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The Securities Edge

Securities Blog for Middle-Market Companies

Politician, heal thyself

Posted in Bob's Upticks, Corporate Governance, SEC

My favorite quote of the week seems to have gone largely unnoticed, despite the fact that I tweeted about it and told several people about it. The quote, attributed to former Congressman Barney Frank, was “people expect too much from boards”. If you don’t believe me, you can find it here – in the venerable New York Times, no less.

Am I the only one who thinks that the statement, particularly considering the source, is offensive? Am I the only one who thinks that the co-sponsor of the legislation that bears his name, and the author and/or instigator of many of its provisions that imposed extensive obligations on boards, saying that we expect too much from boards is similar to the child who kills his parents throwing himself on the mercy of the court because he is an orphan?

In fairness to Mr. (no longer Congressman) Frank (not that I feel compelled to be fair to him), he is also quoted to have said that the most important oversight of financial companies comes not from its directors but from regulators. If that’s the case, however, why does the eponymous legislation bother to impose so many burdens on boards? Why not leave it all to the regulators (or would that leave the plaintiffs’ bar in the lurch)? Alternatively, why not expand the concept of mandatory say on pay votes (which the Dodd-Frank Act imposes upon most publicly held companies) to everything a board does and do away with the board entirely? Need a new plant? Put it to a shareholder vote! Want to think about entering new line of business? How about a say on that?

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Signed, sealed, delivered – and retained

Posted in records retention, SEC, SEC Enforcement

Record retentionThose of us who have been around long enough to remember paper SEC filings may recall the requirement to file one manually signed copy of Exchange Act filings and, if memory serves me correctly, three manually signed copies of Securities Act registration statements.  When EDGAR was implemented, we hoped to be spared the often last-minute scramble to find an authorized officer to sign a filing, but our hopes were not rewarded; not only were we required to obtain manually signed copies, but we were admonished to retain them for five years.

Lest you think that the SEC doesn’t care about these requirements, a recent enforcement action clarifies that it does.  In the action, the SEC cited MusclePharm Corporation for a variety of serious disclosure and books and records violations.  However, one paragraph of the SEC Order notes that “MSLP failed to maintain signed signature pages for most of its filings with the Commission from 2010 through 2013 as required under Rule 302 of Regulation S-T.  MSLP failed to receive or maintain any manually signed signature pages prior to December 2012.  After December 2012, while MSLP had made over 23 Commission filings, MSLP only received or maintained original signature pages for all signatories on eight filings.”

So be sure to get those signature pages signed and make sure they are retained in your files for the required five-year period.

Pay ratio (unfortunately) coming to public company filings soon

Posted in Disclosure Guidance
Pay ratio disclosures

Photo by Brian Talbot

After much foot dragging, I have finished reading the adopting release for the new pay ratio disclosure rules.  Yes, the release is long (300 pages or so), but adopting releases are always long.  The real reason why it took so long is that the whole concept of pay ratio disclosure just seems silly to me (and apparently to Bob Lamm as well) so I just hoped it would go away.

I am not against finding ways to strengthen the middle class.  Just like I am not against ending the sale of certain minerals in Central Africa that end up funding deadly conflict.  The problem I have is that public companies should not have to bear the complete burden of fixing social ills.  Less than 1% of the 27 million companies in the United States are publicly traded.  And there are plenty of private companies that are larger than most publicly traded companies.  Thus, while we may not agree whether the social goals are worth achieving, I think we can all agree that there are better ways to achieve them than selective enforcement (particularly since the SEC itself has said that the pay ratio will not be comparable from one company to another).  The Securities Edge  has been criticizing the social disclosure movement for some time, but we haven’t yet seemed to have stopped Congress from continuing to go down that path.

So, unless Congress acts to reverse its mandate for public companies to disclose their pay ratios before 2018 (the first year of required disclosure), I suppose we should all start learning how to comply.  Leading practices for calculating the ratio and providing narrative disclosure will develop over the next couple of years, but I have summarized the important parts of the rules in this post:

What is the required disclosure?

Registrants must disclose:

  • The median of the annual total compensation of all employees of the registrant (excluding the CEO)
  • The annual total compensation of the CEO; and
  • The ratio of the median to the CEO’s compensation.

The ratio needs to be expressed as X:1 or X to 1 where “X” represents the CEO’s total compensation and “1” represents the median employee’s salary.  The ratio can also be expressed in narrative form such as: “The CEO’s annual total compensation is X times the median employee’s annual total compensation.”  You can’t Continue Reading

Registered investment advisers and anti-money laundering compliance: Is it practical?

