The ink is barely dry from the FAST Act – which had been tucked into a transportation bill and the mashup of numerous bills that had been floated in the US House of Representatives last year – than the House passes three more bills that would changes the federal securities laws, as noted by Andrew Kuettel in this blog. Also see this MoFo blog – and this other blog by Andrew Kuettel…
By the way, Mike Gettelman has been posting a bunch of notes from the recent San Diego conference in his blog – including some analysis of the FAST Act…
Yahoo! Compensation Litigation: Parallels to Disney Case
Here’s a blog by Stinson Leonard Street’s Steve Quinlivan: The Delaware Court of Chancery has issued an opinion on a Section 220 demand made against Yahoo! No complaint has yet been filed, and although Vice Chancellor Laster speculates on some inferences that can be drawn, no one has proven anyone has done anything wrong.
The allegations in the case have eerie parallels to the Disney compensation litigation. The Vice Chancellor notes:
Mark Twain is often credited (perhaps erroneously) with observing that history may not repeat itself, but it often rhymes. The credible basis for concern about wrongdoing at Yahoo evokes the Disney case, with the details updated for a twenty-first century, New Economy company. Like the current scenario, Disney involved a CEO hiring a number-two executive for munificent compensation, poor performance by the number-two executive, and a no-fault termination after approximately a year on the job that conferred dynastic wealth on the executive under circumstances where a for-cause termination could have been justified. Certainly there are factual distinctions, but the assonance is there.
While noting the decision does not hold the Yahoo directors breached their fiduciary duties, the Vice Chancellor observed:
Based on the current record, the Yahoo directors were more involved in the hiring than the Disney directors were, but the facts still bear a close resemblance to the allegations in Disney III. The directors‘ involvement appears to have been tangential and episodic, and they seem to have accepted Mayer‘s statements uncritically. A board cannot mindlessly swallow information, particularly in the area of executive compensation: ―While there may be instances in which a board may act with deference to corporate officers‘ judgments, executive compensation is not one of those instances. The board must exercise its own business judgment in approving an executive compensation transaction.‖ Haywood v. Ambase Corp., 2005 WL 2130614, at *6 (Del. Ch. Aug. 22, 2005). Directors who choose not to ask questions take the risk that they may have to provide explanations later, or at least produce explanatory books and records as part of a Section 220 investigation.
Transcript: “Pat McGurn’s Forecast for 2016 Proxy Season”
We have posted the transcript for the webcast: “Pat McGurn’s Forecast for 2016 Proxy Season.”
This Cooley blog recaps this letter from BlackRock’s CEO to 500 companies about being wary of short-termism (as noted in this Davis Polk blog, the letter also urges companies to scrap quarterly earnings guidance). And here’s an excerpt from this CNBC article:
The world’s largest asset managers have held secret summit meetings to hammer out proposals for improving public company governance to encourage longer-term investment and reduce friction with shareholders. Jamie Dimon, chief executive of JPMorgan Chase, and Warren Buffett convened the sessions with the heads of BlackRock, Fidelity, Vanguard and Capital Group to work on a new statement of best practice that would cover the relationship between U.S. companies and their investors.
Also see this new study about short-termism by a trio of professors…
Transcript: “Proxy Drafting – Mid-Cap & Smaller Company Perspective”
We have posted the transcript for the webcast: “Proxy Drafting: Mid-Cap & Smaller Company Perspective.”
Political Spending: Court Dismisses Suit Against SEC for Not Acting on Rulemaking Petition
In practice, however, very few rights actually attend this right to petition, as was illustrated by the U.S. District Court’s recent ruling in Silberstein v. United States SEC, 2016 U.S. Dist. LEXIS 284 (D.D.C. Jan. 4, 2016). The plaintiff in that case sued the SEC after it failed to take any action in response to his rulemaking petition for over a year. The plaintiff complained that the SEC had both failed to respond and had effectively denied his petition.
With respect to both of these claims, Judge Rosemary M. Collyer ruled that the plaintiff was in the wrong court because Section 25(a)(1) of the Securities Exchange Act vests review of final orders of the SEC in the Court of Appeals, not the District Courts. Judge Collyer also found that SEC did not deny the petition; it merely failed to respond to it. Consequently, the plaintiff had failed to state a valid claim under the Administrative Procedure Act.
