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.”

Really?

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.Continue Reading CEO pay ratios: ineffective disclosure on steroids

Long Delay for JOBS Act Changes
Photo by Omar Parada

On January 14th, the House passed H.R. 37 “Promoting Job Creation and Reducing Small Business Burdens Act.”  Although passed with some support from the Democrats (29 votes, which in these days of hyper-partisanship is practically a bipartisan bill), the White House issued a veto threat on January 12th because the bill also delays part of the Volker Rule effectiveness until July 21, 2019.  Thus, in its current form, it looks dead on arrival, but there are some interesting ideas that I support and will hopefully make it in a revised bill later in the term:

  • Delays the requirement for savings and loan holding companies to register under the Securities Exchange Act of 1934 to the same extent as bank holding companies (assets of $10 million and class of equity securities held of record by 2,000 or more persons).  Also allows deregistration for savings and loan holding companies when they have fewer than 1200 shareholders of record.  This seems fair and was likely an unintended distinction made when the JOBS Act passed.  Unfortunately, this innocuous bill was grouped with the Volker delay. 
  • Provides for an exemption from the Securities Exchange Act of 1934 for certain business brokers.  The bill provides for some restrictions such as
    Continue Reading Update to the JOBS Act? Probably not…

There have been a number of press reports in recent days about attempts by the new Republican majority to repeal all or part of Dodd-Frank.  Depending upon whom you choose to believe (assuming you choose to believe anyone in the current political environment), the Republicans want to eviscerate it, and the Democrats refuse to change

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

I have read several reports quoting Mary Jo White, Chair of the SEC, as saying that the remaining Dodd-Frank corporate governance rulemakings will be out by year-end.  Admittedly, the reports aren’t clear as to what Chair White means.   Does she mean that the so-called pay ratio rule will be adopted in final form by year-end (in which case the disclosures wouldn’t be required until 2016)?  Or that by year-end the Commission will have proposed rules on hedging, clawbacks and pay-for-performance?  All of the above?  It’s anyone’s guess.

I have also read the daily emails I receive from the SEC entitled “Upcoming Events Update.”  (I get several of these “Updates” every day, even though they are identical and don’t seem to have been updated at all.  For those of you who don’t get these emails, they purport to announce things like every meeting of the SEC and every speech to be given by Commissioners and Staff members.)  For the last month or two, no open meetings of the SEC have been scheduled (and it’s virtually impossible for these rules to be proposed or adopted otherwise than at an open meeting).  So when I saw today that
Continue Reading My inaugural Uptick: How about never? Does never work for you?

Is the SEC making a wrong turn by regulating corporate governance?
Photo by doncarlo

In the wake of the recent financial crisis, the Dodd-Frank Act created the SEC Investor Advisory Committee with the stated purpose of advising the SEC on (i) regulatory priorities of the SEC; (ii) issues relating to the regulation of securities products, trading strategies, and fee structures, and the effectiveness of disclosure; (iii) initiatives to protect investor interest; and (iv) initiatives to promote investor confidence and the integrity of the securities marketplace. In other words, the committee is to advise on matters historically within the purview of federal securities laws. While this is fine and good, there is some indication that the SEC may again be considering the use of disclosure rules to indirectly regulate matters that are not federal securities law matters (see, e.g., conflict mineral rules, Iran-related disclosure rules, CEO pay ratio disclosure rules, etc.).

The new potential area of regulation for the SEC may be internal corporate affairs. The committee’s agenda for the October 9, 2014 meeting of the SEC Investor Advisory Committee will include a discussion of
Continue Reading Wrong turn?: Is the SEC looking to further expand its regulatory jurisdiction through the disclosure process?

How Congo Became a Corporate Governance IssueA few months ago, the U.S. Court of Appeals for the D.C. Circuit upheld portions of Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, known as the “conflicts mineral rule.” The rule, enacted by Congress in July of 2010,requires certain public companies to provide disclosures about the use of specific conflict minerals supplied by the Democratic Republic of Congo (DRC) and nine neighboring countries. In the D.C. Circuit case, the National Association of Manufacturers, or NAM, challenged the SECs final rule implementing the conflicts mineral rule, raising Administrative Procedure Act, Exchange Act, and First Amendment claims. The D.C. Circuit agreed with NAM on its third claim and held that the final rule violates the First Amendment to the extent the rule requires regulated companies to report to the SEC and to post on their publically available websites information on any of their products that have not been found to be “DRC conflict free.” Despite this adverse ruling, the SEC made it clear that the conflicts minerals rule is here to stay: in a statement on the effect of the D.C. Circuit’s decision, the SEC communicated its expectation that public companies continue to comply with those deadlines and substantive requirements of the rule that the D.C. Circuit’s decision did not affect. So, what is the conflicts mineral rule, how far does it reach, and what are public companies doing to comply?

