Wow. Two earthquakes in a year over here in DC. After none for the first three decades that I have lived here. Maybe not a big deal for those out in California, but yesterday’s quake scared this bald guy (and broke a few vases). Many workers were sent home early after being evacuated, making the commute a real mess. And some national treasures suffered damage, like cracks in the Washington Monument and broken spires on the National Cathedral.
Even the SEC felt the “shakes,” as this notice was posted on the agency’s home page last night:
The SEC has temporarily suspended operation of its EDGAR filing system as a precautionary measure due to Tuesday’s earthquake activity in the Washington, D.C. area. The system will be available tomorrow (Wednesday, 8/24) during regular business hours. For specific filer questions, SEC staff will be available to provide filer support for those filers attempting to submit documents during the temporary shutdown. Please contact Filer Support at 202-551-8900 for assistance.
At this point, it’s unclear if any “live” filings were impacted by the Edgar suspension since this notice was posted after the 5:30 pm cut-off. So, we don’t know at what time Edgar went off-line. If there were any missed filings that need backdating, sometimes the SEC allows for a blanket exemption – and sometimes requests for relief are needed. I imagine that the SEC will advise on this today.
Earthquake: The Aftershock Picture
Many pictures have been posted in the wake of what was a historical event in DC (“where were you during the quake of ’11?”). Here is my aftershock “crazy-eyes” picture:
Poll: What Caused the Quake?
Please take a moment for this anonymous poll regarding what caused the DC earthquake:
Want to hear some mind-blowing numbers when it comes to shareholder participation for an annual meeting online? In this podcast, Jared Brandman of The Coca Cola Company describes his company’s experience using an e-Forum for an annual shareholders meeting for the first time, including:
– What was your first year’s experience with the e-Forum like?
– How much work did the Forum end up being, both before and after the annual meeting?
– How hard was it to convince senior management to try the e-Forum?
– For those out there considering a Forum, what pointers would you give them now?
The “Man U” IPO: Singapore Bound!
Although relatively rare, there certainly are precedents for sports teams to sell stock to the public (egs. Green Bay Packers; Florida Panthers). But it’s big news that the most popular team in the world – Manchester United, a UK football (ie. soccer) team – is selling a minority interest in an IPO. No, this high profile company will not be listed in the US – nor will it be listed in the United Kingdom. The owners have chosen Asia – but not even Hong Kong. It will be Singapore as noted in this Business Insider article.
Did you know that the Boston Celtics even sold securities to the public at one point in time? It was structured as a limited partnership, but the LP owners were all bought out in ’02 when the team’s controlling ownership changed hands. The Cleveland Indians were also publicly traded for a time in the ’90s.
SEC Adopts Rules to Suspend Duty To File Asset-Backed Reports Under Section 15(d)
Last week, the SEC adopted rules under Section 942(a) of Dodd-Frank to provide certain thresholds for suspension of the reporting obligations for asset-backed securities issuers.
On Friday, I blogged a member’s negative reaction to the obscure provision in Dodd-Frank that requires the SEC to adopt rules eliciting disclosure regarding “conflict minerals” in the Congo. Many corporate lawyers and others in the corporate community (which includes many shareholders) share that member’s reaction. Now, Rep. Carolyn Maloney (D-NY) has introduced a House bill entitled the “Business Transparency on Trafficking and Slavery Act” (H.R. 2759) that would require companies to disclose efforts to identify and address the risks of human trafficking, forced labor, slavery and child labor in their supply chains.
Although these bills are well-meaning, attempting to solve the world’s problems through SEC filings simply is the wrong – and very expensive – way to go. How in the world did Congress start thinking they should influence foreign policy, as well as domestic social and environmental issues, through SEC filings to the determent of shareholders? Well, before Dodd-Frank, Rep. Frank Wolf (R-Va.) used an omnibus appropriations bill in early ’04 to require companies to disclose business activities in countries designated by the State Department as sponsoring international terrorism (Wolf particularly was targeting Iran). Corp Fin’s “Office of Global Security Risk” was born.
And even before that, the SEC’s Y2K interpretive release in ’98 that elicited MD&A disclosures regarding risks associated with potential computer problems (yours truly is the contact person on that release!) was essentially forced upon the agency behind closed doors by some members of Congress. And before that, I would imagine there have been other closed door situations (perhaps the SEC’s interpretive guidance in ’88 that elicited disclosure of illegal or unethical activities relating to government defense contract procurements).