NASAA Proposes Rule for Tier 2 Regulation A Offerings
Here’s this blog from Morrison & Foerster’s Joanne Sur and Ze’-ev Eiger:
On January 27, 2016, the Corporation Finance Section of the North American Securities Administrators Association (NASAA) requested comments on a proposed model rule and uniform notice filing form aimed at simplifying the state notification requirements for Regulation A Tier 2 offerings. One of the most significant concerns regarding the proposed amendments to Regulation A was the requirement to comply with state securities laws. At the time the amendments to Regulation A were proposed, there was no coordinated review process by the states for Regulation A offerings. The final rules amending Regulation A, adopted on March 25, 2015, provide that Tier 1 offerings (for smaller offerings up to $20 million in any 12-month period) will remain subject to state securities law requirements, but Tier 2 offerings (for offerings up to $50 million) will not be subject to state review if the securities are sold to “qualified purchasers” or listed on a national securities exchange. Although the final rules define the term “qualified purchaser” in a Regulation A offering to include all offerees and purchasers in a Tier 2 offering, states continue to have authority to require filing of offering materials and enforce anti-fraud provisions in connection with a Tier 2 offering.
The NASAA’s proposed rule would require Regulation A Tier 2 issuers to file basic information about the issuer and the offering on a short notice form and pay a filing fee that can be used for filings in multiple jurisdictions. A consent to service of process also is included in the notice form so that a separate Form U-2 filing for consent to service of process for each applicable jurisdiction is not necessary. Issuers also can incorporate by reference into the notice form those documents filed on the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. Issuers would be required to submit the notice form at least 21 calendar days prior to the initial sale and the notice form would be effective for 12 months from the date of filing. Issuers can amend or renew the notice form for an additional 12-month period if the same offering is continued.
If you’re someone that spends any time reviewing the lists of comment letters on the SEC’s proposed rules, you may notice that occasionally those lists have a “memo to the file” indicating that a group has met with a SEC Commissioner about that specific proposal. Here’s an example of what such a memo looks like. This begs the question: “what is the rule that requires the SEC to post a memo reflecting that a meeting between a SEC Commissioner and someone happened over a proposal?”
This is a tricky one. It’s not really a rule that causes these “memos to the file.” Rather, it’s an interpretation from the SEC’s Office of General Counsel that the Administrative Procedures Act requires a discussion of a pending rule to be memorialized for the comment file.
Arguably, if the discussion sticks to the four corners of a comment letter submitted by the meeting counterparty, no memo is required (and no memo is required for discussions not related to a proposed rule). Since there is no rule, practice among the SEC’s Divisions, Offices and Commissioners varies in terms of how meticulous they document these meetings. Said differently, not every meeting is reduced to a memo – there might not be anything in the comment file about some meetings. So to answer the question posed above: “No rule, just practice varies by Commissioner.” And practice varies by federal agency – the CFTC is very meticulous about posting memos for all outside meetings. Thanks to Scott Kimpel of Hunton & Williams for his wisdom!
Personally, I remember when they first started posting the memos. I have always thought they were silly since they don’t say anything – nor should they. I think the Commissioners should be allowed to talk to folks to become more knowledgeable about rulemaking and not have it broadcast. But see this blog by Keith Bishop, who doesn’t like these ex parte meetings…
Recently departed SEC Commissioner Dan Gallagher has joined former Commissioners Atkins & Casey to work at Patomak Global Partners, as noted in this WSJ article…
Webcast: “Activist Profiles & Playbooks”
Tune in tomorrow for the DealLawyers.com webcast – “Activist Profiles and Playbooks” – to hear Bruce Goldfarb of Okapi Partners, Damien Park of Hedge Fund Solutions and Renee Soto of Sard Verbinnen identify who the activists are – and what makes them tick.
