staff Legal Bulletin announces Corp Fin’s new process for transmitting their Rule 14a-8 no-action responses. Going forward, Corp Fin is sending those by email rather than paper – so it’s important that you include email addresses in any correspondence so the Staff knows where to send their response. If you don’t include email contact information, the Staff will send its response by snail mail, which is not good for you during the compressed time-frames that exist during the proxy season…
Time to Comment on ISS’s ’12 Policies: Time to Speak Up
Yesterday, as noted in this blog, ISS opened the comment period for it’s 2012 policies, as it has for the past several years. Here is their policy gateway where you can input your views – and here are the draft policies. The comment period is short – ending on October 31st. Given the importance of this proxy season, this would be a good time to get involved if you haven’t before.
Come hear from ISS and Glass Lewis about their policies during our upcoming pair of say-on-pay conferences (one regarding disclosure and one regarding pay practices – both combined for one price) that takes place in less than 2 weeks. You can attend online or in San Francisco. Register now.
Webcast Transcript: “Materiality: The Hardest Determination”
We have posted the transcript of our popular webcast: “Materiality: The Hardest Determination.”
Here’s news from Lynn Turner: Yesterday, the PCAOB issued its first ever Part II of an inspection report on a Big 4 audit firm to the public – it relates to Deloitte & Touche. Here’s the PCAOB’s related statement. Such reports do not become public unless the auditor fails to address and remediate the deficiencies noted in the report. One would think a firm would be incented to do so. The report notes a number of deficiencies and questions the judgments of Deloitte. This is important as auditors have been clamoring for greater latitude in their ability to make judgments – the PCAOB’s report seriously calls that into question.
The report notes deficiencies in Deloitte’s internal systems for monitoring independence on a global basis. In the spring of 2001, the then SEC Chief Accountant called each of the auditing firms down to the SEC to discuss weaknesses in controls that the SEC had identified. That meeting was subsequent to a 1998 letter sent to the CEOs of each of the Big 5 firms. Yet 8 years later, Deloitte still has not addressed and remedied the identified weaknesses. Tough to figure out an excuse for that.
It will interesting to see how the state boards of accountancy react to this – and what, if any, action they take. It also raises a question as to inspections of private audits being performed by the AICPA.
This report – relating to inspections conducted in 2007 about 2006 audits, with Part I released in May 2008 – raises a serious public policy issue of why is such a Part II report citing such serious deficiencies in audit work permitted to remain confidential until almost five years after those audits were performed. And even with the release of this report, investors are not told which companies received deficient audit reports and which partner led those audits. Presumably, Deloitte told the audit committee chairs which audits were determined to be deficient – and yet that information was not provided by audit committees to investors.
Here’s a list of all the Part II reports that the PCAOB has issued over the years – you can see how they are mostly unheard of firms other than Deloitte. Here’s today’s NY Times article about this development.
Webcast Transcript: “”How to Handle Contested Deals”
We have posted the transcript of our DealLawyers.com webcast: “How to Handle Contested Deals.”
EU to Break Up the Big 4 Auditors?
Some pretty wild stuff from this article from “The Economist” that is repeated below:
HOW to improve the work of audit firms, on which investors in public companies depend? Should clients be forced to change them every so often, so auditors and management will not get too cosy? Should two auditors be appointed to especially important companies, so they can check each others’ work? Should, perhaps, auditors even be forbidden from offering any other services, to force them to stick to the knitting so important to investor confidence?
“All of the above” is the answer from the European Commission, according to a leaked proposal from the directorate-general for the European Union’s single market. Michel Barnier, the commissioner in charge, is due to unveil a formal set of proposals for the audit industry in November. The leaked document suggests that he thinks the industry is overdue for reform from top to bottom.
The proposal for mandatory rotation of audit firms has been floating around for the better part of a year. There is little evidence to suggest that it will improve audits, and some weak evidence (based on national experiences in countries like Italy) that it will not help, or make things slightly worse. The big audit firms say that their work improves as they get to know their clients over the years. Their critics say that these years stretch into decades, with auditors forgetting that they serve investors, not company management.
But by far the most radical proposal would be to forbid audit firms from providing non-audit services, even to clients that they are not auditing. In America, providing most non-audit services to audit clients is already forbidden under the Sarbanes-Oxley financial reform passed in the wake of the meltdown of Enron, an energy-trading company. In some European jurisdictions, selling both audit and, say, consulting to a client is still permissible. Mr Barnier’s leaked proposal would not just go down the route of Sarbanes-Oxley and forbid this, but force the creation of pure audit firms.
