According to this WSJ article, the SEC has revised its controversial policy regarding deleting old MUIs (here’s my blog with commentary on the original story; here’s Bruce Carton’s debunking). This announcement comes ahead of the release of several damaging reports from the SEC’s Inspector General on a variety of matters, as reported in this WSJ article.
Here’s an excerpt from the article about the new MUI policy:
Late in the day, SEC General Counsel Mark Cahn issued a memo to Division of Enforcement staff telling them to stop existing record-destruction procedures for closed cases, until further notice. That’s according to people familiar with correspondence issued by Mr. Cahn.
An SEC spokesman confirmed the rules shift Wednesday night, saying: “We have been working with [the National Archives and Records Administration] on a new policy for records retention, and have determined to suspend the current policy out of an abundance of caution until a new policy is in place.”
As Jean Eaglesham and Jessica Holzer are reporting, the SEC’s internal watchdog is exploring the longstanding document-destruction policies–among a number of other matters–and plans to issue several widely awaited reports this month, including one on this.
The SEC’s directive from Mr. Cahn on Wednesday came after months of wrangling inside the agency, some of it personally involving document-destruction whistleblower Darcy Flynn, over various categories of investigative records, from initial to preliminary to formal. The differences in language are key, because categories–and what’s included in those categories–guide disclosure to the national archives agency, and rules about what can be tossed and what must be kept.
Mr. Flynn, whose job involves interpreting SEC policies and guiding enforcement lawyers on what to save or destroy, raised his hand, through his lawyer, on Tuesday to tell the SEC that improper document-destruction was continuing. Mr. Flynn’s lawyer, Gary J. Aguirre, himself a former SEC staff attorney and whistleblower, told Mr. Cahn at the SEC in a letter Tuesday that “we may need to seek injunctive relief” in federal court if the SEC doesn’t freeze its document-destruction policy, according to a copy of that correspondence reviewed by The Wall Street Journal.
TechCrunch as “Journalist”? Can There Be Insider Trading on Pre-IPO Exchanges?
Last week was a whirlwind of changes for TechCrunch – the popular Silicon Valley blog that got sold to AOL for $30 million last year – as it first announced that founder Michael Arrington would be investing in start-ups (with parent AOL also investing) under an exception to AOL’s “conflict of interest” journalism policies. As noted in this article (coming on heels of this David Carr column and TechCrunch rebuttal), this move was controversial and TechCrunch quickly announced some changes to what Arrington’s future role with the blog would be – and then a few days later, it’s been rumored that he was fired altogether.
As I tweeted, Arrington sounds both arrogant and naive at the same time, particularly when he was quoted as saying he didn’t consider himself a journalist. I even consider myself one and I’m not breaking much in the way of news – plus clearly not to as wide an audience as TechCrunch has.
For me, this debate should not only focus on potential conflicts of interest, it should also raise the specter of insider trading. Remember the R. Foster Winans case from the ’80s? He was a well-known WSJ columnist who wrote the influential “Heard on the Street Column” from ’82 to ’84 and was convicted of insider trading for leaking advance word of the contents of his columns to a broker. It’s possible that the same type of risk could be present in the TechCrunch type of scenario now that shares of pre-IPO companies can be traded via SecondMarket, Sharepost, etc.
Although caselaw hasn’t yet dealt with insider trading in the pre-IPO context, I believe it’s just a matter of time before this issue will reach a court. Note how Facebook has already adopted an insider trading policy as mentioned during our recent webcast, “Understanding the Private Company Trading Markets.”
EU Market Participants Oppose Mandates
Here’s news from Rob Yates of ISS’s Governance Institute and Martin Wennerstrom of Nordic Research:
In response to the Green Paper on the EU Corporate Governance Framework, the European Union has received a variety of comments from institutional investors, investor associations, accounting firms, national and European industry associations, professional associations, stock exchanges, proxy advisers, and national regulatory associations. Of the small subset of responses that have been publicly released so far, most said the EU should maintain its comply-or-explain approach to governance and avoid Europe-wide regulation.
The green paper was published in May in an effort to “assess the effectiveness of the current corporate governance framework for European companies.” The paper focuses on three areas: directors, shareholders, and the effectiveness of the comply-or-explain framework, and then outlines potential next steps. According to the paper, governance “is one means to curb harmful short-termism and excessive risk-taking.”
Among the responses that have been published thus far, several general themes have emerged. Most respondents agreed that companies function more effectively with a separate chair and CEO, although they did not believe this is something that needed to be regulated on an EU-wide level.
The Association of Private Client Investment Managers and Stockbrokers, in its response, said: “This model should broadly be followed but it is critically an area where there cannot be a single answer or one-size-fits-all solution and where there may be a division between the approach to SMEs [small and medium enterprises] on the one hand (especially when they are very small) and to larger companies on the other. We believe the question may be wrongly phrased because it does not appear to recognise this.”