DTCC Explores Blockchain Technology
As noted in this blog by Steve Quinlivan, the Depository Trust & Clearing Corporation – known as “DTCC,” whose subsidiary that keeps book-entries is known as “DTC” – issued this white paper examining the use of blockchain technology to settle trades…
Recently, a member claimed that he heard that the SEC’s Public Reference Room was closed. I was surprised to hear that – so I paid a visit to find out that it indeed still exists. It does – albeit it’s now subsumed into the SEC’s library, with daily hours reduced to 10 am – 3 pm.
Of course, the importance of the Public Reference Room has greatly diminished over time. Before Edgar came online, that was the place to go to obtain SEC filings. There were times when there was a huge line to merely gain access to it – and it was often bedlam as described in this NY Times article from 1982. And here’s a GAO report from 1989 about how to improve its operations – remember microfiche! Here’s a pic of the room from 1937. And even when Edgar first started, there were many SEC-related documents that could be found only there.
But at this point, it’s more of a historic relic as information is readily available online, for free or a fee. In fact, the Public Reference Room now consists of what essentially is a one-person office with a solitary filing cabinet in it, filled with Form 144s. And if the SEC eventually requires the electronic filing of those forms (which Jesse Brill has urged for quite some time in The Corporate Counsel and more recently in this rulemaking petition), I imagine the Public Reference Room will truly be history. Please send your memories of the place – I won’t share without your permission.
How’s the SEC’s Library Looking?
I did visit the SEC’s library, which always has been one of my favorite spots. How many of the old-timers out there remember the library being jammed with both Staffers and visitors? And more than one Staffer perhaps getting a little shut eye? A nice quiet place for a nap. Send me your fond memories (and I won’t attribute unless you want it).
Getting in there is not as simple as the old days, when you could just walk in off the street. You still can walk in off the street – but you first must go through security and then wait in the Visitor’s Office until a librarian comes to fetch you. But it’s worth the trip! Of course, the library’s staff spends most of its time managing the numerous electronic resources available to the entire SEC – so the book collection is not visited often. It’s more of a museum. But for securities law nerds, it’s full of classic resources.
An exclusive group of heavyweights is chosen to deliberate over an obscure, yet crucial, policy matter. Two players who didn’t make the membership cut take offense, and spurn an invitation to join the discussion. It’s the stuff of classic Washington power politics intrigue. In this case, the tussle over the shape of an advisory panel has set up a behind-the-scenes tiff between the country’s top markets regulator – the Securities and Exchange Commission — on the one side, and two of the country’s biggest exchanges — the New York Stock Exchange, and Nasdaq – on the other.
The two exchanges are so upset the SEC didn’t offer either of them a seat on the agency’s Equity Market Structure Advisory Committee that they have spurned offers by the panel to participate in policy deliberations held by its members behind closed doors, according to people familiar with the matter.
Our February Eminders is Posted!
We have posted the February issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Spanking brand new. By popular demand, this comprehensive “Materiality Handbook” covers a wide range of scenarios, from how 8-K, press releases and Reg FD to 10-Ks and 10-Qs and securities offerings. This one is a real gem – 32 pages of practical guidance – and its posted in our “Materiality” Practice Area.
The FASB’s “Materiality” Rulemaking: Comments So Far
The two FASB proposals for determining materiality continues to stir controversy. For example, these proposals have raised the ire of investors, including the SEC’s Investor Advisory Committee (see this comment letter from CII and this NY Times column). In its proposals, the FASB has said materiality is a legal concept – and in essence, isn’t an accounting concept. The latter is debatable as many courts have cited to the FASB’s concept of materiality in their decisions – and materiality has been discussed in both legal cases and in the accounting literature (eg. SAB 99). Here’s the comments on the FASB’s proposal so far – check out this one from Jack Ciesielski.
Audit Committees: Regulators Change Bank Duties
This blog by Steve Quinlivan notes how the Federal Reserve, FDIC and OCC recently issued an advisory to indicate their support for the principles in Parts 1 and 2 of the Basel Committee on Banking Supervision’s March 2014 guidance on “External audits of banks” referred to as the “BCBS external audit guidance.” Steven notes that Matt Kelly has written two blogs about the advisory, including this one about the practical implications of it…
Check out this blog by Mike Gettelman to hear what Delaware Chief Justice Leo Strine said this week at the San Diego conference…
Here’s something from Abby Jones, who recently retired from QEP Resources as corporate secretary:
Investor Relations and corporate governance teams increasingly are receiving investor questions about ESG matters. What should these teams do if they receive a call or letter?
