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As noted in a recent post, the future of SEC regulation – and perhaps even of the SEC itself – is uncertain in the wake of Donald Trump’s election. However, the SEC Staff, a smart, decent and hardworking group, continues to stick to its knitting despite the turmoil.
The most recent example of the Staff’s diligence is a “Report on Modernization and Simplification of Regulation S-K – As Required by Section 72003 of the Fixing America’s Surface Transportation Act”. The Report was issued on Thanksgiving Eve, and it’s no turkey. Don’t be put off by the incredibly long title or by the fact that SEC regulations have nothing to do with Surface Transportation. The Report provides a good summary of some actions impacting Reg S-K that have been taken to date, and the Staff’s recommendations for actions down the road (assuming there is a road).
Here are some of the highlights of things that may be on the come: Continue Reading
It remains to be seen whether the new administration will actually drain the swamp or do away with political correctness, but one hope that some of us have – regardless of our views on the election – is that the SEC may finally get around to some issues that have been on the back burner for years.
One such issue is a long-overdue overhaul of the rules surrounding shareholder proposals, including the submission and resubmission thresholds for proposals under SEC Rule 14a-8. Many organizations, including the Society for Corporate Governance, have repeatedly urged the SEC to update these rules, which have been in place for many years. However, the SEC has been reluctant to plunge into the area due to the likely political firestorm that would result.
Now, another organization has jumped in. At the end of October, the Business Roundtable published “Modernizing the Shareholder Proposal Process”, a rational and well thought-out series of suggestions for bringing shareholder proposals into the 21st Century.
In the wake of the election of Donald Trump as the next President, there has been a lot of speculation about the effect of a Trump administration on securities law and corporate governance. Looking into a crystal ball is always risky, but here are some observations.
Conflict Minerals: It’s too soon to tell whether Dodd-Frank will be repealed in its entirety, if it will die the death of 1,000 cuts, or if it will stay pretty much as is. What I will say is that few will cry if the conflict minerals provisions are eliminated (and I will not be among those few). Complying with the conflict minerals rules is time-consuming (and therefore costly), and it’s questionable whether many people care. Perhaps of equal or greater importance is that there is some evidence that the conflict minerals requirements are actually hurting the people they were supposed to help.
Pay Ratio: More of the same here. There is some support for pay ratio disclosure among labor pension funds, but that's about it. Companies don’t like it (duh…), and mainstream investors have no use for it. Given how the Democrats seem to have fared in the industrial states, it’s not clear that they would fall on their collective sword to save this one. Continue Reading
In the midst of the chaos of the presidential election, vicious attacks from Senator Warren, and goodness knows what else, the SEC continues to crank out requests for comment, rules and interpretations. It’s the latter category that has attracted our attention lately, as the Staff has focused on some technical matters that securities counsel have… Continue Reading
If you’ve been reading our posts (and probably even if you haven’t), you should know by now that the SEC has launched a “disclosure effectiveness” initiative and has already taken actions to make some disclosures more “effective”. One such action was the publication of a 341-page “concept” release asking hundreds of questions about whether and how to address a wide range of disclosure issues. More recently, the SEC has proposed rule changes that would eliminate some particularly pesky disclosure burdens.
On July 14, the SEC Staff published a new Compliance and Disclosure Interpretation clarifying when an investor who may not be entirely passive may nonetheless remain eligible to file a beneficial ownership report on Schedule 13G rather than Schedule 13D. Anyone who has tried to dance on the head of that pin will be relieved,… Continue Reading
In recent years, the SEC – frequently due to Congressional mandates – has reduced the amount of disclosure that smaller public companies must provide. Most recently, on June 27, the SEC proposed yet another rule that would reduce disclosure burdens by enabling more companies to qualify as “smaller reporting companies,” or “SRCs.” The proposal would… Continue Reading
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In recent weeks, the SEC has given public companies some new menu items, including the following:
- On June 1, the SEC adopted an “interim final rule” that permits companies to include a summary of business and financial information in Annual Reports on Form 10-K. The rule implements a provision of the Fixing America’s Surface Transportation Act, or FAST Act, in keeping with the new trend to give statutes names that someone thinks make nifty acronyms. (Of course, the connection between this rule and surface transportation remains a mystery.)
- On June 13, the SEC issued an order permitting companies to file financial statement data in a format known as “Inline XBRL” rather than filing such data in exhibits to a filing.
Here is a quick review of these new menu items.
The new, improved 10-K summary – The rule permitting a 10-K summary is interesting in several respects. First, companies have long been able to provide summaries; in other words, there doesn’t seem to have been any reason for the “new” rule. Second, as noted, it permits but does not require the use of summaries; thus, companies that have not provided summaries in the past and don’t want to now don’t have to. Continue Reading
It’s almost exactly one year to the day since I took Senator Elizabeth Warren to task for what I believed was an unwarranted and particularly vicious attack on the SEC – or, rather, Chair White’s tenure at the SEC. Apparently, Senator Warren decided to celebrate the anniversary with another attack on the SEC and Chair White at a Senate Banking Committee hearing. (You can watch the entire unpleasantness here, including Senator Warren’s refusal to allow Chair White to answer any of her questions before launching another attack.)
This time, the attack was directed to the SEC’s “effective disclosure” project – something that many companies and investors support – claiming that by pursuing this project the SEC is putting companies’ interests ahead of investor protection and demanding that Chair White provide evidence to justify that investors are suffering from information overload. Her comments to Chair White included the following: “Your job is too look out for investors, but you have put the interests of the Chamber of Commerce and their big business members at the top of your priority list.”