Posted in Financial Institutions
Photo by Nancy Kamergorodsky

Photo by Nancy Kamergorodsky

Earlier this week, the Financial Crimes Enforcement Network (“FinCEN”) proposed a rule that would require investment advisers registered with the Securities Exchange Commission (“SEC”) to establish anti-money laundering (“AML”) programs and report suspicious activity to FinCEN pursuant to the Bank Secrecy Act (“BSA”). FinCEN’s proposed rule would also add “investment advisers” to the general definition of “financial institution,” which, among other things, would require such advisers to file reports and keep records relating to certain transfers of funds. The public comment period for the proposed rule will commence once the proposed rule is published in the Federal Register and will continue for a period of 60 days. In the spirit of public debate, here are a few of our initial thoughts regarding the proposed rule:

  • The rule would require those investment advisers registered with the SEC to comply with its obligations. Generally speaking, only those investment advisers who manage $100 million or more in client assets must register with the SEC. This, in addition to the laundry list of exemptions from the SEC’s registration requirements, appears to leave a gaping whole through which potential money launderers may nonetheless access the United States financial system through an investment adviser, i.e., through small, midsize, or other unregistered advisers.
  • Most, if not all, investment advisers regularly work with financial institutions already subject to BSA requirements, such as when executing trades through broker-dealers to purchase or sell client securities, or when directing custodial banks to transfer assets. And if FinCEN’s August 2014 proposed rule requiring financial institutions to identify and verify the beneficial owners of legal entity customers comes to fruition, it may, in many cases, expand the scope of customer due diligence for banks and broker dealers with respect to their investment adviser customers and, in turn, the customers of their investment adviser customers. Thus, in many ways, imposing BSA compliance obligations on registered investment advisers might be unnecessarily duplicative.
  • FinCEN’s proposed rule would not require registered advisers to develop and maintain a customer identification program (“CIP”) or comply with certain other AML requirements applicable to financial institutions. While FinCEN has, in other cases, omitted CIP requirements for certain financial institutions, it did not do so with respect to broker dealers and, given FinCEN’s emphasis on investment advisers’ ability to appreciate a broader understanding of their clients’ movement of funds through the financial system, a CIP might actually be a key to accurately capturing and utilizing that broad understanding.
  • FinCEN is proposing to delegate its authority to examine investment advisers for compliance with these requirements to the SEC. Even assuming the SEC isn’t busy enough already, given the issues discussed above, the increase in supervisory and enforcement burden on the SEC may not be justified.

Feel free to join the debate, and please contact us if you have any questions regarding the proposed rule, the BSA or AML compliance generally. After the close of the public comment period, the proposed rule will be subject to additional review and revision based on public comments before it is finalized by FinCEN.

Pay ratio disclosure: Myths and madness

Posted in Bob's Upticks, Compensation, Corporate Governance, Disclosure Guidance, SEC

It’s done. On August 5, the SEC adopted final rules that will require publicly traded companies to disclose the ratio of the CEO’s “total compensation” to that of the “median employee.” We’re still wending our way through the massive (294 pages) adopting release, but one piece of good news (possibly the only one) is that it appears that pay ratio disclosures won’t be needed until 2018 for most companies.

I’ve already posted my views on this rule (see “CEO pay ratios: ineffective disclosure on steroids”), so it’s no surprise that I’m not happy. However, what is surprising are the myths and madness that the mandate has already created. First, there’s the “median employee,” who may be a myth in and of him/herself. But that’s not all; the media (notably The New York Times) have begun to tout the rule and make all sorts of predictions about how it will impact CEO pay, many of which involve myths and madness of their own.

Myth: In an August 6 column, Peter Eavis wrote about the rule, saying “the ratio, cropping up every year in audited financial statements, could stoke and perhaps even inform a debate over income inequality”. Really? In the audited financial statements? I haven’t finished reading the rule, despite its being such a page-turner, but I didn’t see that in there and don’t think I will. Someone better tell the audit firms – and also tell Mr. Eavis that the ratio is not auditable.

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Why I hate “best practices”

Posted in Bob's Upticks, Corporate Governance

Governance wonks can rest easy. In fact, we can all go home and think about another career. The reason? CalSTRS – California State Teachers’ Retirement System – has issued a “fact sheet” entitled “Best Practices in Board Composition”.

It’s interesting that CalSTRS calls it a fact sheet, since much if not most (if not all) of what it says is opinion, belief or aspiration rather than fact. However, I suppose calling it an “opinion sheet” or an “aspiration sheet” would have resulted in fewer hits.

The document lists five “best practices” (though the fifth has four sub-items; perhaps that means there are nine best practices?). No indication is given as to whether the practices are listed in order of their best-ness. However, it’s notable that the first practice is “independent leadership” – in other words, having “an independent chair that is separate from the Chief Executive Officer”.   I’ve done lots and lots of research on this point, and the most that can be said is that there is no conclusive evidence of any connection between an independent board chair and performance. Again – that’s the most that can be said. (If you don’t believe me, take a look at this Yale study.)

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 Summer doldrums in DC? Not so much!

