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New York Surrogate Gideon Tucker (1826-1899) is credited with originating the maxim that “no man's life, liberty or property are safe while the legislature is in session." Were Surrogate Tucker around today, he might have added boards of directors to those who should be wary of legislative action.
There are numerous weird bills rumbling around the hallowed halls of Washington these days, but one of the bills that is making me unhappy is the Cybersecurity Disclosure Act of 2017. The good news is that the bill is very short.
The bad news is threefold. Continue Reading
If you have ever had to search for an exhibit originally filed with the SEC years ago, you know it can take forever, particularly when the exhibit consists of an original document that has been amended several times, each amendment having been separately filed. You will soon have to search no more, because the SEC… Continue Reading
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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
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Conflict Minerals: It’s too soon to tell whether Dodd-Frank will be repealed in its entirety, if it will die the death of 1,000 cuts, or if it will stay pretty much as is.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
The United Kingdom has a new Prime Minister. Her name is Theresa May, and she’s a member of the
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Conservative Party. Remember that, because what you are about to read will probably lead you to think otherwise.
In a speech made a couple of days before Ms. May became Prime Minister, she said that she would pursue the following actions if she were to become Prime Minister: 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
In a June 27 speech to the International Corporate Governance Network, SEC Chair Mary Jo White engaged in a bit of full disclosure herself:
“I can report today that the staff is preparing a recommendation to the Commission to propose amending the rule to require companies to include in their proxy statements more meaningful board diversity disclosures on their board members and nominees where that information is voluntarily self-reported by directors.”
As noted in her remarks, the SEC adopted the current disclosure requirements on board diversity in 2009. However, the requirements were added to other board-related disclosure requirements at the last minute, when it was reported that Commissioner Aguilar refused to support the other requirements unless diversity disclosure was also mandated. As a result, the diversity requirements were never subjected to public comment, did not define “diversity,” and seemed to require disclosure only if the company had a diversity “policy”. When companies failed to provide the disclosure because they had no policy, the SEC clarified that if diversity was a factor in director selection then, in fact, the company would be deemed to have a policy, thus requiring disclosure.
A little over two years ago, the Council of Institutional Investors (“CII”) asked the SEC to review its proxy disclosure rules related to director compensation received from third parties, which we had blogged about here. At the time, the CII was concerned that the existing proxy rules did not capture compensation that may be paid… 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
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Over the years, the PCAOB has developed a reputation for pursuing zombie proposals – proposals that appear to be dead due to widespread opposition and even congressional action. Remember mandatory auditor rotation? It practically took a stake through the heart to kill that one off, and I’m informed that even after it was presumed to be long gone some PCAOB spokespersons were telling European regulators that it might yet be adopted.
Well, here we go again. The latest zombie proposal (OK, reproposal) would modify the standard audit report in a number of respects, the most significant of which would be to require disclosure of “critical audit matters”. The headline of the PCAOB’s announcement of the reproposal says that it would “enhance” the auditor’s report; not clarify, just “enhance”. And, as is customary whenever the PCAOB proposes to change the fundamental nature of the audit report, the proposal starts out by sayng that’s not the intention at all: “The reproposal would retain the pass/fail model of the existing auditor's report,” it says. It seems to me to lead to the opposite result – the introduction of critical audit matter (“CAM”) disclosure could easily lead to qualitative audit reports; one CAM would be viewed as a “high pass”, two would be ranked as a medium pass, and so on, possibly even resulting in numerical “grades” based upon the number of CAMs in the audit report. And let’s not fool ourselves into thinking that any audit firm would ever issue a clean – i.e., CAM-free – opinion. I just can’t envision that happening, ever.
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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.
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.
It shouldn’t come as a surprise to anyone nerdy enough to be reading this blog that the Dodd-Frank Act mandated SEC rulemaking in four areas relating to the disclosure of executive compensation:
- pay ratio,
- clawbacks, and
- pay-for performance.
These items have been variously referred to as the “four horsemen” (as in apocalypse) or the “gang of four” (as in Chairman Mao’s evil wife and her evil friends).
Up until now, the SEC has been moving at a rather leisurely pace to get the horsemen – er, rules – out. In fact, the SEC’s failure to adopt final pay ratio disclosure rules has generated some criticism (see my recent UpTick). Perhaps for that reason, the SEC seems to be moving forward to propose the remaining rules at a somewhat faster pace. Just about 10 weeks ago, the SEC proposed rules on hedging.
And now the SEC has scheduled an open meeting on April 29 at which it will consider proposing rules for pay-for-performance disclosure. You can find the SEC’s Sunshine Act notice of this meeting here. It’s anyone’s guess what the proposed rules will look like, but the proposals will definitely generate lots of interest. So, for the time being, all I can suggest is “watch this space.” We’ll let you know once we have a chance to see what emerges from the open meeting.
On Sunday, April 12, the Business section of the New York Times led with an article by Gretchen Morgenson taking the SEC to task for not having adopted rules requiring disclosure of CEO pay ratios. This follows similar complaints by members of Congress, most recently in the form of a March letter by 58 Democratic congressmen to Chair White. And going further back – specifically, to Chair White’s Senate confirmation hearing in March 2013 – Senator Warren told Chair-Designate White that SEC action on this rule “should be near the top of your list.”
I’ve given this a great deal of thought since Congress mandated pay ratio disclosure in the Dodd-Frank Act, and I’ve yet to figure out why – aside from political considerations – so many people think this disclosure is so important or what it will achieve. In fact, when I coordinated a comment letter on the rule proposal as Chair of the Securities Law Committee of the Society of Corporate Secretaries and Governance Professionals, I told a number of people that it was the hardest comment letter I’d ever worked on, and I believe that was the case because it was hard to comment on a proposal that struck and continues to strike me as ill-advised and unnecessary in its entirety.
Ms. Morgenson’s article proves my point. It provides pay ratio data for a number of companies, as determined by a Washington think tank. But at the end of the article, all the data demonstrate is that the CEOs of the companies in question make a ton of money. The ratios don’t tell us anything more than that; Disney had the highest ratio, but does anyone need a ratio to know that its CEO makes lots of money? Ditto Oracle, Starbucks and the others – in all cases, the ratio is far less informative than the dollar amounts, which of course are and have for many years been disclosable.
The ratios might – but only might – be more meaningful if we knew what the underlying facts are; for example, what is the mix of US to non-US employees? To what extent are the employees part-time or seasonal? But of course the article doesn’t reveal this information, and neither would the proposed SEC rules. And the SEC Staff has indicated the final rules are not likely to allow companies to exclude non-US, part-time or seasonal employees. In other words, we won’t be able to distinguish between two companies with the same pay ratios regardless of the fact that one may have vast numbers of employees in the third world while the other’s employees are located in major industrialized countries.
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.
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.