As some of us contemplate which disclosure rules we’d like to do away with, others are thinking about new rules that would require more disclosure. One possible area of rulemaking relates to disclosure of political contributions. Regardless of one’s views of the merits of such disclosure, significant and vocal groups of shareholders advocate it, and for that reason alone it’s not something that companies (or regulators) can blithely ignore.
What I don’t understand is why those who are pressing for such disclosure seem to believe not only that it is imperative, but also that it must be included in Exchange Act reports, such as 10-Ks or 10-Qs. To the extent (albeit limited) that any securities lawyers are OK with political contributions disclosure in the first place, the insistence upon including it in a 10-K or 10-Q is a major turn-off, because doing so would lengthen those already voluminous reports and, more importantly, would subject a company to Exchange Act liability.
I’ve spoken to one of the principal advocates of such disclosure – who, by the by, is a smart and decent man – about this insistence. I asked why, for example, he’d oppose posting the information on a company’s website, or including it in a supplemental report (both of which are the current norms for such disclosure) outside the framework of the Exchange Act. He countered by saying, first, that only an SEC rule would require all public companies to provide the information and that only an SEC rule would set universal disclosure standards. I disagree; it seems to me that both of those goals could be achieved through industry standard-setting or exchange listing standards. But even if he’s right and the SEC were to impose requirements, that doesn’t mean that the disclosure should have to be in an Exchange Act report. No offense to my smart and decent friend, but I’m still waiting for an answer.
As we approach disclosure “reform” with hopes that the web will offer us some respite from ever-longer SEC filings through more “layered” disclosure, much of it posted on the web, and not all of which needs to be printed or “filed” or even “furnished,” it seems anomalous if not downright ill-advised to insist upon this particular push to make our filings look more and more like doorstops. The good news is that thus far the SEC has shown little or no interest in rulemaking in this area, but time will tell.
It’s not for nothing that I’m a securities lawyer. I sincerely believe in the need for and efficacy of full and fair disclosure, both professionally and personally. That’s one of the many reasons why I have been advocating disclosure reform – or, as we now call it, “effective disclosure” – to assure that important matters are disclosed, and that unimportant matters need not be.
So it’s not surprising that I’m upset about something that happened recently. I attended a program at which a representative of a major institutional investor said that his firm just doesn’t have time to read the proxy statements of the companies in which the firm has invested. I’ve heard this song before in various guises – for example, one major institution told me a few years ago that the most they’d ever spend reading a 100-page proxy statement was 15-20 minutes – but for some reason the statement I heard recently really bothered me.
Why do securities lawyers spend most of their waking hours, and many of the hours when they should be sleeping, trying to provide investors with the information they need to make important decisions? (And, for the cynics out there, I’ve never heard a securities lawyer say anything like “How can we hide this?”) Why do companies spend untold amounts of money paying their lawyers to do that? More important, why is it acceptable for major investors to say that they don’t read their investees’ disclosures? Does it ever occur to them that they may be in violation of their legal and ethical obligations to their clients by blowing off the obligation to read those disclosures and voting on significant matters without reading those disclosures?
Which brings me back to “effective disclosure.” I’m passionate about the topic, and I’ve put my time (which is, after all, money) where my mouth is. But I’d be crazy not to think about whether it’s really worth the time and effort it will take to overhaul our approach to disclosure if, at the end of the proverbial day, few if any people will benefit from it or even care about it.
Years ago I commented on an SEC rule proposal by saying, among other things, that it would result in more disclosure that no one would read. I was told by the then-Director of the SEC Division of Corporation Finance that rulemaking isn’t based on whether anyone reads the disclosures in question. At the time, I thought he was probably right, but now I’m not so sure.
Marketplace lending surely had its day in the sun in 2014. Peer-to-peer lending, which now goes by the term marketplace lending, took a big step forward last year. We saw the IPO of Lending Club rocket in its first day of trading on December 11, 2014 by first pricing above the range at $15 per share and then touching a high mark of 67% that day. Lending Club has been the leader in this field and its IPO highlighted the importance and the emergence of this new lending alternative. Despite this surge, however, not everyone attended the party in 2014. Noticeably, the SEC still has not finalized its crowdfunding rules, which are an important next step for the marketplace lending industry.