These older examples, however, didn’t involve actual legislation and thus could be quickly unwound by the SEC if found problematic. In comparison, the SEC doesn’t have any leeway to change a legislative provision that elicits unwarranted – and expensive – immaterial disclosures. When it comes to foreign policy or social issues, Congress should leave the disclosure process alone and not try to stick its pet projects on the backs of companies and their shareholders!
Rating Agencies Under Fire: Former Moody’s Analyst Breaks Silence
On top of the DOJ and Congressional investigations of S&P in the wake of the downgrading of the United States – one can only wonder how all three of the credit rating agencies have not been fully investigated in the years since the subprime crisis hit tilt – it appears that a former senior Moody’s analyst, William Harrington, has blown the whistle on his former employer in the form of his 78-page comment letter submitted to the SEC (read beyond the odd cover page), as described in this Business Insider article. Here is an excerpt from that article:
We’ve included highlights of Harrington’s story below. Here are some key points:
– Moody’s ratings often do not reflect its analysts’ private conclusions. Instead, rating committees privately conclude that certain securities deserve certain ratings–and then vote with management to give the securities the higher ratings that issuer clients want.
– Moody’s management and “compliance” officers do everything possible to make issuer clients happy–and they view analysts who do not do the same as “troublesome.” Management employs a variety of tactics to transform these troublesome analysts into “pliant corporate citizens” who have Moody’s best interests at heart.
– Moody’s product managers participate in–and vote on–ratings decisions. These product managers are the same people who are directly responsible for keeping clients happy and growing Moody’s business.
– At least one senior executive lied under oath at the hearings into rating agency conduct. Another executive, who Harrington says exemplified management’s emphasis on giving issuers what they wanted, skipped the hearings altogether.
A review of many comment letters issued to date indicates so far the SEC has not routinely issued comments on the interactive data file, or XBRL, exhibits. The most frequent comment we found was regarding incorrectly checking the XBRL question on the cover page of Forms 10-K or 10-Q. Some of the other comments we found are set forth below.
Hyatt Hotels
Comment:
Please tell us how you determined you are not required to submit electronically and post on your corporate Web site, Interactive Data Files pursuant to Rule 405 of Regulation S-T. Refer to Item 601(b)(101) of Regulation S-K.
Response:
Item 601(b)(101) of Regulation S-K states that an Interactive Data File is required to be submitted to the Commission and posted on a registrant’s corporate Web site based on the phase-in schedule outlined in Item 601(b)(101)(i)(A – C). Item 601(b)(101) of Regulation S-K also states that an Interactive Data File first is required for a periodic report on Form 10-Q.
Reference is made to Question 105.07 of the Commission’s Compliance and Disclosure Interpretations (“C&DIs”) of the Commission’s interactive data rules. The Company completed its Initial Public Offering in November 2009. As such, the Company first qualified as a “large accelerated filer” as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of December 31, 2010. Following the guidance set forth in Question 105.07, because the Company did not qualify as a large accelerated filer until December 31, 2010 the Company was not required to submit Interactive Data Files until its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2011 (the “1Q2011 Form 10-Q”). The Company filed its 1Q2011 Form 10-Q with the Commission on May 3, 2011. The Company then filed Amendment No. 1 to its 1Q2011 Form 10-Q with the Commission on May 20, 2011, the sole purpose of which amendment was to furnish Exhibit 101 to Form 10-Q in accordance with Rule 405 of Regulation S-T. In accordance with Rule 405(a)(2) of Regulation S-T, Amendment No. 1 to the 1Q2011 Form 10-Q was filed with the Commission within 30 days of the filing date of the 1Q2011 Form 10-Q.
Amdocs Limited
Comment:
We note that you did not file the certifications required under Rules 13a-14(a) and 15d- 14(a) of the Exchange Act with your amendment to the Form 20-F for the fiscal year ended September 30, 2010. Please tell us how you considered including the required certifications in your amended Form 20-F and the reason for omitting such certifications.
Response:
Pursuant to Rule 405(a)(2) of Regulation S-T, the Company filed the Amended Form-20-F solely for the purpose of submitting its interactive data file for the fiscal year ended September 30, 2010 (the “Interactive Data File”). The Interactive Data File was prepared under the same disclosure controls and procedures in place during the Company’s preparation of the Form 20-F and reflects the same information about the Company’s financial condition, results of operations and cash flows that was reported in the Form 20-F. The Company believes that the certifications filed as exhibits to the Form 20-F, pursuant to Rules 13a-14(a) and 15d- 14(a) of the Exchange Act, are also applicable to the disclosure contained in the Amended Form 20-F.