Similarly, many respondents viewed board diversity, gender balance, and the size of the board as important issues, but not issues that, at this point, warrant wholesale, large-scale regulation. In particular, some respondents said the definition of board diversity should be expanded to include experience, background, and qualifications.
The respondents agreed that “say on pay” votes are an important topic, although many were reluctant to support mandatory votes, or argued that the votes should be advisory only. The European Association of Cooperative Banks, focused its response on the impact of the questions on cooperative banks and said, “In our opinion, it [mandatory votes on remuneration policy and the remuneration report] would be contrary to the principle of division of tasks and powers to strengthen the role of shareholders or members in our case in setting compensation policies for corporate officers.” Other respondents pointed to the need for a consistent policy on remuneration votes across Europe.
The role of regulation and the degree to which it should be implemented in Europe generated a wide array of responses. Many said that regulation, at this point, is not the answer to current issues, and that comply-or-explain is sufficient. For example, the U.K. Financial Regulating Council said in its response: “The comply-or-explain principle is recognised at the European level as an important tool for delivering good corporate governance but the Green Paper raises questions about its effectiveness. We believe that the flexibility that it offers is positive for economic activity . . . Indeed, a comply-or-explain approach depends on regulation to make it effective. There must be a formal requirement for transparency . . . ”
Also, most respondents said regulators should not be responsible for enforcing comply-or-explain adherence, but that shareholders should take an active role in ensuring the quality of corporate explanations. Those respondents argued that regulatory monitoring would lead to a set of boilerplate responses to fit in within the regulators’ guidelines.
The Institute of Chartered Secretaries and Administrators, in its response, stated: “We believe that codes can be more effective at raising standards than legislative solutions.” Those respondents who do support comply-or-explain regulation said it should be enforced on a national level. In its response, the London Stock Exchange Group said regarding EU-wide regulation, “Member states should be free to determine the best approach to applying corporate governance standards.
Only a small subset of the responses have been made public thus far. The European Commission plans to post the green paper comments on its Web site this fall. Here is the ISS response to the green paper.
What if the influence of ISS on how institutional investors vote has been overstated? That’s the upshot of this groundbreaking new study from Professors Stephen Choi, Jill Fisch and Marcel Kahan, the first to gauge the relationship between ISS and mutual fund voting on director elections. Bear in mind that mutual funds constitute the largest group of institutional investors, holding 27% of US equities and that they are relatively free of conflicts of interests compared to other types of institutions.
I’m not a big fan of academic studies, but this one weighs in at a mere 46 pages (before appendixes) and is easy to read. In fact, it’s a “must read” as it could have profound implications for the SEC’s proxy plumbing project, shareholder engagement and proxy solicitation practices – and perhaps change the views of those that harbor ill will towards ISS these days. And it should be helpful framing some of the discussions that will take place soon enough during the multiple panels during our pair of executive pay conferences that deal with proxy advisors, shareholder engagement, etc.
By examining the voting trends of mutual funds – who have been required to disclose how they vote annually on Form N-PX since ’03 – the trio of Professors were able to confirm their earlier contention that ISS swings only 6-10% of the vote in uncontested director elections. That is far less than what others have concluded – they claim that ISS influences 20-30% in a typical election. That alone is significant, but the study has other interesting findings, including:
– More Lockstep Voting with Management than Blindly Following ISS – 25% of funds (as measured by asset size) blindly vote lockstep with management, compared to less than 10% that blindly follow ISS
– Funds Tend to Consider ISS Recommendations Rather Than Blindly Follow – Overall, ISS’s influence is due more to investors evaluating and considering ISS recommendations rather than blindly following them
– Smaller Funds Tend to Blindly Side with Management – Smaller funds are more likely to blindly vote in lockstep compared to larger funds (with either ISS or management)
– Lack of Conflicts for Affiliated Funds – No evidence exists that funds affiliated with banks, etc. are more likely than independent funds to vote with management in an effort to maintain good business relations
– The Big Three Have Wide Influence – The largest fund families – Vanguard, Fidelity and American Funds, each of whom individually accounts for 11% of total fund assets – vote substantially differently both from each other and from what ISS recommends
High Number of Director “Withhold” Votes? How That Happens
One of the most interesting sections of the study starts on page 40. This section gets into what type of factors are present when a director receives a high level of withhold votes, an issue of great importance to directors concerned about their own reputation. Here is an excerpt from the study’s abstract that highlights the findings here:
Finally, we examine the factors associated with high (in excess of 30%) withhold votes in director elections. An ISS withhold recommendation, in conjunction with at least one of four factors – a withhold vote by Fidelity, the director missing 25% of board meetings, the company having ignored a shareholder resolution that received majority support, and a Vanguard withhold vote on outside directors with business ties to the company – is associated with a 49% probability of receiving a high withhold vote. Directors in these groups account for 48% of all directors who received high withhold votes.