So what exactly is marketplace lending? Put simply, it is an Internet based lending market that is created by connecting borrowers with lenders or investors. There are various companies with different approaches to the concept. In Lending Club’s case, potential borrowers fill out online loan applications. The company (and its bank behind the scenes) then uses online data and technology to evaluate the credit risks, set interest rates and make loans. On the other side of the equation, Investors are offered notes for investment that correspond to portions of the loans and can earn monthly returns on their notes that are backed by borrower payments. As a result, marketplace lending effectively offers secondary market trading for loans.
On the positive side, marketplace lending can be good for borrowers because the lower cost structure of an online platform can be passed along to borrowers in the form of lower interest rates. The use of the Internet and online credit resources can also speed up the credit approval process so that borrowers can get funds faster. In addition, some borrowers may get access to loans that they could not get from traditional banks. In other words, the marketplace could help individuals with lower credit scores or negative credit histories find loans. Thus, despite its critics, marketplace lending can help serve a niche that has historically been underserved by the banking industry.
Marketplace lending, however, at least when it comes to Lending Club and those like it, still has a bank at its core. So some borrowers will still not be able to get loans through this marketplace model. Also, the investors are buying registered securities with interests in the loans made in the marketplace. Lending Club turned to registering their notes with the SEC when Continue Reading
Jamie Dimon, CEO of JPMorgan Chase, is reputed to be a decisive person with a strong personality. Of course, that shouldn’t be news to anyone who follows business or who knows what it takes to be CEO of a major company. So it’s interesting that he recently said that he struggled with whether JPM should disclose that he was battling cancer. (For the record, he seems to have won the battle.)
I’m not the only securities lawyer who’s had similar struggles when the CEO of a client has become seriously ill. It’s a very challenging issue for several reasons. First, there isn’t any rule – or even any literature (at least to my knowledge) – that tells us whether and what to disclose in this situation. So when a client says, “show me the rule that says we have to disclose this,” there’s nothing to show. Second, and more important, the issue pits the need to disclose against information that is quintessentially personal. It’s also not just an issue between the executive and the company; often, the executive’s family and, possibly, his/her medical team and others are equally involved. And even when there’s agreement to disclose, it’s very difficult to know what to say about the prognosis, if and when the executive can return to work, and so on.
I think JPM’s decision to disclose was the right one. Among other things, JPM and Mr. Dimon are inextricably linked with each other; he is the public face of the company, and it’s hard to imagine mentioning one without the other. In fact, it’s arguably this linkage that led to the defeat of shareholder proposals seeking to deprive Mr. Dimon of his title as Chairman of the Board; no one wanted to see if he would carry out his threat to leave the company if the proposals passed. Second, his illness was grave and could have killed him. In other words, it seems pretty clear that the information was market-moving – a factor that must be considered in making the disclosure decision. (That said, contrast this with Apple’s treatment of Steve Jobs’s illness.) Also, according to Mr. Dimon, he lost 35 pounds in his battle, making it painfully obvious that something was up. So why hesitate to disclose something that everyone could see?
Another way of evaluating the matter is to consider whether there are any meritorious reasons not to disclose. When I had to grapple with a similar decision, the facts were different; among other things, the CEO wasn’t the company’s alter ego, and it was questionable whether the stock would tank if we disclosed. On the other hand, the company had just gotten past a nasty scandal and a period of intense upheaval in which two senior people had left and the company’s credibility had been shattered. In these circumstances I couldn’t see a significant reason not to disclose. I took some heat from the CEO’s family, but I had no doubt that I made the right decision.
Photo by Omar Parada
On January 14th, the House passed H.R. 37 “Promoting Job Creation and Reducing Small Business Burdens Act.” Although passed with some support from the Democrats (29 votes, which in these days of hyper-partisanship is practically a bipartisan bill), the White House issued a veto threat on January 12th because the bill also delays part of the Volker Rule effectiveness until July 21, 2019. Thus, in its current form, it looks dead on arrival, but there are some interesting ideas that I support and will hopefully make it in a revised bill later in the term:
- Delays the requirement for savings and loan holding companies to register under the Securities Exchange Act of 1934 to the same extent as bank holding companies (assets of $10 million and class of equity securities held of record by 2,000 or more persons). Also allows deregistration for savings and loan holding companies when they have fewer than 1200 shareholders of record. This seems fair and was likely an unintended distinction made when the JOBS Act passed. Unfortunately, this innocuous bill was grouped with the Volker delay.
