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How did we get here?

On September 11, 2020, the SEC adopted new rules to “update and expand the statistical disclosures” that bank holding companies, banks, savings and loan holding companies, and savings and loan associations are required to provide to investors. The old regime – Industry Guide 3, “Statistical Disclosure by Bank Holding Companies” – had not been meaningfully updated for more than 30 years.  There have been all sorts of developments since then, including new accounting standards, a financial crisis, and new disclosure requirements imposed by banking agencies. So it’s not surprising that the SEC began questioning the need to make changes to Industry Guide 3, requesting comments in 2017 and again with a proposed rule in September 2019.

So, what’s new?

The changes were implemented in part to eliminate overlaps with disclosures already required under SEC rules, U.S. GAAP, and International Financial Reporting Standards (“IFRS”), as well as to incorporate new accounting standards. Under the new rules, disclosures are required for each annual period presented (as well as any additional interim period should a material change in the information or trend occur), aligning these disclosures with the annual periods for financial statements. Continue Reading Out with the old, in with the new: Banks and S&Ls must now provide updated and expanded statistical disclosures

I’ve often said that lawyers representing corporations should never underestimate the creativity of the plaintiffs’ bar.  However, it seems that the white collar criminal defense bar may not be slouches in the creativity department either.

I’m referring to a recent report in The Wall Street Journal that the legal team representing Elizabeth Holmes, the “disgraced Theranos founder,” is considering using her mental health (presumably, the lack thereof) as a defense in her upcoming federal trial for engaging in a variety of frauds.

I’m prepared to admit that I am totally if morbidly fascinated by the Theranos case: I’ve read the phenomenal book, Bad Blood, by John Carreyrou – twice, in fact – and will surely be among the first to see the movie (which reportedly will star Jennifer Lawrence as Holmes in what strikes me as the best casting choice ever); I’ve attended programs featuring Tyler Shultz, the whistleblower who blew the top off the fraud (and whose grandfather, former Secretary of State George Shultz, was on the Theranos board at the time in a family saga worthy of Aeschylus); I’ve listened to the podcast; I’ve watched the HBO documentary; and much more.  Still, it seems just surreal. Continue Reading Legal surrealism

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On August 26, 2020, the SEC continued to keep its foot on the gas with respect to its recent practice of modernizing disclosure rules by adopting amendments to the description of business (Item 101), legal proceedings (Item 103), and risk factor disclosures (Item 105) that registrants are required to make pursuant to Regulation S-K. As discussed in a previous post by my colleague, Bob Lamm, regarding the rule changes as originally proposed on August 8, 2019, the changes significantly update the provisions of Regulation S-K and signal a continuing shift to a principles-based approach to disclosure. The SEC gave the green light to the amendments substantially as proposed in 2019, with some minor modifications. Details of the final amendments are included below. The previous post provides commentary on some of the rule changes and some observations regarding the potential impacts of the shift to a principles-based approach to disclosure on registrants and their advisors.

In its press release announcing the amendments, the SEC acknowledged that these updates were due – actually, overdue – after decades of evolution in the capital markets and the domestic and global economy without any corresponding revisions in the disclosure rules. SEC Chairman Jay Clayton stated that  the improvements to these rules “are rooted in materiality and seek to elicit information that will allow today’s investors to make more informed investment decisions,” adding that the revisions “add[] efficiency and flexibility to our disclosure framework.” Continue Reading Pedal to the metal on principles-based disclosure

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On August 26, 2020, the SEC adopted changes to its definition of “accredited investor.” The SEC Release can be found here. The new rules will become effective 60 days after their publication in the Federal Register (around the end of October 2020). These changes are definitely a move in the right direction, and they indicate that the SEC may be willing to further expand and modernize the accredited investor qualification requirements, but I don’t believe they will have a significant impact on the private securities offering process. .

The accredited investor requirements largely determine eligibility to participate in private securities offerings. The current requirements are primarily based on financial status. For most individual investors to qualify as accredited investors, they need an annual income of $200,000 (or $300,000 combined with their spouse) or a net worth (including their spouse’s net worth but excluding the value of their primary residence) of $1 million.

