The still relatively new SEC Chair, Jay Clayton, has let it be known that one of his missions is to improve the health of our IPO market and, thereby, to improve our capital markets generally.  His minions – including a senior SEC Staff member I recently heard in Washington – have been spreading this gospel according to Jay.

I wish him (and them) luck, but I wonder if the mission is impossible.  I’m thinking of some recent articles, including one by the inimitable Andrew Ross Sorkin entitled “Fixing the ‘Brain Damage’ Caused by the I.P.O. Process”, that makes the resuscitation of IPOs seem unlikely.  As if the title weren’t off-putting enough, one of the executives quoted in the article described his company’s IPO process as “a way of living in hell without dying”.  Not a good start.

Continue Reading Can the US IPO market be brought back from the dead?

Loyal readers of this blog won’t be surprised that we’re disappointed that the SEC has again perfunctorily approved another proposal of the Public Company Accounting Oversight Board, or PCAOB.  (If you haven’t been following our blog, you can find our prior screeds here and here, among other places.)

The victim this time is the auditor report.  The new PCAOB standard requires an expansion of the auditor report to include the auditor’s tenure; a statement that the auditor is required to be independent; and some other language changes.  It also requires the report to be addressed to the company’s shareholders and directors.  But the plotz (no typo) de resistance is a requirement to disclose so-called “critical audit matters”.

Continue Reading A missed opportunity (or, when more is less)

 

Photo by Jeffrey Beall

Last year, Congress required the SEC to review the public company disclosure requirements in Regulation S-K and make detailed recommendations as to how those rules might be changed to modernize and simplify the requirements while still requiring disclosure of all material information. The ultimate goal was to reduce burdens on public companies while improving readability and navigation of public company filings, including through reducing repetition in such filings. On November 23, 2016, the SEC released its initial recommendations in a report (the “2016 Report”). The 2016 Report which served as the basis for proposed rules, which were set forth in a 253 page rules release on October 11, 2017. While the proposed rules largely implement the recommendations from the 2016 Report, the proposed rules deviated in certain respects from the recommendations in the 2016 Report. Specifically, the release contains proposed changes to the following provisions under Regulation S-K:

  • Description of Property (Item 102);
  • Management’s Discussion and Analysis (Item 303);
  • Directors, Executive Officers, Promoters, and Control Persons (Item 401);
  • Compliance with Section 16(a) of the Exchange Act (Item 405);
  • Outside Front Cover Page of the Prospectus (Item 501(b));
  • Risk Factors (Item 503(c));
  • Plan of Distribution (Item 508);
  • Material Contracts (Item 601(b)(10)); and
  • Various rules related to incorporation by reference.

Additionally, Some of the proposed amendments would require additional disclosure or incorporation of new technology. These include proposed changes to:

  • Outside Front Cover Page of the Prospectus (Item 501(b)(4));
  • Description of Registrant’s Securities (Item 601(b)(4));
  • Subsidiaries of the Registrant (Item 601(b)(21)(i)); and
  • Various regulations and forms to require all of the information on the cover pages of some Exchange Act forms to be tagged in Inline XBRL format.

While somewhat underwhelming with regard to the actual relief provided, the proposed changes are certainly a step in the right direction for improving the disclosure requirements for public companies. Nevertheless, the proposals seem to be relatively minor in nature and won’t likely do much for public companies as far as reducing their disclosure burdens. Below is a summary description of the material changes proposed in the release: Continue Reading SEC’s Attempt to Modernize and Streamline Disclosures for Public Companies Falls Short

 

With Chair Jay Clayton and Corp Fin Director Bill Hinman now in office for several months, the SEC seems to be gaining traction in a number of areas of interest to
public companies.

Pay Ratio Disclosures

As we noted in a Gunster E-Alert, on September 21, the SEC issued interpretations to assist companies in preparing the pay ratio disclosures called for under Item 402(u) of Regulation S-K.  The consensus (with which we agree) is that the interpretations will make it much easier for companies to prepare their ratios and related disclosures and hopefully to reduce litigation exposure associated with those disclosures.

Continue Reading Your tax dollars at work (at the SEC)

This is a first for The Securities Edge – a book review.  The book in question is The Chickenshit Club – Why the Justice Department Fails to Prosecute Executives by Jesse Eisinger.  Mr. Eisinger is a writer for Pro Publica.  He’s a very smart man and a good (even great) reporter; among other things, he’s won the Pulitzer Prize.  I met him once and was impressed by his intellect and commitment.

However, the book bothers me greatly, and that’s why I’ve decided to post this review.  As indicated by his title, he is concerned with the failure to prosecute executives, both generally and in connection with the financial collapse.  That concern is legitimate; many people – including people in business – share it, and some hold the failure at least partially responsible for our political situation today.  The problem with the book is that in Mr. Eisinger’s view there are heroes and villains and nothing in between; those who prosecute are good, and those who don’t (or who do so halfheartedly) are bad – and the businessmen themselves are the worst of all.