- Provides for an exemption from the Securities Exchange Act of 1934 for certain business brokers. The bill provides for some restrictions such as Continue Reading
Something shocking happened at the SEC yesterday. SEC Chair Mary Jo White directed the SEC Staff to review its long-standing position on when a shareholder proposal conflicts with a company proposal and may be excluded from the proxy statement. As a result, the SEC’s Division of Corporation Finance withdrew a no-action letter that had given Whole Foods the green light to exclude a shareholder proposal on proxy access by including its own (less shareholder-friendly) proposal on the subject. Corp Fin also said that it would not be issuing any additional no-action letters under the rule in question. It’s worth noting that these actions were taken at a sensitive time, as calendar-year companies approach peak proxy season and a major investor campaign is under way to impose proxy access upon companies that have been resisting it.
The SEC’s shareholder proposal rules are very complex, and I won’t go into details here. However, as a general matter, the rules lay out the process by which eligible shareholders can submit proposals for inclusion in a company’s proxy statement. Relevant here is that (1) the rules provide certain conditions under which a company can exclude a proposal and (2) companies can avail themselves of a “no-action” process to get the SEC’s permission to exclude a proposal if the conditions are satisfied. It’s worth noting that the no-action process isn’t dispositive; the proponent or the company can take the matter to court, and there are usually a couple of cases each year in which that happens.
Photo by Justin Kern
Director “refreshment” has become a very hot topic in the governance community. Investors increasingly are calling for replacing longer-serving board members with newer directors, possibly in order to achieve greater board diversity, possibly to get some fresh blood (or fresh thinking) on the board, or possibly to achieve other goals. There is also increased talk about the use (and appropriateness) of age limits, term limits and other processes to assure regular board turnover. For example, Institutional Shareholder Services has suggested that a director serving more than nine years may no longer qualify as independent. As part of this discussion, questions have also been raised about the need for “committee refreshment” – rotating directors off and on committees to keep them fresh and receptive to new ideas.
Governance practitioners have been grappling with the issue of board and committee refreshment for many years, even though the objective may not have been called “refreshment” until recently. For example, corporate secretaries and others have scratched their heads as to how to enforce age limits, how to decide when those limits should be waived or raised, how to grapple with the political and personal issues that can arise when the age limit is waived for one director but not for another, and whether term limits would be preferable to age limits. Recent discussions have also generated pushback from companies and their directors that age and/or long tenure may generate greater, rather than less, independence; after all, a director with 15 or more years of service who has overseen two or more CEOs may feel far less dependent upon the current CEO than a director who has joined the board only recently.
These and other concerns are challenging enough at the board level, but they can be far more challenging at the committee level. In an era when much of the substantive, detailed work of the board is handled by committees, and committee service increasingly calls for subject matter expertise, refreshing a committee is not as simple as putting Mr. or Ms. X on the committee when Mr. or Ms. Y retires. The qualifications and abilities – and, in some cases, expertise – of the replacement need to be considered before he or she can be used to fill the vacancy or simply “rotated on” a new committee.
There have been a number of press reports in recent days about attempts by the new Republican majority to repeal all or part of Dodd-Frank. Depending upon whom you choose to believe (assuming you choose to believe anyone in the current political environment), the Republicans want to eviscerate it, and the Democrats refuse to change one word, or possibly even a punctuation mark.
The real problem with Dodd-Frank is that it’s a mixed bag – a mess, of course, but a mixed bag nonetheless. My take on it is that there are some provisions that are reasonable and make sense; others go way too far; and still others don’t go far enough. For example, the infamous (and, IMHO, ridiculous) provision requiring public companies to disclose the ratio of the CEO’s pay to that of the mean of all employees’ compensation. On the other side, one wonders if the statute really did anything to regulate the financial services industry or if it did nothing more than exponentially increase the costs of compliance while leaving open the possibility that recent history (i.e., an economic collapse) could happen all over again for the same reasons.