By contrast, an ISS withhold recommendation that is not combined with one of these factors is associated with only a 21% probability of a high withhold vote, and the general probability of a high withhold vote is a mere 2%. These findings suggest steps that companies and directors should take to try to avoid high withhold votes. They are also evidence that not all ISS recommendations have the same impact on voting outcomes.
ISS’s Biggest Shortcoming? Be Careful What You Wish For…
For me, the largest mindblower of the study is on page 24. This is where the professors explain “perhaps the biggest shortcoming of ISS” – which is identified as ISS not providing sufficient details about why it is recommending a vote “for” a particular director. Without that explanation, it is more challenging for an investor to decide whether to not follow ISS’s “for” recommendation – and thus decide to vote “against/withhold” instead.
For those on the “bash ISS at all costs” bandwagon, think about that for a minute. Imagine if ISS fixes this shortcoming and directors stop receiving so many “for” votes just because ISS recommended as such. Read my prior blog entitled “The Debate Over ISS’s Role: Imagine a World Without” – and be careful what you wish for…
“The Twittersphere is alive with the sound of #proxyaccess!” Sung to the tune of “The Sound of Music.” Late yesterday, SEC Chair Mary Schapiro issued a statement that the SEC would neither seek a rehearing of the US Court of Appeals for the District of Columbia Circuit decision nor appeal the decision to the US Supreme Court. So the SEC chose “Door #4” of the options available that I laid out in a blog yesterday.
In her statement, Chair Schapiro reaffirmed her support for the proxy access concept – but she also pledged not to rewrite a proxy access rule anytime in the near future. While this means that “mandatory” proxy access is dead for now, the real story is that the SEC did allow the Rule 14a-8 amendments to go into effect (when the current stay expires next week), which means that the agency will allow access shareholder proposals (“absent further Commission action”) for this proxy season. Private ordering, here we come – a nice boon for corporate lawyers. Here’s the SEC’s statement:
The Securities and Exchange Commission today confirmed that it is not seeking rehearing of the decision by the U.S. Court of Appeals in Washington, D.C. vacating a Commission rule, Rule 14a-11, which would have required companies to include shareholders’ director nominees in company proxy materials in certain circumstances. Nor will the SEC seek Supreme Court review.
Chairman Mary L. Schapiro issued the following statement:
“I firmly believe that providing a meaningful opportunity for shareholders to exercise their right to nominate directors at their companies is in the best interest of investors and our markets. It is a process that helps make boards more accountable for the risks undertaken by the companies they manage. I remain committed to finding a way to make it easier for shareholders to nominate candidates to corporate boards.
At the same time, I want to be sure that we carefully consider and learn from the Court’s objections as we determine the best path forward. I have asked the staff to continue reviewing the decision as well as the comments that we previously received from interested parties.”
# # #
Last year, when the Commission adopted Rule 14a-11, it also adopted amendments to Rule 14a-8, the shareholder proposal rule. Under those amendments, eligible shareholders are permitted to require companies to include shareholder proposals regarding proxy access procedures in company proxy materials. Through this procedure, shareholders and companies have the opportunity to establish proxy access standards on a company-by-company basis — rather than a specified standard like that contained in Rule 14a-11.
Although the amendments to Rule 14a-8 were not challenged in the litigation, the Commission voluntarily stayed the effective date of those amendments at the time it stayed the effective date of Rule 14a-11. The Commission’s stay order provides that the stay of the effective date of the amendments to Rule 14a-8 and related rules will expire without further Commission action when the court’s decision is finalized, which is expected to be September 13. Accordingly, absent further Commission action, Rule 14a-8 will go into effect and a notice of the effective date of the amendments will be published.
The SEC’s Rethink of All Its Rules: The First Step
Yesterday, the SEC issued this press release announcing that it’s seeking public comment on the process it should use to conduct retrospective reviews, such as how often rules should be reviewed, the factors that should be considered, and ways to improve public participation in the rulemaking process. Comments are due by October 6th – and can be submitted via this form.
This forward-looking retrospective is due to President Obama’s memo a few months ago recommending that independent agencies do this rethink (see Vanessa Schoenthaler’s blog for the full background of Obama’s memo). How the SEC will be able to undertake this project given its Dodd-Frank rulemaking burden – not to mention all the resources needed to constantly respond to various Congressional inquiries – is a mystery. But note that this request is just to help the agency develop a plan under which it will then review its rules and regulations – it is not soliciting comment on specific items at this time (although the SEC does have this webpage that solicits comments on specific rules & regs – so there is that opportunity).
