In Case You Missed It - Interesting Items for Corporate Counsel (Cumulative)

November 18, 2022

1. The SEC adopted final clawback rules last month, here, a mere seven years after they were originally proposed! After publication of the final rules in the federal register (soon), stock exchanges must propose listing standards to require listed company compliance within a year. See the SEC fact sheet here and analysis here, here and here.
2. The SEC’s clawback rule adoption is part of the Biden Administration’s modest acceleration of rulemaking toward the end of 2022, which saw the adoption of:
   • Rules requiring investment managers to disclose how they voted on public company “say on pay,” here.
   • Rules expanding the SEC’s whistleblower program, here.
   • Pay versus performance disclosure rules here, which also were seven years in the making. The rules are effective for fiscal years ending after December 16, 2022; summaries are here and here.
   • Broker-dealer electronic recordkeeping rules, here.
   • Revised proxy advisor rules, here, which generally reverse Trump Administration rules on the topic.

   No word on the timeline for final action on the SEC’s proposed climate disclosure rules, here, but there are some rumblings that the rule will be delayed (here) and maybe significantly modified (here).

3. Note that the six-month transition period to begin e-filing Forms 144, glossy annual reports, and other items previously filed in paper form, ends on December 10, 2022. See the final rule here.
4. A slew of public companies have amended their bylaws to address universal proxy rules, here, intended to rationalize the process for contested director elections. A redline showing proxy rule changes to accommodate universal proxies is here. Bylaw amendments may not be strictly necessary, but universal proxy requirements should at least be coordinated with existing “advance notice” provisions (everyone should have these) and “proxy access” provisions (most large public companies have them, most smaller companies do not). Some are leveraging the new universal proxy rules to make dissident stockholders disclose detail on what they hope to achieve in a proxy battle, among other things; activist push-back against those efforts (and at least one lawsuit) is a thing, see here.

   We think bylaws should be modified at least to require a dissident stockholder to deliver to the company:

   • Each proposed director’s consent to being named in “a” proxy statement, to ensure the nominee is “bona fide” per Rule 14a-4(c)(5) and (d)(1), and a completed D&O questionnaire in the company’s standard form.
   • A representation that the dissident will make a separate proxy solicitation as required by Rule 14a-19 (i.e., to at least 67% of the stockholders within the shorter of five days after the company-filed proxy statement or 25 days before the shareholder meeting date). This may give a clearer path to disqualifying dissident candidates without involving courts and maybe to recovering proxy card reprinting fees or other costs if the dissident fails to comply with Rule 14a-9. (Bylaws might even specify that if the dissident shareholder abandons its proxy solicitation or fails to timely make it, the dissident must pay the costs of recirculating the company’s proxy card.)

   We expect that under new Schedule 14a, Item 21(c), companies will disclose in proxy statements that, in lieu of recirculating proxy cards, if the dissident shareholder fails to comply with Rule 14a-19, like by not timely filing its proxy statement, the company will treat votes for the dissident’s nominees as “withhold” or “against” votes on the company’s slate, depending on whether plurality or majority voting standards apply. Perhaps some will bake that treatment directly into their bylaws. (We don’t expect many would take the position that they can reallocate votes to management’s slate—not strictly prohibited, but overreach.)

   We suspect the rules won’t result in much of an uptick in proxy contests. It’s still expensive (although not that expensive under the e-delivery model), and dissidents often operate at a disadvantage to the company in any case. We’ll see. Counterpoints and analysis are here and here.

5. The SEC also released three new Universal Proxy Compliance and Disclosure Interpretations, 139.01 (dissidents can’t nominate more directors than open seats), .02 (company must inform dissidents of other dissident nominees), and .03 (60-day notice by dissidents is a minimum, advance notice bylaw provisions can require earlier notice), available here.
6. ISS guidance about universal proxies is discussed here. (Generally, “pro.”) ISS also posted proposed voting policy changes for 2023, here, and announced 23 new ESG rating updates here.
7. On the topic of charter document amendments and proxy matters, Delaware companies should consider updates to capture 2022 changes to Delaware General Corporation Law (see blackline of DGCL changes effective August 1, 2022 here), including:
   • Certificate of incorporation amendments to include officer exculpation now permitted by DGCL § 102(b)(7), which trues the risk of serving as a corporate officer to the risk of serving as a corporate director. We expect many of these proposals at upcoming annual stockholder meetings. See commentary here, here, and here.
   • Bylaw amendments to capture changes to §§ 219 (stockholder lists) and 222 (adjourned meetings and electronic notice), although these are required or default provisions under the DGCL, so you need not update if existing bylaw provisions do not cover these areas.

   Additional sources re the DGCL changes are here, here, and here.

8. The 2022 report on SEC enforcement actions is available here, and analysis is here. Recall also cautions about stepped-up SEC scrutiny of Rule 10b5-1 plans (e.g., here, here, and here) and that the SEC earlier proposed Rule 10b5-1 changes (here). As always, it’s useful to treat SEC enforcement priorities as a touchstone for corporate governance practices and internal compliance focus.
9. And just to terrify you more, CFIUS released guidance on enforcement penalties here (summary here).
10. Disclosure isn’t just for publicly traded companies, as the Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department reminded us when it adopted final rules, here, required by the Corporate Transparency Act (here) that implement beneficial ownership reporting for most legal entities formed in the U.S. Summaries are here, here, and here.
11. Unless you’ve been living on Mars, you know that Elon Musk completed his purchase of Twitter on the eve of resumption of Twitter’s lawsuit against him. For all the ink spilled since Musk announced the purchase, tried to cancel it, failed to renegotiate it, and then completed it, at the end of the day the M&A legal lessons are merely these: binding agreements are binding; proving a “material adverse change” is still tough in Delaware after Akorn v. Fresenius (2018), here.

