Once again it is time for our annual departure from all things SEC- and governance-ish so that I can let you know about my favorite reads of the year gone by.
In case you’re wondering about the title of this post, it reflects my view that book critics who tell us what they think were
You may have noticed that the SEC has been very quiet on the rulemaking front in recent weeks. It comes as no surprise, as action on a number of items on the SEC’s Regulatory Flexibility Agenda had been moved from late 2024 to early 2025. (The cynic in me wonders whether the scheduling changes resulted from concerns that accusations of over-regulation would impact the 2024 election cycle, but – for now, at least – I’ll leave that to others.)
However, the SEC has definitely not been idle. Quite the contrary. In fact, recent weeks have seen what strikes me as an inordinate number of announcements of enforcement actions. Some of these actions are relatively “standard” – insider trading, recordkeeping violations, securities fraud, whistleblower protection violations (discussed in our recent e-alert), and so on. But others are somewhat unusual. For example:Continue Reading Law and Order: SEC
The SEC recently enacted a new exemption from registration for brokers who provide certain services in M&A transactions. The new exemption, which became effective on March 29, 2023, largely confirms and codifies prior SEC guidance that was provided in a January 31, 2014 No Action Letter and will provide some comfort and certainty to qualifying M&A brokers and their advisors who work in this arena. However, it may require some M&A brokers to register with the SEC despite the fact that they were not previously required to do so.
The new exemption from SEC registration, which is contained in new Section 15(b)(13) of the 1934 Act, incorporates much of the language of the 2014 No Action Letter, but it imposes size limitations that were not contained in the 2014 No Action Letter. The SEC withdrew the 2014 No Action Letter on March 29, 2023.
Section 15(a) of the Securities Exchange Act of 1934 generally requires any person engaged in the business of carrying out securities transactions for other parties to register with the SEC. Such registration can be costly, intrusive, and time consuming, and it probably does not create a high level of additional consumer protection or benefits in the M&A context. This has consistently been an area of concern, however, since unregistered brokers can be subject to severe penalties such as monetary fines and disgorgement of fees that they have received. As a result, most M&A brokers and their advisors have relied on the 2014 No Action Letter to justify not registering with the SEC. This has largely been a successful strategy absent other disqualifying factors, but because no action letters can be reversed or changed, participants were unable to get totally comfortable.Continue Reading New SEC Exemption from Registration for M&A Brokers: A Positive Step, but Not for All
In case you missed it, there was a rather provocative article in a recent issue of The Wall Street Journal entitled “How to Give Shareholders a Say in Corporate Social Responsibility” (subscription required). It was written by a professor and an executive fellow at London Business School and suggests that “if companies are going to pursue goals beyond profits, investors should be allowed to weigh in.” Specifically, it proposes “to give investors a ‘say on purpose’ vote, similar to the two-part ‘say on pay’ votes that investors have in Europe.” The article goes on:
“Here is how it would work. A company issues a statement… stating its purpose beyond profits…. [I]t would clarify the… trade-offs the company might make between investors and stakeholders (say, it will sacrifice profits to reduce carbon emissions) or between different stakeholders (it will decarbonize even though doing so will lead to layoffs). Every three years, investors would have a ‘policy vote’ on this statement, to convey whether they buy into it and the trade-offs it implies. An investor would vote against it if he or she disagrees with the priorities, or if it is so vague it gives little guidance on what the company stands for.”
Now I grant you that say on pay votes have generally benefited both companies and investors by encouraging and facilitating engagement between the two. I also grant you that among the topics investors and companies might discuss is how companies should address their “purpose.” But voting on it? I beg to differ.
Continue Reading Say on What???
When a company issues bad or less-than-good news on a Friday or the eve of a major holiday, say just before July 4th, investors and the media generally squawk like the proverbial stuck pig. And there is some justification for that squawking. After all, good news and bad news should be treated in a similar manner, and IMHO it’s too cute by half when a company tries to sneak something past the public at an odd time in the hopes that it won’t be noticed.
However, it appears that Institutional Shareholder Services does not regard itself as subject to the same concerns. Specifically, on November 2, the eve of what was arguably one of the most newsworthy if not significant elections in recent history, ISS snuck out an announcement that, effective January 2, 2021, it would no longer provide draft proxy voting reports to the S&P 500. Apparently, ISS – which has long been criticized for limiting the distribution of draft voting reports to the S&P 500 – has decided that the way to eliminate that criticism is not to send out draft reports at all.
Instead, ISS will send out proxy voting reports to its clients — i.e., investors — earlier and will send reports to all issuers at the same time at no cost. Thus (according to ISS), companies will have the time to provide feedback, and we’re assured that its “formal ‘Alert’ process” will enable companies to correct any errors and investors to change their votes. Anyone who’s gone head-to-head with ISS knows how well that process works; corrective alerts can get lost in the shuffle, votes don’t get changed, etc. And this new policy will almost surely lead to a big increase in the number of alerts.
Continue Reading ISS Tries to Hide in Not-So-Plain Sight
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
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
About a year ago, I was speaking with the governance committee of a prospective client. One of the committee members asked me what the “best practice” was in a particular area. I said that I hate the term “best practice,” because one size never fits all, there is almost always a range of perfectly fine practices, and that a company needs to think about how a particular practice would work (or not) given its industry, its history, and its culture, among the many things that make a company unique. Afterwards, I wondered if my candor would result in not getting the work, but evidently the committee agreed, and the rest is history.
At the time, I’d forgotten about a 2015 blog post I’d written on so-called best practices. In fact, I continued to forget about it until I recently read a fantastic paper published by the Rock Center for Corporate Governance at Stanford. Loosey-Goosey Governance discusses four misunderstood governance terms: good governance, board oversight, pay for performance, and sustainability. Along the way it demonstrates how wrong “conventional” wisdom can be – and is – regarding what companies should and should not do in the governance realm. Some examples:
Continue Reading “Loosey-Goosey Governance” (or, why I STILL hate “best practices”)
Although Dodd-Frank was enacted in 2010, the rule needed to implement one of its provisions – the requirement to disclose hedging policies – only recently took effect. In fact, for calendar-year companies, 2020 will be the first year in which the proxy statement will have
I recently came across an article reporting that the interim president of a state university system had failed to report a number of corporate board seats on his ethics forms. That got me thinking about the forms he may have been asked to complete, which in turn got me thinking about D&O questionnaires.
Getting directors and officers to accurately complete and return questionnaires in a timely manner is one of the most frustrating tasks faced by corporate secretaries. Years ago, I was speaking at a program for aspiring corporate governance nerds, when a young aspirant asked me if I had the secret to getting this task done. If memory serves me correctly, my response was to the effect that if I had the answer to her question, I could retire.
However, I sometimes think that people who circulate questionnaires are their own worst enemies. For example, a recent study reported that D&O questionnaires averaged 40 pages and 65 questions. That means that some, perhaps many, questionnaires are far longer. It’s unrealistic to expect someone with a life – much less a day job – to devote the amount of time necessary to complete a 40-page (or longer) questionnaire, particularly when many questions don’t lend themselves to simple “yes” or “no” answers.
Continue Reading The lowly D&O questionnaire