To develop this review plan, the timeframe is tight. As noted in this blog, agencies have 120 days to report their findings to the Office of Management and Budget as well as the public – and that clock started ticking about 60 days ago…
Poll: Which Corp Fin Rules Should the SEC Reconsider?
Although it’s early in the process of the SEC rethinking its rules, we can still conduct an anonymous poll about which rules you wish the SEC to review (“XBRL” seems to be popular write-in candidate):
Today is the deadline for the SEC to decide whether to appeal the decision of the US Court of Appeals for the DC Circuit in the Business Roundtable’s and Chamber of Commerce’s lawsuit over proxy access. The SEC can file a petition for rehearing (which seeks review before the panel) or a petition for rehearing en banc (seeking review of all judges of the DC Circuit) or both.
If the SEC doesn’t not file anything today, the court’s mandate (ie. final judgment) will issue seven days later and the case will be sent back to the SEC. Even in this scenario, the SEC could ask the Solicitor General to appeal the decision to the US Supreme Court – but that is fairly unlikely given that there is no split among the circuit courts on this issue and a statutory standard is involved that is fairly unique to the SEC and CFTC. Thus, it is improbable that SCOTUS would grant certiorari.
Although CII has urged the SEC to appeal, it also has urged the agency to continue the stay on Rule 14a-8 – even if the case is not taken up for rehearing. And now the ABA’s Business Law Section has also submitted a letter to the SEC also urging that the stay be continued.
A Facelift! Corp Fin Reformats the “Financial Reporting Manual”
Last Thursday, Corp Fin posted a new and improved formatted “Financial Reporting Manual.” The facelift didn’t change the substance in the Manual…
Last week, the SEC also revised Form ID to allow for new applicant types to file the Form and make Edgar filings. The new Form ID requires the filer to select an entity type. Those that have already filed a Form ID are not required to re-file or otherwise revise what they already have filed.
Our September Eminders is Posted!
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Yesterday, the SEC issued its second fee advisory for the year (along with this methodology). Right now, the filing fee rate for Securities Act registration statements is $116.10 million (the same rate applies under Sections 13(e) and 14(g)). Under the fee advisory, this rate will slightly decline to $114.60 per million, a 1.2% price drop. Not bad, unless you recall last year’s 63% price hike, the largest one-year rate hike in my experience.
As noted in this SEC order, the new fees will go into effect on October 1st – which is a departure from the past when the new rates didn’t become effective until five days after the date of enactment of the SEC’s appropriation for the new year, which often was delayed well beyond the October 1st start of the government’s fiscal year as Congress and the President battled over the government’s budget.
You might be asking, “How are the SEC’s fees set?” Or more importantly, “Will the rate hike help the SEC’s push for more resources?” The SEC sets its filing fees annually under the “Investor and Capital Markets Fee Relief Act of 2002.” The SEC’s budget is not dependent on its fees as it’s not a self-funded agency. All of the fees go to the US Treasury. In theory, these fees could help convince Congress to allow the SEC to receive their requested budget – but that surely hasn’t worked as of late. Learn more how the filing rate-setting process works in this blog.
Too funny. I had a brief conversation with an AP reporter last night and today I’m quoted in 468 newspapers, all of them in this same short piece. The power of the Associated Press! I wonder how @MrPoorCEO will take it…
Heating Up: Calls for More Political Contribution Disclosures
One topic that has been on the lobbyist agenda – but never quite on the hot seat – is greater disclosure about corporate political contributions. In the wake of the Citizens United decision by the Supreme Court, that is changing. As Ted Allen blogged a few days ago, the International Corporate Governance Network is the latest to weigh in with a letter to the SEC on the topic, commenting upon the rulemaking petition filed several weeks ago by a group of academics (here are other letters sent in about the petition).
Section 13(d) Reporting: CSX Case Highlights Need for SEC Action on Derivatives
A divided panel of the U.S. Court of Appeals for the Second Circuit has finally issued its opinion in the CSX case in which the District Court addressed whether the long party in a cash-settled total-return equity swap should be considered the beneficial owner of the underlying shares for reporting purposes under Section 13(d) of the Williams Act. The majority opinion — issued nearly three years after the appeal was argued — declined to resolve the beneficial ownership issue, noting that there was disagreement within the panel on the subject. Instead, the panel considered only whether a “group” had been formed under Section 13(d) as to the shares held outright by the defendant activist funds.
The majority opinion also addressed whether and under what circumstances a party should be precluded from voting shares acquired during a period when it was in violation of its disclosure obligations under Section 13(d). CSX Corp. v. The Children’s Inv. Fund Mgmt. (UK) LLP, Docket Nos. 08-2899-cv, 08-3016-cv (2d Cir. July 18, 2011).