According to the Commission’s Compliance and Disclosure Interpretations, Question 130.1 related to Rule 405 under the Securities Act of 1933, as amended (issued May 29, 2009) (the “C&DI”), in an amendment filed for the sole purpose of submitting its interactive data file, the Commission requires an issuer to include the cover page, an explanatory note, the signature page, an exhibit index, and exhibit 101. The C&DI does not state that that new certifications must be filed with such an amendment. Lastly, although the Company acknowledges that the practices of other issuers are not dispositive, the Company’s review of other public filings suggests that numerous other issuers take the position that new certifications are not required to be filed with an amended filing filed for the sole purpose of submitting an interactive data file.
Dr. Pepper Snapple Group
Comment:
We note you calculated the aggregate market value of common equity held by non-affiliates to be $5,382,637,225 as of June 30, 2009, and that you did not indicate by check mark whether you have submitted electronically and posted on your corporate Website, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T. Please tell us whether you have filed such interactive data, and if not, explain to us why you have not provided the interactive data files pursuant to Rule 405 of Regulation S-T.
Response:
As more fully discussed in our public filings, we became a public company on May 7, 2008 with the spin-off by Cadbury plc of its beverages business in the United States, Canada, Mexico and the Caribbean. We became a “large accelerated filer” on December 31, 2009 under Rule 12b-2 of the General Rules and Regulations promulgated under the Securities Exchange Act of 1934.
Under Regulation S-K (Item 601(b)(101)(i)) an Interactive Data File is required to be submitted to the Commission and posted on the registrant’s corporate Web site in the manner provided by Rule 405 of Regulation S-T by “a large accelerated filer that had an aggregate worldwide market value of the voting and non-voting common equity held by non-affiliates of more than $5 billion as of the last business day of the second fiscal quarter of its most recently completed fiscal year that prepares its financial statements in accordance with generally accepted accounting principles as used in the United States and the filing contains financial statements of the registrant for a fiscal period that ends on or after June 15, 2009”, except that an Interactive Data File is first required for a Form 10-Q.
Since we first became a large accelerated filer on December 31, 2009 and had market value in excess of $5 billion as of last day of our second quarter in calendar year 2009, under our reading of the above-noted rule, the first filing for which we would be required to file an Interactive Data File would be our Quarterly Report on Form 10-Q for the first quarter ended March 31, 2010 (“our next Form 10-Q”). As a result, we will file an Interactive Data File with our next Form 10-Q.
With respect to our decision to not indicate by check mark on the facing page of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (“our 2009 Form 10-K”) whether or not we had submitted the Interactive Data File electronically and posted it on our corporate website, we relied on Question 105.04 of the Compliance and Disclosure Interpretations posted by the Division of Corporation Finance, which provides that “[a] company should not start checking the cover page box relating to Interactive Data File compliance until it is required to submit those files”. In our view, at the time we filed our 2009 Form 10-K, we were not then required to comply with Rule 405 for the reasons noted above. We will check mark the facing page of our next Form 10-Q to indicate our compliance with the Interactive Data File rules.
Yesterday, I blogged about the story sweeping the mass media about how a SEC Enforcement attorney had blown the whistle to Sen. Grassley regarding how the agency had been routinely destroying records relating to MUI’s that hadn’t panned out for formal investigations. A lot of sexy components to this story, but when you stop and think about it, it seems like a “made for the media” story based on the facts as reported so far. Below are a few of my thoughts (in addition, here’s thoughts from Prof. David Albrecht and Bruce Carton).
1. What is a MUI? – To best understand what the hubbub is all about, it’s essential that one knows exactly what a MUI is. A MUI – stands for “Matter Under Inquiry” – is simply a database entry by a SEC Enforcement Staffer anytime a Staffer comes across anything remotely suspicious. It plants a flag for the rest of the SEC Staff to know that someone else came across something about the same incident/person – this enables the Staff to avoid duplication of effort and allows for coordination. In the vast majority of cases, the MUIs are really nothing at all – some Staffer read a newspaper article perhaps that sounded a little curious and inputted it into the database in case another Staffer comes across something more suspicious.
2. Gary Aguirre’s Involvement – One interesting angle is that the complaining SEC lawyer – Mr. Darcy Flynn – is being represented by none other than former SEC lawyer Gary Aguirre, who you may recall was the rabble-rouser who kicked off the whole firestorm over the Pequot/John Mack insider trading fiasco several years ago and ended up getting a big dollar settlement from the SEC to resolve his claim of wrongful and retaliatory termination (with a lot of help from the grandstanding of Grassley & Co.). I guess Gary has been around the block as a SEC whistleblower and maybe he’ll be representing all SEC Staffers who bring allegations to light?