Really? Perhaps Ms. Warren should ask some investors to testify. She might learn that many investors do not read disclosure documents, particularly proxy statements (which will soon contain the pay ratio disclosures that she once said should be the SEC’s highest priority), because they are too long and investors just don’t have the time. She might also learn that many investors applaud the SEC’s initiative, because it is designed to enhance some disclosures rather than just eliminate them. Continue Reading
[caption id="attachment_2770" align="alignright" width="240"] © Alex Harbich[/caption]
Until recently, I’ve firmly believed that the SEC’s use of the bully pulpit can be effective in getting companies to act – or refrain from acting – in a certain way. Speeches by Commissioners and members of the SEC Staff usually have an impact on corporate behavior. However, the use of non-GAAP financial information – or, more correctly, the improper use of such information – seems to persist despite jawboning, rulemaking and other attempts to stifle the practice.
Concerns about the (mis)use of non-GAAP information are not new. In fact, abuses in the late 1990s and early 2000s led the SEC to adopt Regulation G in 2003. It’s hard to believe that Reg G has been around for 13+ years, but at the same time it seems as though people have been ignoring it ever since it was adopted. Over the last few months, members of the SEC and its Staff have devoted a surprising amount of time to jawboning about the misuse of non-GAAP information; for example, the SEC’s Chief Accountant discussed these concerns in March 2016; the Deputy Chief Accountant spoke about the problem in early May 2016; and SEC Chair White raised the subject in a speech in December 2015. And yet, the problem seems to persist.
On April 13, the SEC authorized the issuance of a major concept release. Concept releases are trial balloons that the SEC publishes to elicit input on possible rulemaking, including whether rulemaking is needed and what form it should take if it happens. The April 13 concept release is entitled "Business and Financial Disclosure Required by Regulation S-K". Given that Regulation S-K spells out many of the disclosure requirements applicable to all sorts of Exchange Act filings, it's bound to be significant.
The concept release is a very large trial balloon indeed – it runs to nearly 350 pages – and I have yet to crack it open. However, I do intend to read it. And I urge you to do the same, as it's likely to impact disclosure requirements for the next generation.
Some preliminary thoughts about the concept release, based upon press reports and the opening statements made by the Commissioners during the meeting at which the release was approved for publication: Continue Reading
Two news items from the front lines:
First, you may recall my mentioning that the Council of Institutional Investors was considering adopting a new policy that would limit newly public companies' ability to include "shareholder-unfriendly" provisions in their organizational documents (see "Caveat Issuer", posted on February 13). I just came back from Washington, DC, where I attended the Council's Spring Meeting, and the new policy appears to have been adopted as proposed. While the text of the new policy was not made available at the meeting, and has yet to be posted on the Council's website, it appears to provide that while some of these provisions can be in place when a company goes public, others -- such as plurality voting for directors in uncontested elections -- should be absent from the get-go.
By the way, my hotel room had a lovely view of the Jefferson Memorial, and the cherry blossoms were about to pop.
In other news, the SEC has announced, by way of a Sunshine Act Notice, that at an open meeting to be held on March 30 it “will consider whether to issue a concept release seeking comment on modernizing certain business and financial disclosure requirements in Regulation S-K”. Looks like the disclosure effectiveness program may be moving forward. Watch this space for details.
According to SEC Chair White, regulators are looking – and not happily – at companies’ increasing use of customized financial disclosures. In fact, her recent remarks suggest that additional regulation is not being ruled out to curb the use of such “bespoke” data.
For some of us it may seem like only yesterday – though it was actually in 2003 – that the SEC adopted Regulation G to address the then-growing concern that companies were developing odd ways of communicating financial information to make their numbers look better. In general, Reg G says that companies
- cannot make non-GAAP disclosures more prominent than GAAP disclosures;
- need to explain why they use non-GAAP disclosures; and
- must provide a reconciliation showing how each non-GAAP measure derives from the GAAP financial statements.
So far, so good. However, some companies give little more than lip service to these requirements. For example, it’s not unusual to see Item 2 addressed by a statement along the lines of “investors who follow the company use this measure to assess its performance.” And, more recently, companies seem to be developing more peculiar ways of showing performance, such as excluding the effects of some taxes but not others. This creativity may not be as arch as excluding recurring items or turning losses into gains, but it still makes regulators uneasy.
Those of you who've been following my postings know that I'm not a fan of Congressional interference in the workings of the SEC. Well, those same wonderful folks who've garnered the lowest opinion ratings in history are at it again.
First, you may recall that Congress acted a few weeks ago to avoid another federal government shutdown. Well, a few interesting provisions were added to that legislation and – you guessed it – one of them was precisely the kind of thing that sets me off; in this case, it was a prohibition against any SEC rulemaking requiring disclosure of political contributions.
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?
Those 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… Continue Reading
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.
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.
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:
Unless you’ve been off the grid, you’ve surely read about the kerfuffle between Senator Elizabeth Warren and SEC Chair Mary Jo White (here’s an example). It seems that Senator Warren is unhappy that the SEC, under Chair White’s leadership, hasn’t done enough. Specifically – among other things – it hasn’t adopted a bunch of rules that the Senator believes are critical, such as requiring public companies to disclose the ratio of CEO pay to that of rank-and-file employees.
I’ve written before about Congressional interference in SEC rulemakings (for example, Connecticut Senator Blumenthal’s recommendation that the SEC should deem “fee-shifting” by-laws not just a risk factor but a “major” risk factor – discussed here). I’ve also called out the SEC when I think it’s out of line (for example, here). However, the recent attacks by Senator Warren seem to me to be beyond the pale – they’re strident and scream disrespect for Chair White and for the Commission generally.
Moreover, they demonstrate Senator Warren’s inability, failure or refusal (or all of the above) to recognize certain fundamental issues with which the SEC has to deal, including these (among many others): Continue Reading