This would be a huge change to the business model of the “big four” audit firms: PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG. These are technically networks of firms, rather than single global entities. All have seen robust growth in their consulting business in recent years, which now accounts for around a third of total revenues for most of them, whereas the mature audit business has grown more modestly. Forcing the break-out of pure audit firms would separate an exciting and growing business from a plodding but vital one, in Europe at least.
Would that force the big four to split elsewhere? Joe Echevarria, the new head of Deloitte in America, merely says that policy pendulums will swing, sometimes overshooting their ideal mark. Well might his parent network, Deloitte Touche Tohmatsu, not want to lose its consulting work. In the year ending in May 2011, the consulting business grew by 14.9%, against 4.7% for the audit business, a result in line with recent years. If such a trend continued for another decade, Deloitte (like its rivals) would go from being an audit business with a consulting arm to a consulting business with an audit arm.
Mr Barnier’s proposals are still in draft, and may change before formal unveiling. After that, the EU’s Council of Ministers (representing national interests) as well as the European Parliament will take a crack at modifying it. It is unlikely that the leaked draft will become final law in its entirety. But it does represent a marker: the mood in Europe (reflected elsewhere) that auditors have a crucial function that is being weakened by distractions like consulting, and even by over-long audit engagements.
On Friday, Corp Fin issued Staff Legal Bulletin No. 19 that provides guidance on Legality and Tax Opinions in Registered Offerings. Stan Keller of Edwards Wildman Palmer notes:
The Corp Fin Staff has long had internal guidance on legal opinions that made its way around to some people on the outside. This is the first time the Staff has made opinion guidance available publicly. Not only does issuance of the guidance increase transparency that will be helpful to practitioners, both as to Exhibit 5 legality opinions and Exhibit 8 tax opinions, it updates the Staff’s positions to reflect current opinion practice and to address some specific issues.
For example, the guidance addresses opinions on interests in non-corporate entities and recognizes the necessary flexibility to deal with the unique aspects of these entities. The guidance also shows flexibility in dealing with the difficulties of providing Exhibit 5 opinions in continuous or frequent medium-term note (MTN) programs and sets out one alternative for handling opinions in these programs. The Staff is to be applauded for developing this updated guidance that accomodates the federal securities law requirements for opinions with prevailing opinion practice and the practical needs of particular securities offerings.
Corp Fin Issues Cybersecurity Risk Disclosure Guidance
Last Thursday, Corp Fin issued the second installment of its new type of informal written guidance – “CF Disclosure Guidance: Topic No. 2 – Cybersecurity” – to direct companies to review, on an ongoing basis, the adequacy of their cybersecurity risk disclosures (here’s a blog about the first installment).
The cybersecurity guidance doesn’t create new standards – and other than a few accounting cites, it doesn’t really add anything new to what was covered in this blog (and this Sullivan & Worcester memo cited in it). But now that Corp Fin has articulated standards in this new guidance, the expectations of providing disclosure in this area should rise akin to the higher expectations (but perhaps not the reality) after the SEC’s climate change guidance came out in February. Thanks to Jim Brashear of Zix Corp and Howard Berkenblit of Sullivan & Worcester for their input.
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:
– More on “Putting an Overall Pricetag on XBRL”
– The Need for Continuing Disclosure by Private Companies
– Second Circuit: Rating Agencies Are Not “Underwriters” Under the ’33 Act
– Galleon and the Recent Scrutiny of Expert Networks
– Fraudulent Private Placements: Court Finds Distinction Between Broker and Underwriter
– Even More on “Insider Trading Analysis of Sokol Charges”
Yesterday, Corp Fin launched a new way for practitioners to send in formal exemptive, interpretive and no-action requests to its Office of Chief Counsel – they can now be uploaded via this form. A caveat is that Rule 14a-8 shareholder proposals requests are not permitted to be uploaded via this form – they should continue to be submitted via email to shareholderproposals@sec.gov (to the extent that they are submitted electronically at all). Before yesterday, electronic submission of no-action requests were required to be sent by email via cfletters@sec.gov rather than uploaded. Of course, paper submissions are still permitted.