3. Some Oddities Do Exist – While my overall sentiment is that there doesn’t appear to be anything too nefarious about this situation as reported, it does raise the legitimate question of whether the SEC has been complying with federal record retention laws when it comes to MUIs. I have no idea what those laws require, but presumably they exist (see today’s NY Times’ article that says the National Archives and Records Administration has written 3 letters to the SEC since July 2010 on the matter) – and it does seem odd that the Enforcement Staff would routinely discard documents relating to MUIs immediately upon closing the matter out. You’d think they’d want to keep them in case a week later another complaint comes in about the same subject matter or company, and the new complaint is convincing that the matter deserves closer scrutiny after all.
4. 60-Day Lifespan for MUIs – Note that under current SEC Enforcement policy, a MUI has a maximum life span of only 60 days (unlike the old days when I was there when I think the lifespan was indefinite). Within the first 60 days, the Staff must either close the case or convert it to an “investigation” (either formal or informal), or the computer system automatically converts it to an “investigation” at 60 days. Once it becomes an investigation (regardless of how), I assume the record retention policy is a bit more strict. For general and official background on MUIs and their conversion to investigations, see Section 2.3 of the Enforcement Manual.
While I do understand and agree with the laudable intentions of its proponents, I believe that the “conflict minerals” section of Dodd-Frank is the worst securities law I have ever seen. I think it is unwise to try to address this issue through a disclosure law. When the NY Times (not The Wall Street Journal) publishes an editorial that states that the law is hurting rather than helping the people it is supposed to benefit, it makes me doubly angry.
I do appreciate that many well-intentioned activists in the environmental and social causes communities believe that they should have a way to pressure corporations and their boards to consider their views, some of which I share. The conflict minerals law, however, is a quantum leap from the social activism inherent in much of the Rule 14a-8 process. The law seeks to use the US securities regulatory regime to solve a problem it is ill-equipped to solve, with unforeseen and unintended consequences and unjustifiable costs. That the problem is horrendous does not mean that securities disclosure is the way to address it.
Nuggets from “The Advisors’ Blog”
We continue to post new items daily on our blog – “The Advisors’ Blog” – for CompensationStandards.com 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:
– Senate Bill: An End to Tax Breaks for Stock Options?
– SEC Commissioners Reject Enforcement Staff Proposal to Settle Clawback Case
– Clawbacks: Open Issues for the SEC
– Senate Democrats Defend Pay Equity Disclosure Provision
– View from the Equilar Conference Summit
Going through the news headlines as I return from vacation, I can see that it’s more of the same for the SEC: getting pummeled in the press. The latest is a story broken by “Rolling Stone” magazine – of all things – about how the Enforcement Division destroyed thousands of documents when things didn’t pan out on a MUI (“matter under inquiry”). The story broke due to an investigation led by Sen. Grassley – who’s been gunning for the SEC for quite some time – after he learned of revelations by a current Enforcement Staffer who works in the records preservation area of the Division and who’s claiming protection under whistleblower laws.
This excerpt from an article in today’s NY Times tells the story as we know it so far (here’s the WSJ article fyi):
An enforcement lawyer at the Securities and Exchange Commission says that the agency illegally destroyed files and documents related to thousands of early-stage investigations over the last 20 years, according to information released Wednesday by Congressional investigators. The destroyed files comprise records of at least 9,000 preliminary inquiries into matters involving notorious individuals like Bernard L. Madoff, as well as several major Wall Street firms that later were the subject of scrutiny after the 2008 financial crisis, including Goldman Sachs, Lehman Brothers, Citigroup and Bank of America. The S.E.C. is the very agency that is charged with making sure that Wall Street firms retain records of their own activities, and has brought numerous enforcement cases against firms for failing to do so.
The agency’s records were routinely destroyed under an S.E.C. policy, since changed, that called for the disposal of records of a preliminary inquiry that was closed if it did not get upgraded to a formal investigation, according to Congressional records and people involved in inquiries into the matter. The agency believes that both the original policy and the new rules comply with federal document-retention laws. John Nester, an S.E.C. spokesman, said that while the agency was not required to retain all documents, it changed its policy last year regarding destruction of files for “matters under investigation,” the category of initial inquiry by the S.E.C.’s enforcement division that is the subject of the current scrutiny.
Changes were made to the S.E.C. policy after questions about the document destruction were raised in early 2010 by Darcy Flynn. Mr. Flynn, an employee of the S.E.C.’s enforcement division for 13 years, began a new job in January 2010 helping to manage the disposition of records for the division. Mr. Flynn, who continues to work at the S.E.C., has sought protection under federal whistle-blower laws.
