[caption id="attachment_2869" align="alignright" width="300"] Internet Archive Book Images[/caption]
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Conflict Minerals: It’s too soon to tell whether Dodd-Frank will be repealed in its entirety, if it will die the death of 1,000 cuts, or if it will stay pretty much as is.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
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.
Good, but not surprising, news for issuers considering a Regulation A+ offering. Back in May 2015, Massachusetts and Montana sued the SEC in an attempt to invalidate the Regulation A+ rules. Montana had attempted to obtain an injunction to prevent the Regulation A+ rules from going into effect last June, but was denied. Now, the… Continue Reading
[caption id="attachment_2785" align="alignright" width="240"] © Michael Sutton-Long[/caption]
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.
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.
The SEC has issued its much-anticipated Staff Legal Bulletin on two rules impacting shareholder proposals. You can find the SLB here. The SLB looks a bit more benign than some had feared; in other words, it’s got some bad news, but the good news is that it’s not as bad as some feared. Rule 14a-8(i)(9)… 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
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.
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… Continue Reading
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.
A few weeks ago - “From the same wonderful folks who brought you conflict minerals (among other things)” – I complained about Senator Blumenthal’s attempt to tell the SEC what to regulate and how to regulate it. I had an equal and opposite reaction to the recent news that Commissioner Gallagher and former Commissioner Grundfest had gone after the Harvard Shareholder Rights Project, in effect telling the Project (AKA Lucian Bebchuk) that its actions violate the federal securities laws.
I agree with some (though not all) of Commissioner Gallagher’s views. I’m also troubled by the notion of an esteemed academic institution taking aggressive, one-size-fits-all positions on corporate governance matters. However, in this case, I’m inclined to think that Commissioner Gallagher should have taken a higher road – encouraging discussion, maybe even holding an SEC Roundtable on the topic. And if he really thinks that there’s a violation here, perhaps he should have whispered in the ear of the Enforcement Division that it might want to look into this. Instead, he’s behaving somewhat like a bully – not that the Good Professor is likely to be quaking in his boots about it.
Also, it strikes me as downright inappropriate for a Commissioner to make a statement about a matter that the Commission could conceivably have to rule on if the matter ever does result in an enforcement action. At a minimum, he’d have to recuse himself on the matter, which could mean the difference between victory and defeat. And given recent criticisms of the SEC for (1) pursuing more matters as administrative proceedings than court cases and (2) unfairly touting its enforcement record, does Commissioner Gallagher think he's enhanced the stature of the SEC by doing this?
In my first UpTick (“How about never? Does never work for you?”), I questioned statements by SEC Chair White that the remaining corporate governance rulemakings under Dodd-Frank would be out by year-end. Well, the SEC has now updated its regulatory rulemaking agenda and – lo and behold – final action on the pay ratio rule is now set for October 2015 (you can find the reference here). Assuming that a final rule is adopted in that time frame (which in turn assumes, among other things, that a Republican-controlled Congress won’t do something to the relevant provisions of Dodd-Frank – or to the Act in general), the pay ratio rule will first be in effect for the 2017 proxy season.
Further, based on the regulatory agenda, we shouldn’t expect rulemaking on the three other rules comprising the “four horsemen” (namely, hedging, clawbacks, and pay for performance) until October 2015 as well.
In other words, never may just work for us. Perhaps that’s another reason to give thanks?
Connecticut Senator Richard Blumenthal has written to SEC Chair White urging that the SEC label so-called “fee-shifting” bylaws major risk factors and require companies to disclose them before any initial public offering. Moreover, Blumenthal believes the SEC should take the position that fee-shifting provisions are inconsistent with the federal securities laws and should refuse to permit registration statements to move forward for any company that has adopted these provisions.
I believe that Senator Blumenthal is a good and decent man, and I base this in part on some indirect personal knowledge of him. I also think that there are legitimate concerns with fee-shifting bylaws and that a debate on those and other provisions is perfectly appropriate. However, I find it seriously troubling that our legislators feel obliged to tell the SEC how to do its job, particularly at such a granular level. Are they trying to do away with the SEC? Do our senators and congressmen believe that they can do a better job regulating our capital markets and disclosure directly rather than through the SEC?
I happen to think that, in general, the SEC has done a superlative job in both areas. Of course, there have been errors of commission (no puns intended) and omission (e.g., can you say “Madoff”?), but over the 80+ years of its existence, the SEC has generally been an apolitical beacon of serious and legitimate regulation. And I suspect there’s a strong correlation between the SEC’s screw-ups and congressional interference (or lack of funding).
I don’t think for a nanosecond that Senator Blumenthal wants to do away with the SEC. So why is he trying to do so by more subtle means?
What do you think?