From the stats I have heard, the vast majority of no-action requests are being submitted electronically these days, which is not surprising considering how correspondence related to SEC filings has been submitted electronically via Edgar for quite a while now. In addition, we all have been accustomed to submitting comments on proposed rules electronically for years. [In comparison, most requests for informal guidance are still made by phone rather than electronically.] So I am sure the transition to uploading instead of emailing will be fairly smooth…
ISS Releases Final ’11 US Postseason Report
Yesterday, ISS released its Final 2011 U.S. Postseason Report, which includes vote results for meetings held before September 1st, with findings that include:
– During 1st year of mandatory say-on-pay, investors overwhelmingly endorsed companies’ pay programs, providing 92.1% support on average.
– 38 Russell 3000 companies, or just 1.6% of the total that reported vote results, had their say-on-pay voted down. The primary driver of these failed votes appears to be pay-for-performance concerns, which were identified at 28 companies. Almost half of the failed-vote firms have reported double-digit negative three-year total shareholder returns. Also contributing to investor dissent were issues like tax gross-ups, discretionary bonuses, inappropriate peer benchmarking, excessive pay, and failure to address significant opposition to compensation committee members in the past.
– Investors overwhelmingly supported an annual frequency for SOP, with a majority (or plurality) support at 80.1% of companies in the Russell 3000 index, as compared to triennial votes, which won the greatest support at 18.5% of issuers.
– Management preferences did not appear to have a significant influence on the outcome of this year’s frequency votes. Investors had defied management recommendations for triennial votes at 538 of 892 Russell 3000 companies. Shareholders also were not swayed by biennial recommendations at 34 out of 47 Russell 3000 firms.
– The number of directors at Russell 3000 firms that failed to garner majority support fell by nearly half as say on pay votes presented shareholders with an alternative to votes against compensation committee members. Poor meeting attendance, the failure to put a poison pill to a shareholder vote, and the failure to implement majority-supported shareholder proposals were among the reasons that contributed to majority dissent against board members this year.
– Among governance proposals, the biggest story of this year was the greater support for shareholder proposals that seek board declassification. These resolutions averaged 73.5% support, up more than 12% from 2010, and won majority support at 22 out of 23 large-cap firms.
– Majority voting proposals averaged almost 60% support, while proponents reached settlements with more than 30 firms. Independent chair proposals fared better this year, winning majority support at four companies.
– Investor support for shareholder resolutions on environmental and social (E&S) issues continues to rise. This year, there was a 20.6% average approval rate for these proposals, the first time this support level had reached the 20% mark. Five proposals received a majority of votes cast, a new record.
– Investors were more receptive to the Center for Political Accountability’s long-running proposal campaign for more disclosure on corporate political spending. This year, the average support for those resolutions was 32.5%, up from 30.4% for similar proposals in 2010.
Only Two Weeks Until the Big Conference! ISS & Glass Lewis on 4 Different Panels!
As happens so often, there is now a mad rush for folks to register for our upcoming pair of say-on-pay conferences (one regarding disclosure and one regarding pay practices – both combined for one price). Come hear the views of ISS and Glass Lewis, as representatives will sit on a total of 4 panels during the two days of action. See the agendas.
Act Now: Come join 2000 of your colleagues in San Francisco – or thousands more watching live (or by archive) online – to receive a load of practical guidance and prepare for what is promising to be a challenging proxy season. Register now.
Below are some interesting thoughts from Vince Pisano of Troutman Sanders:
The combination of economic pressures and the competitive environment among law firms in the capital markets arena may be creating an atmosphere which is going to cause problems for firms in the near future. Item 509 of Regulation S-K requires disclosure in a registration statement of the interest in the issuer of issuer’s counsel or underwriters’ counsel who are identified in the prospectus as having given an opinion in connection with the offering. It also requires disclosure if such counsel were retained for that purpose on a contingent basis. The reason is obvious – if counsel is to be paid only if the offering is successful, it could influence the judgment of the lawyers on matters which may have a negative impact on the offering.
Law firms have always been good about identifying stock ownership of lawyers in the firm who hold securities in the registrant, but I believe that market pressures on fees have resulted in situations where disclosure should arguably be made as to those fee arrangements, as they may be deemed to be contingent interests. Stories abound in certain markets, particularly in Asia, that major law firms in pitching for new business are agreeing that no fee will be paid unless an offering closes. Fee pressures have also caused many firms to agree to major busted-fee write offs – and, in fact, those agreements have long been the norm for underwriters’ counsel.