Dodd-Frank: Business Groups Targeting Next Batch of Rules to Attack in Court
As I blogged several weeks ago, the DC Circuit’s proxy access decision in the Business Roundtable/Chamber lawsuit could have implications far beyond proxy access. This article from today’s NY Times notes that business groups have been meeting in DC – one meeting was dubbed “Dodd-Frank Excesses” – to determine which rules to haul into court next, with the SEC’s new corporate whistleblower program and a provision surrounding the extraction of oil and natural gas from foreign countries being identified as two potential targets. According to the article, the SEC will be hiring 8 economists over the next 2 years to help with its new burdens during the rulemaking process.
How Much Time Did the SEC Spend on Proxy Access Rulemaking? 21,000 Staff Hours
As I blogged two weeks ago, a trio of House Representatives sought information about how many SEC Staff hours were spent on proxy access rulemaking via this letter. Now, the SEC has responded that 21,000 Staff hours – valued at $2.2 million – were spent writing the rule and $315,000 defending it against a court challenge, as noted in this Bloomberg article.
Yesterday, the PCAOB issued a concept release on auditor rotation and independence, as first warned was coming by Chair Jim Doty in a speech shortly after he arrived at the agency two months ago. This is bound to be quite controversial and it appears that the PCAOB will take its time considering the concept as a roundtable on the topic isn’t scheduled until March ’12. Comments made by some of the newer PCAOB Board Members during the open meeting yesterday indicate that the PCAOB’s inspection staff has found numerous problems with independence that has led to this concept release.
The perceived independence issues associated with a company paying the fees of an auditor who performs the company’s audits were dealt with in Sarbanes-Oxley in ’02 when the lead audit partner and audit review partner were required to be rotated every 5 years. Here’s an excerpt from Board Member Steven Harris’ remarks during the meeting:
Over the years, many alternatives have been considered to further strengthen auditor independence. For example, prominent individuals such as Paul Volcker and Michel Barnier, the European Commissioner for Internal Market and Service, have suggested at various times consideration of “audit-only” firms. Under this concept, in exchange for the statutory franchise given to the audit profession, auditing firms would perform only accounting and audit related services and not provide non-audit services. Others have suggested lengthening the list of prohibited non-audited services. And it has also been suggested that the mandatory tendering of audit contracts could be required at regular intervals.
While some of these or other alternatives may merit further consideration, they do not address the fundamental conflict of interest inherent in the system. The auditor is paid by the company that he or she audits. And, as a natural and inevitable result of that arrangement, auditors know that if they push management too hard, they risk losing the fee not just for the current audit but, potentially, the fees for an unlimited number of audits in the future. In essence, they risk losing an annuity.
And the stat in this excerpt from Chair Doty’s remarks surprised me as I thought changing auditors was fairly rare:
To be sure, when auditors change, there may be a learning curve for the new auditors. But consider this: according to the research firm Glass Lewis, between 2003 and 2006, more than 6,500 public companies, or nearly 52 percent of all public companies, voluntarily changed their auditors. How did auditors and companies manage those changes? What did auditors, and the audit committees that oversee them, do to make sure the new auditors were in a position to provide reasonable assurance in the early years of an engagement? This experience should inform the responses of preparers and auditors to this concept release. The learning curve, and cost-based issues involved in changing audit firms, cannot be fairly described as uncharted waters.
SEC Approves NYSE Rule Allowing Exchange to Favor Certain IR Services
As noted by Dominic Jones in his “IR Web Report,” the SEC’s Division of Trading and Markets recently approved new Section 907.00 of the NYSE’s Listed Company Manual, which will result in the NYSE including information about a suite of “complementary” investor relations services available to listed issuers, including investor relations website and news distribution services from giant Thomson Reuters and shareholder identification services from Ipreo.
Although I didn’t submit a comment letter, I did blog my disapproval of the concept that the NYSE’s rules should favor secondary services offered by the exchange. And I agree with Dominic’s conclusion expressed in this excerpt from his blog:
In its decision, the SEC conceded that by subsidizing the services of some vendors and not others, the NYSE would cause some companies to shift their business to its preferred service providers, but it said that competition between exchanges would lead the NYSE to provide better quality services. The SEC also said it recognized that “some small service vendors may be placed at a disadvantage” by its approval of the rule given that the NYSE contracts only with large vendors capable of providing services to all of its listed companies.
“Nonetheless, the Commission does not believe that the proposal harms the market for the complimentary products and services in a way that constitutes an inappropriate burden on competition or an inequitable allocation of fees, or fails to promote just and equitable principles of trade, in a manner inconsistent with the Act,” it said.