As to the District Court’s finding of a “group,” the majority opinion, by Judge Newman, found insufficient for appellate review the District Court’s finding that a group was formed by the activities of the two funds (TCI and 3G) that suggested “concerted action” vis-à-vis CSX. The Court therefore remanded the case to the District Court for additional findings on that limited subject, as well as to reconsider the appropriateness and scope of any injunctive relief should a group violation of Section 13(d) be found with respect to the purchase of shares outright. In connection with its consideration of the group issue, the majority ruled that “activities” resulting from group action were insufficient to form a group unless — in the words of the rule — the group “act[s] together for the purpose of acquiring, holding, voting or disposing” of equity securities of the issuer.
As to the availability of injunctive share “sterilization,” the majority opinion adhered to prior precedent holding that an injunction prohibiting the voting of shares acquired while in violation of Section 13(d)’s reporting requirements was not an available remedy if the required disclosure is ultimately made in sufficient time for informed action by shareholders. The opinion rejected the arguments that sterilization may be necessary to provide a “level playing field” and to deter violations of Section 13(d), relying in part on the policy notion that sterilization might injure those stockholders who, after full disclosure, choose to support an insurgent’s program.
Judge Winter filed a separate opinion concurring in the result, and, unlike the majority opinion, directly addressed the issue as to whether the long party in a total-return swap transaction may be deemed to beneficially own the shares purchased as a hedge by the short counterparty. Judge Winter’s opinion rejected the District Court’s view that equity swaps are (in Judge Winter’s words) “an underhanded means of acquiring or facilitating access to [shares] that could be used to gain control through a proxy fight or otherwise.” Judge Winter instead writes that, absent an agreement on acquiring or voting the short party’s hedge position, “such swaps are not a means of indirectly facilitating a control transaction. Rather, they allow parties such as the Funds to profit from efforts to cause firms to institute new business policies increasing the value of a firm.”
Judge Winter rejected the position that the shares acquired by the swap dealer to hedge the swap should be deemed beneficially owned by the long party based on a review of the statutory language; other legislation that has addressed swaps — including Dodd-Frank, which granted new authority to the SEC to promulgate rules providing that “a person [] be deemed to acquire beneficial ownership of an equity security based on the purchase or sale of a security-based swap”; and the SEC’s ongoing and, as yet, inconclusive consideration of derivatives and beneficial ownership under Section 13(d), including its recent repromulgation of Rule 13d-3.
The CSX majority’s determination not to address whether the long party to a total-return swap may be deemed, for purposes of Section 13(d), the beneficial owner of the underlying shares underscores the need for SEC action. We have previously set forth detailed proposals on the subject, and continue to believe that SEC action is both necessary and overdue.
The concluding statement in Judge Winter’s concurrence eloquently articulates the need for SEC leadership on the issue:
Total-return cash-settled swap agreements can be expected to cause some party to purchase the referenced shares as a hedge. No one questions that any understanding between long and short parties regarding the purchase, sale, retention, or voting of shares renders them a group — including the long party — deemed to be the beneficial owner of the referenced shares purchased as a hedge and any other shares held by the group.
Whether, absent any such understanding, total-return cash-settled swaps render a long party the beneficial owner of referenced shares bought as a hedge by the immediate short party or some other party down the line is a question of law not fact. At the time of the district court opinion, the SEC had no authority to regulate such “understanding”-free swaps. It has such authority now, but it has simply repromulgated the earlier regulations. These regulations, and the SEC’s repromulgation of them, offer no reasons for treating such swaps as rendering long parties subject to Sections 13 and 16 based on shares purchased by another party as a hedge. Absent some reasoned direction from the SEC, there is neither need nor reason for a court to do so.
Recently, I have blogged about the risks involved in some Chinese companies, more recently because the US exchanges have listed questionable companies even when the Chinese regulators would not. So it’s noteworthy that the SEC’s Division of Enforcement recently issued two stop orders to prevent effectiveness of the registration statements of two Chinese companies (whose auditors had resigned and trading had been halted several months earlier). Stop orders are fairly rare but certainly seem warranted in this case (here’s stop order for China Century Dragon Media and here’s stop order for China Intelligent Lighting and Electronics).
What might a Chinese company – one incorporated in the Cayman Islands – do when accused of fraud? How about move the assets to another company and leave 8000 employees stranded…
The Problems of Chinese Reverse Mergers
In this podcast, Matt Orsagh of the CFA Institute talks about reverse mergers for some Chinese companies that have implications for investors:
– What has the PCAOB said about Chinese reverse mergers?
– What do you think is the biggest risk for investors in these companies?
– How should investors go about analyzing these companies?