In an unusual attempt to curtail human rights abuses in Africa through regulation of U.S. public companies, the conflicts mineral rule requires companies to trace the origins of gold, tantalum, tin, and tungsten used in manufacturing and to
Continue Reading Despite First Amendment concerns, the conflict minerals rule is here to stay

Looking into the future of changes to corporate governanceInterest in corporate governance has increased exponentially over the last several years, as has shareholder and governmental pressure – often successful – for companies to change how they are governed.  Since 2002, we’ve seen Sarbanes-Oxley, Dodd-Frank, higher and sometimes passing votes on a wide variety of shareholder proposals, and rapid growth in corporate efforts to speak with investors.  And that’s just for starters.   

These developments represent the latest iteration of what has become part of our normal business cycle – scandals (e.g., Enron, WorldCom, Madoff, derivatives), followed by significant declines in stock prices, resulting in public outrage, reform, litigation, and shareholder activism.   Now that the economy is rebounding, should we anticipate a return to “normalcy” (whatever that may be)?  Are we back to “business as usual”? 

Gazing into a crystal ball can be risky, but I’m going to take a chance and say “no.”  While our economic problems have abated, I believe that the past is prologue – in other words, we’re going to continue to see more of the same: investor pressure on companies, legislation and regulation seeking a wide variety of corporate reforms, and the like.  Some more specific predictions follow: 

  • Increased Focus on Small- and Mid-Cap Companies:  Investors have picked most if not all of the low-hanging governance fruit from large-cap companies.  Sure, there are some issues that may generate heat and some corporate “outliers” that investors will continue to attack.  However, most big companies have long since adopted such reforms as majority voting in uncontested director elections, elimination of supermajority votes and other anti-takeover provisions, and shareholder ability to call special meetings, to name just a few.  If investors (and their partners, the proxy advisory firms) are to continue to grow,
    Continue Reading The shape of things to come in corporate governance
SEC may change identity of angels
Illustration by Royce Bair

Potential Changes.

Accredited investors have long been critical participants in private financing transactions, and the success of most private financings is largely determined by the participation of these investors and the availability of their capital. State and Federal securities laws have been written or amended to foster and facilitate investment by these accredited investors. Based on recent developments, the standards for qualification as an accredited investor may be changing, and these changes could pose problems for companies seeking financing.

The current requirements for accredited investor status are contained in Rule 501(a) of the 1933 Act. The most commonly used standards for individual investors are a $200,000 annual income (or $300,000 combined income with a spouse) or a $1,000,000 net worth (excluding the value of the investor’s primary residence). Other than the exclusion of the investor’s primary residence (which became effective in 2012), these standards have been in place since 1982 without any changes to reflect the effects of inflation during that period.  

Based on these current standards, observers estimate that there are approximately 8.5 million accredited investors in the United States. Some critics have asserted that this number is far higher than it should be, and that many of these people only qualify as accredited investors because
Continue Reading Accredited investors – potential changes and some helpful guidance

Uniform fiduciary duty standard for broker-dealers
Illustration by Divine Harvester

As we blogged about last August, Section 913 of the Dodd-Frank Act directed the SEC to study the need for establishing a new, uniform, federal fiduciary standard of care for brokers and investment advisers providing personalized investment advice. Recall that, traditionally, broker-dealers and investment advisors are subject to different duties of care: a suitability standard for broker-dealers and a more stringent, fiduciary duty for investment advisors. 

Despite the express mandate given to it by Section 913 of the Dodd-Frank Act, the SEC has made slow progress in determining whether to adopt a uniform fiduciary standard rule. In January 2011, the SEC issued its Section 913 Report, recommending “the consideration of rulemakings” that would establish a uniform fiduciary standard for both broker-dealers and investment advisers. In the wake of issuing its Section 913 Report, in March 2013 the SEC opened its doors comments, requesting data and other information relating to the costs and benefits of implementing a uniform fiduciary standard. While the comment period ended in July of 2013, the SEC has apparently not yet completed its anticipated cost-benefit analysis. Based on the SEC’s regulatory agenda for the 2014 fiscal year, it does not seem to be in much of a rush: in the agenda, the SEC listed the “Personalized Investment Advice Standard of Conduct” as a “long-term action” and as its 40th priority out of 43 items. That said, in a speech at the SEC Speaks Conference in Washington on February 21, 2014, SEC Chair Mary Jo White said she
Continue Reading Uniform Fiduciary Standard for Broker-Dealers: An Update