My view is that the SEC’s decision is disappointing as it will lead to a continuation of the broad stagnation we have seen in the US investor relations services market over the past few years.
Smaller IR service providers will continue to struggle to compete against those vendors subsidized by the NYSE. Meanwhile, the big, subsidized vendors will have little incentive to improve their services when no other vendors are large enough to replace them.
Query: How Many Bald Guys Does It Take To…
Just back from vacation and digging out. Enjoyed our time in Seattle, including a visit with the Pacific Northwest Chapter of the Society of Corporate Secretaries to talk social media. Great pic of the three wise bald men, PACCAR’s Kevin Fay; me; and Microsoft’s Peter Krause:
Another aspect of the credit rating removal rulemaking that I blogged about yesterday is the amendment of Securities Act Rule 134 to remove paragraph (a)(17), which permitted the disclosure of a security rating assigned, or reasonably expected to be assigned, by a nationally recognized statistical rating organization (NRSRO) in a Rule 134 notice (or “tombstone” as some like to call it). Rule 134, of course, provides that a communication published after a registration statement with a Section 10(a) prospectus is on file and limited to the Rule 134 content will not be considered a prospectus or free writing prospectus for the purposes of the SEC’s rules.
Rule 134(a)(17) appears to be arguably an innocent bystander in the quest to remove credit ratings from SEC rules and forms prompted by Section 939A of the Dodd-Frank Act, which required the SEC to “review any regulation … that requires the use of an assessment of the credit-worthiness of a security or money market instrument and any reference to or requirements in such regulations regarding credit ratings.” Nonetheless, the SEC believed that the presence of the reference in Rule 134 represented reliance on credit ratings, and ultimately determined that the change would not have a material impact on the information available to investors “because issuers will (as is common now) be able to disclose a credit rating in a free writing prospectus.” In fact, the free writing prospectus is now pretty much the only place where a credit rating can be disclosed in a securities offering, because Dodd-Frank’s repeal of Rule 436(g), as a practical matter, prevents the disclosure of credit ratings in a prospectus (or report incorporated by reference into a prospectus) for the purpose of offering the security.
The SEC did note that the removal of the safe harbor for the credit rating reference did not necessarily result in a communication that included rating information being deemed to be a prospectus or a free writing prospectus, rather the issuer would have to make the determination now based on all of the facts and circumstances. While that statement is helpful, I am not sure if it provides too much comfort in the Rule 134 context, so that by and large I expect that we will say goodbye to ratings in Rule 134 notices come September 2. (Note that the SEC did not rescind or otherwise amend Item 10(c) of Regulation S-K as part of the quest to remove credit ratings, which governs how disclosure of credit ratings should be provided when an issuer elects to include disclosure of credit ratings in an SEC filing)
Testing the Bounds of the Disqualification Waiver
A few weeks back, the SEC denied Xerox Corporation’s request for a waiver of the disqualification provisions of forward looking statement safe harbors found in Securities Act Section 27A and Exchange Act Section 21E, which arose because Xerox acquiree Affiliated Computer Services, Inc. had settled a civil action with the SEC, which subjected Affiliated Computer Services to an order prohibiting future violations of the antifraud provisions of the federal securities laws.
The SEC decided to deny the waiver request on the grounds that the disqualification provisions in the forward looking statement safe harbors did not apply to Xerox, because Xerox acquired Affiliated Computer Services after the violations alleged in the SEC’s action were committed and Xerox did not otherwise become subject to the SEC’s order. This appears to be the first time that the SEC has addressed this issue.
Large Trader Reporting Rules Adopted
With all of the volatility in the markets over the past few weeks, it reminds us that much of the concern coming out of the financial crisis focused on identifying and evaluating systemic risk. A few weeks back, the SEC moved a bit closer to having enhanced insight into market movements with the adoption of the large trader reporting rules. As this Alston & Bird memorandum notes:
The large trader reporting requirements are intended to provide the Commission with data to support its investigative and enforcement activities, as well as to facilitate its ability to assess the impact of large trader activity on the securities markets, to reconstruct trading activity following periods of unusual market volatility, and to analyze significant market events for regulatory purposes. The Commission has had the authority to adopt a large trader regime for 20 years. In response to the market crash of 1987 (and the less severe break of 1989), Congress passed the Market Reform Act of 1990, which, in part, added Section 13(h) to the Exchange Act.3 Section 13(h) specifically authorized the Commission to establish large trader reporting and was intended to provide the SEC with the ability to identify causes of market disruption. The Commission proposed a large trader registration and reporting regime for the third time shortly before the flash crash of May 6, 2010, in which the Dow Jones Industrial Average fell about 900 points and then recovered those losses within minutes. The flash crash and the recent financial crisis prodded the Commission to finally and unanimously adopt these new requirements.