What this suggests is that to make Dodd-Frank a good statute – assuming that’s possible – would require delicate surgery that would take time, careful thought and bipartisanship. It may go without saying, but I’ll say it anyway – that isn’t going to happen in the current environment. Grandstanding and blustery populist oratory seem to be the order of the day, and careful drafting isn’t even on the agenda. (Of course, that was the case when the statute was being drafted – one of the scariest things I ever saw on a monitor was a live webcast of Barney Frank’s subcommittee hearing, when multi-page riders were waltzed in to the hearing room and voted upon before anyone could read them – much less debate them.)
I’m not sure where that leaves us, but wherever that is, it’s not a good place to be.
There it is. I’d like to know what you think.
A few years ago, after I became Chair of the Securities Law Committee of the Society of Corporate Secretaries and Governance Professionals, I did something that I thought would be criticized – I posted a list of the top 10 books I’d read the prior year. I thought I’d be criticized, not only because the topic had absolutely nothing to do with the Committee, but also because of my weird taste in reading. To my surprise, the posting generated a lot of positive responses (and no negative ones, to my recollection). And so I decided make this an annual event.
From my humble perspective, 2014 was not a great year for reading. I read lots of books, but the good ones were few and far between. The good news is that this made it easier for me to choose the 10 I liked the most. BTW – note that these are books that I read in 2014, not necessarily books that were published during the year. So here goes.
- The Moor’s Account, by Laila Lalani – A novel based on an actual Spanish expedition to Florida in that failed, one of the few survivors a Moroccan slave who is the author of the account
- The Invention of Wings, by Sue Monk Kidd – Another historical novel about two sisters in Charleston who became abolitionists
- An Officer and a Spy, by Robert Harris – Still a third historical novel based on the infamous Dreyfus affair in 19th Century Paris
- The Wife, the Maid and the Mistress, by Ariel Lawhon – A delightfully atmospheric take on the disappearance of Judge Crater in Jazz Age New York
- All the Light We Cannot See, by Anthony Doerr – A serious historical novel about intersecting tragic lives in World War II; I didn’t love the ending, but it was a good read
A great deal has been written about the recent reversal of two insider trading convictions. Specifically, the U.S. Court of Appeals for the Second Circuit threw out the convictions of Todd Newman and Anthony Chiasson, hedge fund traders found guilty at the District Court level.
The press reports have treated the reversal as a major slap in the face for Preet Bharara, the U.S. Attorney for the Southern District of New York. Bharara has made a big name for himself on the backs of numerous alleged – and quite a few convicted – insider traders, including Raj Rajaratnam. While I’m sure Mr. Bharara isn’t happy about the reversal, he should take solace from the convoluted – no, byzantine – legal route by which insider trading convictions are achieved.
I suspect that most readers will not remember the SEC’s pursuit of Ray Dirks and a few others charged with insider trading many years ago. Dirks, a securities analyst, uncovered a massive fraud perpetrated by a company named Equity Funding. He alerted the SEC and some media about the matter, but neither did anything. When he couldn’t gain any traction, Dirks advised his clients to sell the company’s stock. For reasons that remain murky (including rumors of bad blood between the SEC and Dirks), the SEC decided to pursue insider trading charges against Dirks and a few other people who arguably should never have been prosecuted.
The courts have a way of dealing with cases that shouldn’t have been brought in the first place, and in this and some other prosecutions the outcome was the “misappropriation” theory of insider trading. Simplistically stated, insider trading is not insider trading unless the tipper owed some duty to the company whose information was misappropriated (though not necessarily the company about which information was leaked) and derived a personal benefit from leaking the information. Subsequent cases have generated many more wrinkles in what the theory really means. As for Messrs. Newman and Chiasson, their convictions were reversed because even though their tipper derived a personal benefit from giving the tip, they didn’t know that he was deriving that benefit.
So if you think that the point of insider trading prosecutions is to maintain a level playing field, think again. It’s not about what you know, or who you know; apparently, it’s about what you know about who you know. There ought to be a law, but this isn’t it.
I’d like to know what you think.