Enforcement Actions: Compare PCAOB vs. SEC
In a trio of recent enforcement actions, the PCAOB recently barred three certified public accountants for 2-3 years. It is a positive development to see the PCAOB take action against CPAs in such instances. In one of the actions, an audit partner was fined $50,000 for providing misleading documents to the PCAOB and not being truthful with respect to whether documents had been changed. The PCAOB can fine an individual up to $750,000 and a firm up to $15 million. In this case, the fine for misleading the PCAOB was 1/15th of the maximum. It will be interesting to see if the state boards of accountancy take action.
Lynn Turner notes “the enforcement actions do not name the company being audited. That is in contrast to SEC enforcement actions which do often name the company. I don’t believe there is anything in Sarbanes-Oxley that prevents the PCAOB from informing investors as to the name of the company. IT will be interesting to see if that is a trend.”
Here’s the latest on attempts in Congress to tweak Dodd-Frank, courtesy of this alert by Cooley’s Cydney Posner which is repeated below:
They’re at it again! H.R. 2483, the ”Whistleblower Improvement Act of 2011,” takes another stab at remaking Dodd-Frank, this time by modifying the whistleblower provisions set forth in Section 21F of the Exchange Act. The bill would require, as a prerequisite to receiving a whistleblower bounty, that the employee first report the matter to his or her employer. The bill was introduced at the end of last week by Representative Michael Grimm (R-NY) and is co-sponsored by four other Congressman, Reps. John Campbell (R-CA), Bill Flores (R-TX), Scott Garrett (R-NJ) and Steve Stivers (R-OH). The bill was referred to the House Committees on Financial Services and Agriculture.
The bill is designed to address the most contentious aspect of the SEC’s final whistleblower rules – the SEC’s decision not to mandate internal compliance reporting, prior to or contemporaneously with SEC reporting, as a prerequisite to eligibility for a whistleblower bounty. Critics charged that mandatory internal reporting would deter many whistleblowers, while advocates contended that allowing whistleblowers to bypass companies’ internal compliance programs would have a corrosive effect on these programs (including those mandated by SOX) and undermine companies’ ability to address the wrongdoing. The SEC’s decision not to mandate internal reporting arose out of its concern that employees could be hampered in internal reporting if, for example, management were involved in the misconduct.
The bill would amend Section 21F to require that, to be eligible for a whistleblower award, an employee who provides information relating to a violation of the securities laws that was committed by his or her employer (or by another employee of his or her employer), must first report the information to his or her employer before reporting to the SEC and then must report that information to the SEC within 180 days after internal reporting.
However, the bill does attempt to address the SEC’s concern regarding potential deterrents to internal reporting. Under the bill, whistleblowers who did not comply with the internal reporting requirement could still be eligible for awards if the SEC determined the following:
– that the employer lacked either a policy prohibiting retaliation for reporting potential misconduct or an internal reporting system allowing for anonymous reporting; or
– that internal reporting was not a viable option for the whistleblower based on either (i) evidence that the alleged misconduct was committed by or involved the complicity of the highest level of management, or (ii) other evidence of bad faith on the part of the employer.
The bill would also amend Section 21F to make ineligible any whistleblower who had legal, compliance or similar responsibilities and had a fiduciary or contractual obligation to investigate or respond to internal reports of misconduct or violations (or to cause the entity to do so), if the information learned by the whistleblower in the course of duty was communicated to the him or her with the reasonable expectation that he or she would take appropriate steps to respond.
Currently, Section 21F requires that awards be at least 10% and no more than 30% of the total monetary sanctions collected on an action. The bill would eliminate the minimum award requirement and cap awards at 30% of the amount collected. Also, under Section 21F, any whistleblower convicted of a criminal violation related to the matter is ineligible for an award. The bill would expand the exclusion from eligibility for culpable whistleblowers to include civil liability or other determination by the SEC that the individual committed, facilitated, participated in or was otherwise complicit in the misconduct.
Under the bill, the SEC would be required to notify the entity prior to commencing any enforcement action related to a whistleblower complaint to enable the entity to investigate the alleged misconduct and take remedial action, unless, based on evidence of bad faith or complicity in the misconduct at the highest levels of management, the SEC determined that notification would jeopardize the investigation. If the notified entity responded in good faith, which may include conducting an investigation, reporting its results to the SEC and taking appropriate corrective action, the SEC would be required to treat the entity as having self-reported the information and its actions in response to the notification evaluated accordingly.
With regard to the anti-retaliation provisions of Section 21F, the bill would make clear that employers would not be prohibited from enforcing any established employment agreements, workplace policies or codes of conduct against a whistleblower, and that any adverse action taken against a whistleblower for violation of those agreements, policies or codes would not be considered retaliation, as long as enforcement was consistent with respect to other employees who were not whistleblowers.