These quantitative requirements have been subject to criticism. They have been in effect since 1982, with the only change being the exclusion (in early 2012) of the value of the investor’s primary residence in the net worth test. Some commentators say that these requirements are too restrictive and exclude too many investors from participation in private offerings, thus stifling the capital available to smaller companies. That criticism may have become less valid over time; when the $200,000 annual income test was first implemented in 1982, less than 1%  of potential investors qualified. Due to inflation and the lack of an increase in the income requirement, approximately 9% of potential investors currently qualify. . Conversely, however, this standard has been criticized by other commentators on the basis that it allows more investors to participate in risky and dangerous private investments because the qualification standards have not changed over time. This has led to some calls for indexing the income standard to inflation. The SEC did review these quantitative standards but declined to make any changes at this time. Continue Reading SEC changes “accredited investor” definition – good, but not enough

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For both public and private companies, it’s important to determine the skills and other attributes needed to form a good or, hopefully, great board.  Of course, there are basics that always apply, such as integrity, intelligence, and a good mix of collegiality and candor.  However, once you get past those basics, it’s desirable to figure out what the organization really needs.  If the company has a consumer-facing business, you probably want to have a director or two with experience in that and related fields, such as marketing.  If it’s a defense contractor, you likely need someone with expertise in government relations.  And so on. However, in searching for and, hopefully, finding those board members, it’s also desirable to find individuals whose abilities extend beyond a single area of experience or expertise.

The notion of avoiding such “one-trick ponies” came to me while reading an article in a recent article in the Financial Times.  Since a subscription may be needed to access the article, the headline reads “US companies urged to appoint Covid-19 experts to boards.”  In fairness, the headline was a bit misleading; the article itself said that “the dean of Harvard’s school of public health has called on companies to put public health professionals [i.e., not Covid-19 experts] on their boards… to manage a pandemic threat that could hang over businesses for years.” Continue Reading One-trick ponies and hordes of directors

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From where I sit, the SEC under the chairmanship of Jay Clayton has generally done a good job for public companies.  It has adopted a number of rules and amendments that make disclosure more effective without appreciably adding to – and in some cases reducing – the burdens on public companies.  Examples include streamlining financial disclosure requirements, rationalizing the definitions of “smaller reporting company”, “accelerated filer”, and “large accelerated filer”, and revising the rules governing financial statements of acquired and disposed businesses (although the latter do not take effect until 2021). And let’s not forget the very recent rule changes affecting proxy advisory firms, including a critical requirement that those firms provide companies with their voting recommendations.

While I wish that the SEC had also focused on proxy plumbing, it’s still a pretty good record, and it’s only a partial listing.

However (you knew there would be a “however”), I’m profoundly disappointed in the SEC’s proposal to “fix” Form 13F – the form on which large investment managers report their equity holdings of public companies.  While it’s nice that the SEC has turned its attention to a form that has long been in need of updating, the proposal seems to me to be unacceptable in at least two major respects. Continue Reading 13F proposal — the SEC can (and should) do better

In my last post, I expressed some thoughts about the need to address our history and continuing practice of racial discrimination and inequality.  I’m still thinking about specific actions that I can take to put my actions where my mouth is.  However, in the meantime, I want to share a communication I received today from Paul Washington.

Paul is currently the Executive Director of the ESG Center (formerly the Corporate Governance Center) of The Conference Board.  I have known Paul for more years than he or I care to think.  He is a consummate lawyer, having served (among other things) as a Supreme Court clerk, as Corporate Secretary and Deputy General Counsel of Time-Warner, and as Chair of the Society for Corporate Governance.  I have the honor of being a Fellow of the ESG Center, one of the major perks of which is the opportunity to continue to work with Paul.