The rule’s effective date is October 2, 2011. Those entities identified as “Large Traders” must comply with the self-identification requirements of Rule 13h-1(b) by December 1, 2011. Broker-dealers must comply with the recordkeeping, reporting and monitoring requirements by April 30, 2012.
In the latest installment of the Dave & Marty radio show, Marty and I are in Manhattan discussing the DC Court of Appeals decision in the proxy access case and the implications for the SEC. We also date ourselves yet again with a discussion of our favorite songs from The Allman Brothers Band.
Upcoming Changes to S-3 Eligibility: Staff Relief Possible?
A few weeks back, Broc blogged about the changes to Form S-3/F-3 eligibility adopted by the SEC in response to Section 939A of the Dodd-Frank Act, which directed the SEC to remove credit ratings from its rules and forms. The changes go into effect on September 2, however the rules provide for a 3 year “grandfathering” period whereby issuers with a reasonable belief that they would have been eligible under the old criteria can continue to use the Form. Under the new criteria, S-3/F-3 is available for:
1. An issuer that has issued (within 60 days of the registration statement filing date) at least $1 billion of non-convertible securities other than common equity ( e.g., debt, preferred), in primary offerings for cash (not exchange offers) registered under the Securities Act (excluding, e.g., Rule 144A, Reg. S offerings) over the last 3 years; or
2. An issuer that has outstanding (again within 60 days of the filing date) at least $750 million of the same securities referenced above; or
3. The issuer is a wholly-owned subsidiary of a WKSI; or
4. The issuer is a majority-owned operating partnership of a REIT that qualifies as a WKSI.
Some have expressed concern that, despite the SEC’s efforts to address commenters’ concerns and keep as many issuers on S-3/F-3 as possible, there are still some investment grade debt issuers who will be excluded going forward, once the grandfathering period comes to an end. We heard from the Staff at the ABA Annual Meeting last week that they would be amenable to considering requests for relief from any issuers who would otherwise lose their status as a result of the changes to the Forms. We also heard from the Staff that issuers relying on the grandfathering provision should generally not be concerned about the need to obtain consents from rating agencies when they are providing required disclosure concerning the reasonable belief that the issuer would have satisfied the investment grade eligibility criteria if it were still in effect (i.e., by referencing the issuer’s rating, the actual or anticipated rating for the securities or the belief that the securities would be rated “investment grade”).
The bottom line here seems to be that the Staff is going to be somewhat flexible in implementing these particular Dodd-Frank Act-mandated rule changes, so give them a call if you have a concern.
Director Pay Climbs a Bit and Shifts More to Equity
More and more these days, I get questions about director compensation issues, perhaps reflecting the trend toward making director pay more complicated than the old days of cash retainers and meeting fees. As noted in this recent study of 2010-2011 director pay conducted by the NACD and Pearl Meyer & Partners, director pay recently rose 5% at larger firms and 20% smaller firms, with an increasing emphasis on equity compensation in the form of full value shares.
Over one year after enactment of the Dodd-Frank Act, the SEC’s whistleblower rules go into effect today, establishing a process for lucky whistleblowers to cash in with bounties of up to 30% of the government’s recovery when cases involve in excess of $1 million. The SEC’s whistleblower website is expected to be updated later today to provide a link to the new Form TCR and FAQs about what the whistleblower rules require with regard to submitting information to the SEC, to submitting a claim for an award under the program and the procedures and considerations in connection with assessing award claims. According to this Reuters article, the SEC Staff has indicated that it will seek to remedy problems with the whistleblower program if they arise.
What will be the hot buttons for whistleblowers? Most likely, alleged Foreign Corrupt Practices Act violations will represent a large portion of whistleblower claims, given the high SEC penalties in those cases and the potential for individuals within an organization to be directly aware of bribes and other potentially illegal conduct. The opportunities are so great that U.S.-based plaintiffs’ lawyers are ramping up their advertising throughout Europe, Asia and Africa in order to bring SEC whistleblowers out of the woodwork. Some plaintiffs’ lawyers have set up websites or retooled their websites to become SEC whistleblower lawyers – here are just a few:
What will the SEC’s whistleblower program mean for companies? At this point it may be too soon to tell, but certainly the specter of whistleblower recoveries puts a premium on (1) having an effective internal reporting program that employees have confidence in, (2) establishing the right tone at the top and (3) educating employees about the internal reporting mechanisms and how they interact with the SEC’s whistleblower rules. Further, every manager in the organization should be versed in the anti-retaliation provisions of the SEC’s whistleblower rules, so that no inappropriate employment actions or threats are carried out when someone either comes forward internally or goes directly to the SEC. Finally, we will be watching how the whistleblower program affects self-reporting by companies to the SEC, as the prospect of highly motivated whistleblower claims may compel companies to “head them off at the pass” by going directly to the SEC first.