Posted in Accounting, Bob's Upticks, Compensation, Disclosure Guidance, PCAOB, SEC

For those who think nothing ever gets done in Washington, last week must have been a challenge. From outward appearances, both the SEC and the PCAOB seem to be working overtime, possibly in order to ruin our holiday weekend or at least lay some guilt on us for not spending the weekend reading what they’ve put out.

First, on July 1 the SEC published rule proposals on the last of the so-called Dodd-Frank “four horsemen” (or, as the SEC Staffers called them, the “Gang of Four”) compensation and governance provisions – specifically, clawbacks. It’s too soon for even nerds like me to have gone over the proposed rules in any detail, but at first blush they disappoint in a few respects. Among other things, they appear to call for mandatory recoupment of performance-based compensation whenever the financials are restated, without regard to fault or misconduct; even a “mere” mistake will trigger the clawback. Moreover, neither the board, nor the audit committee, nor the compensation committee will have any discretion or any ability to consider mitigating circumstances. Last (for now), they do not seem to provide any exemptions or relief for small companies, emerging growth companies or the like. Interestingly, equity awards that are solely time-vested will not be considered performance-based compensation for purposes of the proposed rules. Of course, these are only proposed rules, and they will eventually take the form of exchange listing standards rather than SEC rules, but the basic approach is absolute and draconian, and it’s difficult to envision them changing very much.

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A dispatch from the front lines (with SEC Chair White telling us to wave the white flag)…

Posted in Bob's Upticks, Corporate Governance, No-action letters, SEC, Shareholder proposals

Last week I attended the National Conference of the Society of Corporate Secretaries and Governance Professionals in Chicago. It was a great conference – wonderful, substantive programs and a chance to catch up with many friends and colleagues.

With some exceptions.

One exception was the opening speech by SEC Chair Mary Jo White. Now don’t get me wrong – I’m a fan (particularly when Senator Warren and others go after her – as in my last post). Among other things, I love the fact that she speaks clearly; unlike so many others in Washington, whose statements make me think I know what it must have been like to visit the Delphic Oracle, she’s perfectly straightforward about her views.   It was her views – or at least most of them – that I didn’t like.

Chair White addressed four topics, and on all but one of them she basically told the corporate community to give up. Her topics and views can be summarized as follows:

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SEC charges unlicensed broker/dealers in EB-5 Program

Posted in SEC Enforcement
Courtesy of JasonHerbertEsq

Courtesy of JasonHerbertEsq

The SEC continued its program of enforcement actions in connection with the Federal EB-5 Program by bringing charges against two firms which raised approximately $79 million for EB-5-related situations. This matter is a little different in that it is the first SEC action to be brought in connection with unregistered broker-dealer activities in the EB-5 context. This action is important and should be reviewed by all participants in the EB-5 arena because it demonstrates the SEC’s willingness to exercise its enforcement powers in connection with these immigration-related matters. It also shows the SEC’s willingness to partner with other regulatory agencies (in this case the U.S. Citizenship and Immigration Services (CIS)). The SEC’s action is summarized in its June 23 press release.

The Federal EB-5 Immigrant Investor Program is designed to provide a way for foreign nationals to achieve legal residency in the U.S. by investing in certain approved U.S.-based businesses or designated regional economic development centers. The requirement for investment in a regional economic development center is generally less than the amount required to invest in a U.S. business under this program.

According to the SEC’s Order, Ireeco LLC and a successor company, Ireeco Limited, acted as unregistered broker-dealers in raising funds from a number of foreign investors. According to the Order, these companies promised to help investors locate the best regional center in which to make their investments, but they allegedly only directed these investors to a small number of regional centers. These regional centers allegedly made payments to the Ireeco companies once the CIS granted certain approvals for conditional residence to the investors. The SEC alleged that the two Ireeco companies raised approximately $79 million in this manner

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More Positive Regulation A News

Posted in Capital Raising
Photo by Patricia J. Lovelace © All rights reserved

Photo by Patricia J. Lovelace © All rights reserved

This week, the SEC published a series of new Compliance and Disclosure Interpretations (“CDIs”) related to the newly revised Regulation A, which became effective on June 19, 2015. While many of the new CDIs addressed procedural and interpretational issues under the new rules, there was an important development that could make Regulation A that much more useful for companies.

The positive news comes in the form of the SEC staff’s response to Question 182.07 which asks whether issuers would be able to use Regulation A in connection with merger or acquisition transactions that meet the criteria for Regulation A in lieu of registering the offering on an S-4 registration statement. Based on the SEC’s final adopting release, it did not appear that Regulation A would be available for use in these types of business combination transactions. However, the interpretation published yesterday clarifies that issuers may, in fact, use Regulation A in connection with mergers and acquisitions. The one exception is that Regulation A would not be available for business acquisition shelf transactions that are conducted on a delayed basis.

This is a very positive development for issuers that want to issue equity in connection with acquisitions of other companies, but do not wish to become a public reporting company under the Exchange Act. Previously, these issuers had very few Continue Reading