The bill would also make corresponding changes to Section 23 of the Commodity Exchange Act.
FINRA’s New Social Media Guidance: Guidance for Companies?
From Suzanne Rothwell: Recently, FINRA issued updated guidance to broker/dealer firms on social networking websites in Regulatory Notice 11-39. This Notice supplements guidance issued early last year in Regulatory Notice 10-06. Although the FINRA requirements are specific to the regulatory environment for broker-dealers, companies may nonetheless find some of the guidance useful in developing a social media policy for themselves – particularly where employees use social media sites for business purposes – and in reviewing the company’s website.
The most recent FINRA Notice clarifies that broker-dealer employees may use smart phones or tablet computers and other personal communication devices to access the firm’s business applications so long as the business and personal communications can be separated on the device thereby enabling the firm to retrieve and supervise the business communications without accessing the employee’s personal communications.
In addition, a principal of the broker-dealer firm must review prior to use any social media site that an associated person intends to employ for a business purpose. A broker-dealer firm is responsible for training its associated persons on its social media policies and must follow up on “red flags” that might indicate non-compliance with firm policies.
FINRA points out that some firms require that associated persons annually certify compliance with the policies and some firms randomly spot check the websites of associated persons to monitor compliance with firm policies. The Notice also warns that a broker/dealer firm is responsible for ensuring that a data feed to the firm’s website does not contain inaccurate information and should not include a link on its website to a third-party site that the firm knows has false or misleading content (for which the firm will be responsible if it endorses the content on the third-party site).
SEC Decides to Rescind Form F-9
Recently, as noted in this Paul Weiss memo, the SEC decided to eliminate Form F-9, effective as of December 31, 2012. Form F-9 is the SEC’s Multijurisdictional Disclosure System form used by some Canadian companies to register investment grade debt and preferred securities. One of the reasons for the SEC’s decision is Dodd-Frank’s Section 939A that directs the SEC to propose alternative criteria to replace rating agency criteria. Thus, Form F-9 had become largely duplicative of Form F-10. Still, it’s notable because it’s pretty rare that the SEC rescinds a form.
Last week, the WSJ ran this article about how Corp Fin is peppering oil & gas companies with comments about fracking. Members were quick to ask: “Is Corp Fin pulling the ’34 act reports for all oil & gas companies as part of a special targeted review project?”
Personally, I don’t think that these is a “special” review project and that these comments are being delivered in the normal-course review process. Clearly, this has been a big topic for the oil and gas industry for some time. For example, the Interfaith Center on Corporate Responsibility ran this press release on Friday noting the WSJ article and that an investor coalition has been pressing 2 dozen companies on this issue through shareholder proposals since ’09. So it’s become a high profile issue and perhaps Corp Fin’s actions will help head off any Congressional action in this area.
Here are some random examples of comment letters that Corp Fin has sent recently:
Proxy Access: CII Urges SEC to Appeal Court Decision
As noted by Ted Allen in ISS’s Blog, the Council of Institutional Investors has sent this letter to SEC Chair Schapiro urging the agency to seek an en banc rehearing from the full US Court of Appeals for the D.C. Circuit over the adverse decision by a 3-judge panel of the DC Circuit Court last month. The SEC has until September 6th to decide whether to appeal the Business Roundtable/Chamber of Commerce case.
More Thoughts on Proxy Access and Judicial Review
I’ve blogged several times recently about the DC Circuit’s proxy access decision in the Business Roundtable/Chamber lawsuit and its implications far beyond proxy access. Here’s some thoughts on the topic – as well as proxy access itself – from Prof. Larry Hamermesh of the Widener University School of Law, fresh off his stint as a Corp Fin Fellow at the SEC.
The leading Republican contender for his party’s nomination – Mitt Romney – apparently would like to roll back the clock, take another swing at regulatory reform and repeal Dodd-Frank, or at least parts of the year-old law. Here are excerpts from a recent Boston Globe article:
In the past, Romney has criticized the bill for creating uncertainty in the financial industry and causing bankers and the financial service employees to pull back. Today, he went further and said he would repeal Dodd-Frank, if he were elected president. “The extent of regulation in the banking industry has become extraordinarily burdensome following Dodd-Frank,” Romney told a roundtable of 18 businessmen at The Common Man Restaurant.
“I’d like to repeal Dodd Frank, recognizing that some revisions make sense,” Romney said. In July, Romney was unable to name specific parts of the bill that he liked or disliked. When asked, he said only, “It’s 2,000 pages. I’m sure there’s something in there that’s good…I’d be happy to take a look at it perhaps line by line at some point and lay out the provisions that I think are unfortunate.”