The events of the last couple of weeks have inevitably drawn comparisons to the Fall of 2008 (see, e.g., this New York Times article from yesterday), when the bottom fell out of the global financial system and by all accounts we came way too close to the end of the economic world as we know it. Who knows where things will go from here, but there are certainly a few things we can learn from our foggy memories of the 2008 fiasco.
First, things appear to be somewhat different this time – at least for larger companies – because their cash balances are high and leverage is lower, making it easier to weather the storm of volatile markets. In 2008 and 2009, portions of the capital markets were shut down at various times, making it exceedingly difficult for companies to raise capital, turn over maturing obligations, etc.
Second, the dark days of a few years ago taught us the value of having a shelf registration statement on file with the SEC. During and ever since the financial crisis, offerings are generally conducted with as much speed and stealth as can be mustered, because of market volatility and hedge funds that are always looking for a reason to short a company’s stock. Many of the offering techniques that are in vogue today, such as over-the-wall deals and registered directs, generally work best when a shelf registration statement is already on file and a takedown can be done quickly and quietly. Getting a shelf on file when you are a WKSI is best, because you generally want to avail yourself of the advantages of that status, which means that the shelf should be filed before your stock price plummets and you know longer qualify for WKSI status (e.g., $700 million or more of worldwide public float).
And finally, August is just a terrible month to try to do a deal or to have bad stuff happen in the economy and the markets, given that so many traders around the world often decamp for their holiday during August, particularly in the last two weeks of the month. It always strikes me as interesting how such a human element – the overriding desire to take a vacation – can have such a significant impact on the markets as a whole.
Webcast Transcript: “Key Disclosure Policies: The Dangers of Standing Pat”
We have posted the transcript for our recent webcast: “Key Disclosure Policies: The Dangers of Standing Pat.”
Poll: What Would You Do With Your SEC Whistleblower Bounty?
A group of 10 academics submitted a rulemaking petition to the SEC earlier this month, asking the agency to consider adopting rules that would require disclosure of corporate political spending. Activism has driven quite a few large companies to disclose details of political contributions in the last few years, but that trend is apparently not enough for this group which calls themselves the “Committee on Disclosure of Corporate Political Spending.”
To read our take on this proposal, check out the upcoming July-August 2011 issue of The Corporate Counsel. If you are not a subscriber, take advantage of our “Free for Rest of 2011” no-risk trial to The Corporate Counsel.
The Big GAAP/Little GAAP Debate
While the debate goes on over whether the US will ultimately cede authority for setting GAAP to the IASB with a move to IFRS, an equally vehement debate is raging in the US over the future of standard setting for GAAP applicable to private and public companies. Edith Orenstein discusses the latest round of comments on this issue in the FEI Financial Reporting Blog. The Financial Accounting Foundation (FAF) (the body which oversees the Financial Accounting Standards Board, FASB) is considering whether to establish a private company standard setter that is separate and apart from the FASB.
A Blue Ribbon panel recommended earlier this year that an optional set of modifications and exceptions to standard GAAP be established for private companies, however the question of who would actually establish such modifications and exceptions has created controversy, as various groups consider the FASB to be best suited to the task, while others believe that a separate standard-setting body would be preferable. The AICPA and a number of state CPA societies support the idea of setting up a whole new standard setter for private company GAAP, while others such as FEI’s Committee on Private Company Standards suggest a more moderate approach of working within the existing FASB framework.
Of course we have had two standard setters for GAAS for some time, with the PCAOB being the exclusive authority for GAAS applicable to the audits of public companies, while the AICPA continues to establish auditing standards that apply to the audits of private companies. This dichotomy can be somewhat confusing for all of us non-accountants out here (as we also discuss in more detail the upcoming July-August 2011 issue of The Corporate Counsel – so sign up for a free no risk trial today).
More on our “Proxy Season Blog”
Even though the proxy season is over, we still are posting new items regularly on our “Proxy Season Blog” for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– They Held a Revolution and Nobody Came
– Proxy Season: The Latest Voting Results
– More on “Annual Meetings: The Use of Floor Proposals”
– The Best Annual Report of 2011? Acuity’s “Storybook Year”
– Advisory Votes Help Shield Directors From Investor Dissent