How We Got Here – ESG stands for Environmental, Social and Governance. ESG has become shorthand for investment methodologies that consider sustainability. The ESG investment theory posits that considering ESG factors offers portfolio managers added insight into the quality of a company’s management, culture, and risk profile. ESG investors want companies to increase their disclosure of environmental, social and governance information so that investors can make investment decisions with that information in mind.
In February 2010, the SEC issued an interpretive release titled “Commission Guidance Regarding Disclosure Related to Climate Change.” In response, few companies provided climate change disclosure in their 10-Ks. Fearing the SEC guidance was inadequate, advocacy groups including the Global Investor Coalition on Climate Change, the Climate Disclosure Standards Board, and the Sustainability Accounting Standards Board issued carbon asset risk disclosure guidelines.
And some sustainability advocacy groups – such as Ceres – claim that most companies have failed to provide meaningful carbon asset risk disclosures in response to these guidelines. In order to obtain information, some large investors with ESG goals have begun to contact investors directly. Hence the calls.
Who is Calling Whom? – Some large investors such as state pension funds and large institutions with specialized funds have ESG teams devoted to gathering ESG information. Their first point of contact is typically someone in Investor Relations or the Corporate Secretary’s department.
What Do Investors Want to Know? – The information these investors seek can be very specific. For example, some investors have recently asked for greenhouse gas (GHG) emission totals, plans to submit data to the Carbon Disclosure Project, internal GHG emission targets, plans to adopt a corporate sustainability plans, and other related data. Those asking the questions are often well-informed about the subject matter and the industry involved.
What Should I Do Upon Receiving a Call or Letter?
Here are my suggestions:
1. Make sure all internal stakeholders are aware your company has been contacted. This will generally include Investor Relations, the Operations and/or the Health Safety and Environmental (HSE) team, the governance team, the CEO and CFO. Obviously, the list will vary depending on the organization.
2. Determine whether any of the information is proprietary, and your company’s willingness to release it, whether narrowly or broadly.
3. Determine whether your company has the information sought, and whether you measure it the same way the requesting investors do.
4. Ascertain which department(s) are responsible for gathering and maintaining the information.
5. Put together a working group to assemble the data to be released and to answer the policy questions.
6. Decide whether your company wants to provide the information just to the investor who requested it – or more broadly.
7. Set up a time to talk with the investor representatives. Even if your company plans to broadly disseminate the information, you should take the time to speak with the investors who contacted your company.
8. If you plan to disclose to just the individual investors, review all data you plan to provide with legal counsel to ensure you do not run afoul of Regulation FD. Have that counsel present during the call in case the answer to a question prompts disclosure of additional information.
9. If you plan to disclose the information more broadly, work with the Legal Department Investor Relations, Financial Reporting, and Corporate Communications to ensure adequate and accurate disclosure.
10. Have employees who understand the subject matter on the phone for the call. They are best qualified to have these discussions – and to answer specific questions.
11. If you have good facts to tell, by all means tell them. Investors want you to answer their questions – but in my experience they also like to hear about innovative processes your company has developed to advance ESG goals. Don’t be afraid to go “off topic” to provide good news.
Examining Carbon Reduction ROI & Competitive Positioning
Here’s a great blog by Pam Styles that analyzes disclosures companies have made about their ROI when it comes to carbon reduction initiatives. It includes some good sample purchasing company disclosures…
Transcript: “Audit Committees in Action: The Latest Developments”
We have posted the transcript for our recent webcast: “Audit Committees in Action: The Latest Developments.”
In an insider-trading case that will be closely watched until it is decided before the end of June, the U.S. Supreme Court granted certiorari to decide critical open questions about what is required to establish insider trading by a remote “tippee”—specifically, what kind of personal benefit must a “tipper” receive, and what knowledge of that benefit must the “tippee” have, for a conviction or sanction to stand.