For example, among the people he idolizes is Stanley Sporkin, a retired USDC judge who previously served as the SEC’s Director of Enforcement. Mr. Sporkin’s integrity may be beyond question, but in Mr. Eisinger’s view, his judgment is (and was) as well.  Those of us who practiced during Mr. Sporkin’s tenure at Enforcement may have a different view.  Among other things, Mr. Sporkin was responsible for pursuing insider trading cases against Vincent Chiarella and Ray Dirks.   Mr. Eisinger lauds Mr. Sporkin for going after Mr. Chiarella – a typesetter for a financial printer who saw some juicy (nonpublic) information and traded on it.  Did he trade on the basis of inside information?  Yes, but at the end of the day he was a schnook who should have gotten a slap on the wrist rather than being subjected to a (literal) full court press by the federal government.  The courts apparently felt the same way, and, as courts often do, they found a way to let him off the hook by developing a strained approach to insider trading law that continues to haunt us today.  (Mr. Eisinger doesn’t mention the equally ill-advised insider trading prosecution of Ray Dirks, which also contributed to the current garbled state of affairs in insider trading law.)

Continue Reading Heroes and villains: A review of “The Chickenshit Club” by Jesse Eisinger

Now that I have your attention, you may be disappointed to know that I’m referring to another s-word: “sustainability”.  It’s surely one of the big governance words of 2017.  Investors are pressuring companies to do and say more about it.  Organizations are developing standards – sometimes inconsistent ones – by which to measure companies’ performance in it.  And companies are dealing with it in a growing variety of ways, including through investor engagement and disclosure.

Being a governance and disclosure nerd, I’ve given lots of thought to sustainability in both contexts.  Lately, I’ve come up with two thoughts about it.

Thought 1 Continue Reading The s-word and your investment portfolio

Earlier this month, the Federal Reserve proposed changes to its guidance on corporate governance for banking organizations.  The proposals suggest a new approach to corporate governance that could extend beyond the banking industry; among other things, they suggest that boards should spend more time on more important matters, such as strategy and risk tolerance, than on compliance box-ticking. However, taken as a whole, the proposals strike me as being something of a mixed bag.  And some of the positive aspects of the proposals are already being subjected to attacks.

The Good News

The good news is that the Fed seems to be acknowledging that the board’s role is that of oversight and that boards are spending far too much time micro-managing compliance and should focus on big picture items such as strategy and risk.  Those of us who speak with board members know that this has been a significant concern since the enactment of Dodd-Frank.

Continue Reading Federal Reserve governance guidance: the pendulum swings back (?)

In late July, S&P Dow Jones and FTSE Russell announced that they were changing or proposing to change the standards that govern whether a company is included in their indices.  Although their approaches differ, the changes would effectively bar most companies with differential voting rights from their indices, as follows:

  • In its July 31 announcement, S&P Dow Jones said that companies with multiple share classes will no longer be included in the indices comprising the S&P Composite 1500 – which includes the S&P 500, S&P MidCap 400 and S&P SmallCap 600. There are some exceptions; companies currently in these indices will be grandfathered, as will any newly public company spun off from a company currently included in any of the indices.
  • Five days earlier, FTSE Russell proposed to require more than 5% of a company’s voting rights – across all equity securities, whether or not listed or traded – to be held by “free float” holders to be eligible for inclusion in the FTSE Russell indices.

Continue Reading Class Acts: Stock Indices Bar Differential Voting Rights

Some of you may remember Christopher Cox, who served as SEC Chair from 2005 to early 2009, when he was succeeded by Mary Schapiro.  His name doesn’t come up often, perhaps because his legacy was a weakened Commission tarnished by, among other things, the financial crisis and the Madoff scandal.

While Chairman Cox may not have been responsible for either of those debacles, he did leave another unpleasant legacy – XBRL.  He was among the biggest cheerleaders for XBRL, claiming that it would enable investors to compare companies within and across industries and would perform various other miracles.  Suffice it to say it hasn’t done that.  Aside from the fact that it’s time-consuming, it has failed to provide the benefits of comparability.  As a client recently said,

“[E]ven if two companies use the same taxonomy/tagging for Cost of Sales, they probably are not consistent in the underlying details that go into Cost of Sales.  One company might classify certain components as G&A instead.  There are many other examples.  Consistency is very important for one company’s reporting from period to period, however comparisons of competitors’ financials will always be approximations at best.”

Continue Reading RIP XBRL?

The young ones among you may not be familiar with Harvey Pitt, but he is an incredibly smart man and a gifted attorney who chaired the SEC some years back.  He made some political gaffes in that role, but that doesn’t diminish his understanding of the securities laws and how disclosure works.

A few weeks ago, he was quoted in The Wall Street Journal on the subject of disclosure (“Harvey Pitt Envisions a New Form of Corporate Disclosure”).  Specifically, he points out that “[d]isclosure is supposed to be for the purpose of informing…but…it’s become for the purpose of providing a defense”.  He also says “…when you have proxy statements that run hundreds of pages…it’s impossible to expect any normal individual to put in the time to read all of those pages”.  As I said, he’s an incredibly smart man.

So what is his solution?  He suggests a “summary disclosure document the way disclosure used to be” – say five or six pages – and that more detailed information be available by hyperlink for the investors who want to dig deep.  At the same time, companies could track how many people actually make that deep dive and make judgments as to eliminating information that no one seems interested in.

Continue Reading On the subject of effective disclosure…