Today, he was more specific. Romney said he believes it does make sense to regulate derivatives. He said it also makes sense to have different capital requirements if someone is holding a home mortgage compared to someone holding high-risk securities. “Some features have to be addressed,” he said. At the same time, he said, the 2,000 pages of the bill are “overwhelming” for community banks and the fact that pages of rules must still be written creates too much uncertainty.
It’s always fascinating to see which business issues become focal points in the Presidential campaign. Last time around, CEO pay became a high profile issue and that may well happen again. I’m not sure why the length of Dodd-Frank itself should be an issue. I suppose it has to do with the “smaller & less intrusive government” movement – and the sheer length of a bill somehow becomes a proxy for its true impact. Candidate Herman Cain initially wanted bills to be limited to 3 pages!
I guess Romney is betting that most of the voting public won’t recall that it took Congress over two years to pass anything in response to the financial crisis (not that I think that Dodd-Frank is perfect by any stretch of the imagination). So the question remains: “How long a piece of legislation did that near-Depression warrant?” Take the poll below…
In more political news, according to this LA Times article, Rick Perry will be hamstrung by new SEC rules that inhibit donations from financial services company employees to sitting governors.
The PCAOB’s Upcoming Roundtable on the Auditor’s Reporting Model
Yesterday, the PCAOB announced that it will host a roundtable on September 15th to discuss its recent concept release on possible changes to the auditor’s reporting model. Here’s the related briefing paper. Here’s some thoughts from Jim Peterson’s “Re:Balance” Blog on the concept release.
Poll: Congressional Legislation & Does Size Matter?
Last week, I blogged about the PCAOB’s concept release on mandatory audit firm rotation – which essentially floats the idea of mandatory firm rotation every 10 years, at least for large companies. Here’s some thoughts from a Forbes’ article penned by Francine McKenna. And here’s a reaction from an inhouse member:
The thing that surprised me the most as I read through this release is that it essentially admits that not only have the regulators not found any correlation between audit failures and long-term audit firm tenure — but academic studies essentially have found the opposite. On a related note, the concept release quotes heavily from a detailed GAO study issued in 2003 that recommended against mandatory rotation for a variety of reasons, including estimates that initial year audit costs would increase by over 20% and that there would be an increased risk of audit failures in the early years of the audit. The concept release even admits that based on its experience conducting inspections since the GAO report, the PCAOB believes that audit quality has improved since then — yet they still put out this release, stating generally that “more can be done to bolster auditors’ ability and willingness to resist management pressure.”
In light of all this, I have to believe that some comment letters will be tempted to quote from the recent proxy access decision, to remind the regulators that they must adequately consider the effect of any new rules upon efficiency, competition and capital formation. In addition, that case reminds the regulators that they must rely on sufficient empirical evidence when claiming benefits of a new rule – the agency must examine the relevant data and articulate a satisfactory explanation for its action, including a rational connection between the facts found and the choices made. I understand that we are just at the concept release phase – and do not even have proposed rules never mind final rules to fight at this stage. But I think the PCAOB really has an uphill battle on this one, and I can’t figure out why they are pursuing something like this at this time.
Voluntary Early Disclosure of Material Events: Is it OK to Stop?
I just finished reading the July-August issue of The Corporate Counsel that was just mailed and I was struck by this question because it’s something I’ve often been asked. In other words, whether an issuer that chooses to report under Item 8.01 of Form 8-K material events that are not required to be reported on Form 8-K has created a duty to continue filing voluntary 8-Ks when similar events occur in the future? The theory is that the duty would be based on an implied representation to investors that such events will be disclosed promptly rather than after the end of the quarter, on Form 10-Q/K. This question is different from the question of whether an issuer has a “duty to update” previously disclosed information. Check out your copy of the July-August issue to read Alan Dye’s analysis on this challenging topic (or if not yet a subscriber, try a “Rest of 2011 for Free” when you try a ’12 No-Risk Trial).
Mailed: July-August Issue of The Corporate Counsel
The July-August issue of The Corporate Counsel was just mailed to subscribers. This issue includes important practical guidance on:
– What You Should Be Doing Now With Respect to Proxy Access
– Staff Confirms/Clarifies 8-K and S-K Item 401 Interpretations
– Disclosure of Broker Non-Votes on the Say-on-Frequency Proposal
– Use of Non-GAAP Financial Measures to Demonstrate (vs. Explain) Pay for Performance
– The CSX Case–Still Not Clear Whether Cash-Settled Equity Swaps Confer 13(d) Beneficial Ownership
– Voluntary Early Disclosure of Material Events–Is it OK to Stop?
– Whither the Devon Energy Corp. 701 No-Action Letter?
– Communications with Auditors: Citing the Right Auditing Standard
Act Now: Get the “Rest of 2011 for Free” when you try a ’12 No-Risk Trial now.