The case is Salman v. United States, No. 15–628, and it involves a criminal defendant who traded on the basis of stock recommendations given to him by the brother of a Citigroup investment banker. The banker had given material nonpublic information about pending M&A deals as a gift to benefit his brother, who in turn gave the information to the defendant, Salman. Salman was convicted, and on appeal, he urged the Ninth Circuit to follow the requirements adopted by the Second Circuit in 2014 in United States v. Newman: that the government must prove that a remote tippee like Salman knew of the “personal benefit” that the original tipper received in exchange for the tip; and that the benefit must be “objective, consequential, and represent at least a potential gain of a pecuniary or similarly valuable nature.” Affirming Salman’s conviction, the Ninth Circuit refused to follow Newman, and held that it was sufficient for the government to establish that the tipper had made “a gift of confidential information to a trading relative or friend.” In so holding, the Ninth Circuit created a significant circuit split over the proper scope of remote tippee liability for insider trading.
To resolve this conflict, the Supreme Court must revisit its 1983 decision in Dirks v. SEC. Dirks held that, to establish tippee liability, the government must show, first, that the tipper of inside information “personally will benefit, directly or indirectly, from his disclosure,” for “[a]bsent some personal gain, there has been no breach of duty”; and, second, that the “tippee knows or should know that there has been a breach.” The Ninth Circuit in Salman and the Second Circuit in Newman each grounded their decisions in Dirks, but drew divergent lessons from it.
The Court’s eventual answer will define the outer boundaries of insider trading liability in future cases. But as we advised in our memo on Newman, whatever the Court’s answer turns out to be, corporations and financial institutions that have established compliance policies and systems to prevent the misuse of confidential information by their employees should continue to maintain, and vigilantly enforce, such controls. Although Salman may well reshape the outer boundaries of the law in this area, the core proscriptions against disseminating material nonpublic information will remain firmly in place, and as the recent In the Matter of Marwood Group Research proceeding illustrates, companies can face significant liability for failing to maintain robust systems and procedures to prevent the misuse of confidential information.
XBRL: SEC Staff Updates FAQs on Calculations
Yesterday, the SEC’s Division of Economic & Risk Analysis updated these FAQs on XBRL calculations. I will never read them personally…and thankfully…
The federal government in DC is quasi-open today – including the SEC – due to the weekend snow storm. There is a 3-hour delay for federal DC workers – with an option for unscheduled telework or leave…
By the way, don’t forget the annual ASECA dinner for SEC alumni is on Friday, February 19th in DC. You don’t have to be an alum to attend. I won’t be there as I’ll be on vaca but I can say that the cocktail party is always fun beforehand…
As noted in this memo, in a speech delivered last month at the AICPA national conference, SEC Chair White suggested that the SEC will continue to scrutinize the use of financial measures that do not conform with GAAP. Also see Randi’s blog today in “The Mentor Blog” about an uptick on the number of comments related to non-GAAP measures…
The federal government in DC is still closed today – including the SEC – due to the weekend snow storm. See my earlier blog about how this might impact the processing of your filings (& what you can do if you have a deal that must go forward now).
– FAQ #15: Problematic Pay Practices & Equity Plans – Will consider three-year average concentration ratios above 30% for the CEO – or above 60% for the NEOs in the aggregate – as a signal that an equity plan is not broad-based
– FAQ #59: Externally-Managed Issuers – More details about the minimum level of disclosure required to avoid an automatic “against” recommendation
– FAQ #61: Subsequent event handling – More details about how ISS will evaluate agreements or decisions subsequent to the fiscal year covered by the CD&A
Whistleblowers: SEC Grants $700k Award to Expert Outsider
As reflected by this recent SEC whistleblower award, the SEC is willing to provide an award to someone outside the company if they can provide useful information…
Webcast: “Alan Dye on the Latest Section 16 Developments”
Tune in tomorrow for the Section16.net webcast – “Alan Dye on the Latest Section 16 Developments” – to hear Alan Dye of Section16.net and Hogan Lovells discuss the most recent updates on Section 16, including new SEC Staff interpretations and Section 16(b) litigation.