At any rate, here’s Paul’s note:

  • Be prepared to talk with – and engage – your board on racism, especially at consumer-facing companies. Don’t be afraid to ask your board for advice or board members to meet directly with employees on this topic.
  • Executive leadership is key. CEO leadership and visibility are critical. But it’s important to engage the entire C-suite and other business leaders.
  • Consider holding “courageous conversations”where you can hear first-hand stories from employees at all levels. Companies sometimes have been hesitant to have such discussions because they can raise the specter of workplace discrimination claims. But that may well be a risk worth taking – and one that can be mitigated by ensuring you have a robust system in place to investigate any issues that come up.
  • Be prepared for a sustained, broad-based effort. After the initial statements, it’s a good idea to pause to think more deeply and broadly about what the company can do. Companies can have a direct impact through their workforce and workplace policies, as well as through their corporate citizenship efforts. But they can also have a broad and lasting impact through their business investment decisions, how they produce and distribute their products and services, and the public policy stands they take that go beyond the company’s immediate economic interests.
  • Be sensitive to other diversity imperatives, but there’s no need to dilute the company’s efforts. It’s important to acknowledge the multiple forms of discrimination that take place, but there’s a singular opportunity to address discrimination against African-Americans, which can help serve as a catalyst for all of a company’s diversity, equity, and inclusion efforts.

Thank you, Paul.

Readers of this blog know that my posts tend to be on the light side – even when addressing subjects I regard as important, I find it hard to avoid at least a touch of sarcasm or irony.  Each posting also includes a picture intended to be humorous.

This is not a usual posting, however.  This time, I’m writing from my heart on a subject that can’t be treated with humor, irony, or sarcasm.  And no pictures this time.  It’s about our country’s heritage and our future, and I’m about as serious as I can be.

The subject in question is race, or race relations.  I know I am not alone in being profoundly upset about recent developments.  But what really upsets me is that where we are today is really not about recent developments.  Rather, our country is coping with what may be its original, 400 year-old sin, slavery, and the legacy of that original sin that even 150 years later we can’t seem to shake.

We can and must do more and do better.  One of the many posters I saw on TV during the protests was one saying “Silence is Violence.”  I agree.  If we stay silent in the face of discrimination, its manifestations, and its consequences, we will at best find ourselves exactly where we are today 150 years from now (assuming that we don’t destroy ourselves or our planet before that).  At worst, we will do just that – destroy ourselves.  We need to examine and change our institutions, our practices and, frankly, our minds and the minds of those around us. Continue Reading I’m serious

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As noted in a prior post, every now and then the SEC Enforcement Division likes to remind companies of the requirement to disclose personal benefits, or perquisites.  I’d even hazard a guess – completely unsubstantiated by research – that enforcement actions regarding perquisite non-disclosure make up a significant percentage of enforcement actions concerning proxy statements.

And yet, companies seem to keep forgetting about perks disclosure.  In some cases, the companies’ disclosure controls may not capture perquisites, but my hunch – again, unsupported by research, but this time supported by experience – is that companies and, in particular, their executives, manage to persuade themselves that the benefits in question have a legitimate business purpose and thus are not personal benefits at all.  Over the course of my career, I’ve heard hundreds if not thousands of reasons why a seemingly personal benefit should be treated as a business expense.  Here are just a few: Continue Reading When it comes to perquisites, caveat discloser

 

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About two years ago, I wrote a post about director compensation, quoting the old saw that pigs get fat but hogs get slaughtered. Given what I’ve been reading of late, I think it’s time for a refresher, but this time I’m discussing executive, rather than director, compensation.

With the onset of the COVID-19 pandemic, a number of companies or their executives took action to reduce pay.  In some cases, salaries were reduced to $1 a year or eliminated entirely.  So far, so good.  However, there were also cases in which the executives were given so-called mega-grants of equity to make up for their sacrifices.  That may have raised a few eyebrows, but the eyebrow-raising may have been mitigated or overlooked because the grants were made when the stock markets had dropped precipitously and many companies’ shares were trading at 52-week lows.

Of course, what goes down must come up, so when the stock markets rallied (and, in general, have continued to rise to levels that seem absurd in the face of what’s going on these days), the noble executives who sacrificed pay made out like bandits. Or hogs.  No sane person would argue that the stock markets have any rational connection to corporate performance generally, much less to that of a particular company.  However, the rising tide has floated a number of boats, including the holders of those mega-grants. Continue Reading Of shields and swords, pigs and hogs