I have never seen a prospectus that discloses these agreements – and in fact, I have never even participated in a conversation about whether that kind of disclosure is required or appropriate. In an age when law firms’ exposure to litigation are greater than ever, it may be time to give more thought to and discussion of this problem. The pressure on individual partners to avoid large write-offs has not been greater at any time in the last 30 years and very significant amounts may be at stake.
FINRA Re-Proposes to Require Filing of Private Placements
From Suzanne Rothwell: As part of FINRA’s continuing focus on sales by FINRA members of private placements, FINRA recently filed a proposal with the SEC to adopt new Rule 5123 that would require the filing of any private placement – in which a FINRA member or associated person participates – subject to certain exemptions, and require disclosure of the use of proceeds, offering expenses and offering compensation. Currently, FINRA Rule 5122 imposes similar requirements on FINRA members for private placements by the member of its own securities or those of a control entity. That rule would remain unchanged.
In comparison to the original proposal published by FINRA in Regulatory Notice 11-04, proposed Rule 5123 would:
1. Be in a rule separate from Rule 5122;
2. Not require that at least 85% of the offering proceeds be used for the disclosed business purposes;
3. Not require disclosure of any affiliation between the issuer and any participating FINRA member;
4. Narrow the application of the rule to only apply if a FINRA member offers or sells the security or participates in the preparation of any offering or disclosure document (thereby excluding offerings where members solely provide consulting services to the issuer, among other activities);
5. Require filing of the private placement disclosure document with FINRA consistent with the timing for SEC Form D of Regulation D instead of being required at the time the document is first provided to any prospective investor; and
6. Impose the filing requirement on each participating FINRA member instead of allowing members to rely on a filing by a managing member.
The new Rule – Rule 5123 – will prohibit member firms and their associated persons from being involved in a private placement unless certain written information about the deal is provided to investors and filed with FINRA. Each member firm or person associated the firm will be required to deliver a private placement memo, term sheet or other disclosure document to each investor prior to any sale, and file the document, together with any exhibits, with FINRA within 15 days after the first sale. The document must describe “the anticipated use of offering proceeds, the amount and type of offering expenses, and the amount and type of compensation provided or to be provided to sponsors, finders, consultants, and members and their associated persons in connection with the offering.” FINRA expects each firm involved in a private placement to make its own filing; thus, there will be multiple filings for any offering where more than one FINRA member firm is involved.
The proposal no longer has certain of the problematic aspects contained in FINRA’s earlier proposal, such as a prohibition on participating in private placements where less than 85% of the offering proceeds are used for the business purposes described in the disclosure document, and an implied requirement to monitor the post-offering use of proceeds. Nevertheless, FINRA intends to reconsider numerical limitations on the use of proceeds depending on the substantive terms of private placements described in the initial filings under Rule 5123.
Tackling a frequently asked question, this WSJ article entitled “Schapiro to Stay at SEC Through Next Fall” puts to bed any rumors that SEC Chair Mary Schapiro is a short-timer. Here is an excerpt from the article:
Securities and Exchange Commission Chairman Mary Schapiro intends to stay at the securities regulator for at least another year, a spokesman said Monday. Ms. Schapiro’s plans to remain at helm of the SEC come despite a series of stumbles for the agency in recent months, including an ethics scandal involving its former general counsel and a stream of critical court decisions and reports from an internal watchdog. In addition, House Republicans have sought to curtail the SEC’s budget despite hundreds of new mandates under last year’s Dodd-Frank financial-regulatory overhaul.
Outside observers of the SEC have quietly wondered for months if the setbacks would prompt Ms. Schapiro to step down. But John Nester, the SEC spokesman, said Ms. Schapiro has told colleagues she plans to stay another year, if not longer.
PCAOB Proposes Disclosure of Engagement Partners in Audit Reports & More
Yesterday, as covered in FEI’s Financial Reporting Blog, the PCAOB proposed requiring audit firms to disclose the name of the engagement partner in audit reports (but not require the engagement partner’s signature), as well as on the Annual Report – ie. Form 2 – they submit to the PCAOB. It would also require disclosure in the audit report of other accounting firms and other persons not employed by the auditor that took part in the audit. This follows a concept release with this idea from back in mid-’09. The PCAOB has posted this press release – and here is the proposal itself…
Webcast: “Lyin’, Cheatin’ and M&A Stealin’: Negotiating the Fraud Exception”