In response to this new GAO report on board gender diversity, Rep. Carolyn Maloney (D-NY) sent a letter to SEC Chair White earlier this month urging amendments to the proxy statement rules to require that companies disclose each board nominee’s gender, race, and ethnicity – as was proposed by nine large public pension funds in a March 2015 petition to the SEC.
That petition seeks this amendment to Item 407(c)(2)(v) of Regulation S-K (proposed new text underlined):
Describe any specific minimum qualifications that the nominating committee believes must be met by a nominating committee-recommended nominee for a position on the registrant’s board of directors, and describe any specific qualities or skills that the nominating committee believes are necessary for one or more of the registrant’s directors to possess. When the disclosure for this paragraph is presented in a proxy or information statement relating to the election of directors, these qualities, along with the nominee’s gender, race, and ethnicity should be presented in a chart or matrix form.
The petitioners describe the current diversity disclosure requirement (Item 407(c)(2)(vi)) of Regulation S-X) as inadequate to determine racial and ethnic and even gender diversity in certain cases, but view it as complementary to their suggested approach.
Here are the key findings of the GAO study, which was prompted by Rep. Maloney’s request in May 2014:
In 2014, women comprised about 16% of board seats in the S&P 1500 – up from 8% in 1997
Even if equal proportions of women and men joined boards each year beginning in 2015, it could take more than four decades for women’s representation on boards to be on par with that of men’s.
Even if every future board vacancy were filled by a woman, the GAO estimated that it would take until 2024 for women to approach parity with men in the boardroom.
The GAO identified various factors that may hinder women’s increased representation among directors. These include boards not prioritizing recruiting diverse candidates; few women in the traditional pipeline to board service—with CEO or board experience; and low turnover of board seats
Most stakeholders interviewed supported improving SEC disclosure requirements on board diversity.
The U.S. lags behind other industrialized nations, including Australia, Canada, the UK, Germany and Norway – where serious, concerted efforts have been made to address discrimination against women in the board room.
Among the potential strategies identified in the report for increasing board gender diversity in addition to expanded disclosure requirements are:
– Requiring a diverse slate of candidates to include at least one woman
– Setting voluntary diversity targets
– Expanding board searches beyond the traditional pool of CEO candidates
– Expanding board size to include more women
– Adopting term or age limits to address low turnover
– Conducting board performance evaluations
Rep. Maloney is a senior member of both the House Financial Services Committee (where she serves as Ranking Member of the Subcommittee on Capital Markets) and House Oversight and Government Reform Committee, and Ranking House member of the Joint Economic Committee.
Board gender diversity improved among Fortune 1000 companies on the 2020 Women on Boards’ recently released 2015 Gender Diversity Index. The GDI’s 842 companies consist of the Fortune 1000 companies that remain active since the organization’s tracking began in 2011 based on the 2010 Fortune 1000 list.
Key findings of this year’s report include:
Women now hold 18.8% of board seats – an increase from 17.7% in 2014 and 14.6% in 2011. This compares to 17.9% of board seats on the 2015 Fortune 1000 list – a lower percentage than the GDI Index due to the fact that the majority of new companies are smaller and smaller companies have less gender diverse boards, as well as the fact that companies that drop off the GDI (due to, e.g., M&A, bankruptcy) tend to have one or no women.
Women gained 75 board seats in 2015 – an increase from 52 board seats gained in 2014.
Number of Winning “W” Companies (greater than 20%) has increased to 45%, compared with 40% last year. The number of Zero “Z” Companies (no women) continues to decline, to 9% this year, compared with 11% in 2014.
Percentage of women on boards has increased in all sectors, but five sectors have increased to over 20%: Consumer Defensive, Financial Services, Healthcare, Technology, and Utilities.
We continue to post new items daily on our blog – “The Mentor Blog“ – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Director Exit Interviews
– Data Breach Derivative Suit Protection: Action Items
– How to Calmly Effect Emergency Succession
– Non-GAAP Disclosure Compliance Tips
– Redefining the Board’s Role in Strategic Planning