    Three weeks in, it’s still unclear how Musk expects to underpants-gnome his way to making Twitter profitable, but simultaneously soothing advertisers and tweeting weirdo conspiracy theories was an odd way to start. Musk is erratic and appears plan-less, a plus to those irrationally drawn to bombast, but to others it makes his self-designation as “Chief Twit” seem more unnecessary than amusing. (And to leave no doubt, this.)

    The MAGA set has simultaneously delighted in Musk’s mass firing of Twitter employees (spoiled!) and heralded the purchase as a triumph of free speech, for some reason. (For the MAGA set, see here but definitely not here.) Liberal celebrities have bravely declared they will no longer post random thoughts or shill for products on the platform. For some, watching the drama is likely more fun than contemplating the reality that Twitter is likely a sinkhole that will slowly drain some of Musk’s resources (but maybe not that slowly, here). For us, the nonstop news coverage makes us pine for the days when Googling “Musk disaster” merely yielded results like this and this.

12. And speaking of free speech, but mostly just for fun, check out:
    • The greatest Amicus Curiae brief in support of a petition for a writ of certiorari you will ever read (a high bar indeed), here.
    • A missive from the “upside down” of free speech in Florida, here.
13. And finally, in non-FTX cryptocurrency news, we were amused to see this and to imagine how cool it must have felt for regulatory nerds to go after Kim Kardashian.

February 12, 2021

As we continue to stumble into 2021, initially disappointed that our low expectations for a relatively better year lasted only six days, our editorial staff hews to the clamor for a calming retrospective on legal happenings in the tail end of 2020, for tips on significant changes for 2021, and for updates on the Paycheck Protection Program. We aim to please. 

Some public company changes . . .

1. The SEC rule changing Regulation S-K Items 101 (description of business), 103 (legal proceedings) and 105 (risk factors) is here and a redline showing the language changes is here. Based on early returns, we don’t expect all that much to change in upcoming annual reports based on the Regulation S-K changes.
   • The business description is more clearly principles-based, but we expect most will continue to treat suggested disclosure topics as prescriptive, including the new requirement to disclose information about human capital resources.
     • An overview of disclosures about “human capital” by early-filers, including Form 10-K excerpts, is included in the FW Cook report here and the Willis Towers report here; the rule-making petition cited in the rule, which describes potential areas of disclosure focus, is here; at least one perspective on what investors care about is here; and some historical perspective on how we got to the new rule is here.
     • The rule changes offer the chance for a fresh look at the business description, but aside from disclosure about human capital and a little tinkering around the edges, we don’t expect radical rewrites. Similarly, we do not expect many to take advantage of the ability to hyperlink to prior disclosures and to just provide only updates in current filings, largely because it’s easier to tweak the whole business description each time rather than to include a cascading series of updates you’ll have to consolidate at some point.
   • Written as they are by cautious lawyers, we have never found legal proceeding descriptions particularly interesting, and largely the changes to Item 103 just mean the range of things an issuer need not disclose has broadened slightly, and broadened slightly more if a company discloses its practice of not disclosing government proceedings that are likely to result in sanctions equal to the lesser of $1 million or 1% of current assets.
   • Finally, in lieu of trimming risk factors (if only!), we expect issuers with 15+ pages of risk factors will include the summary required by the rule, and that all issuers will reorganize risk factors under “topical headings,” including moving “general” risks to the end. The risk factor summary is supposed to be in “the forepart” of the filing, which isn’t defined. We think it’s adequate to include the risk factor summary in the “forward-looking statement” disclosure, which often immediately follows the cover page and which may already include a bulleted summary of risk factors. Hard to get more “forepart” than that, and there’s obvious flow between the forward-looking statement disclaimer and the risks that could cause those statements to be wrong. There is no requirement to caption the summary, but we’re sympathetic to (and might even agree with) those who prefer to include a separate caption as a guidepost, and expect to see many include successive captions for “Forward-Looking Statements” and “Summary of Risk Factors.”

   Lengthier descriptions of the rule changes are here, here, and here.

2. The SEC also adopted modifications to Regulation S-K, here, to eliminate selected financial data disclosure, streamline supplementary financial data disclosure, and modify MD&A requirements. A redline showing rule changes is here. The rule is effective February 10, 2021, but compliance is not required until the annual report for the fiscal year ending on or after August 9, 2021. Early compliance is allowed as long as a filer adopts the S-K changes whole-hog. Under revised Item 303 of Regulation S-K, MD&A must now focus on material events and uncertainties likely to affect operations and liquidity,¹ making the disclosure more forward-looking and principles-based, and trims prescriptive disclosures significantly, eliminating among other things prescriptive disclosures about off-balance sheet arrangements and contractual obligations. Summaries of the changes are here, here, and here.
3. Don’t forget, because it might sneak by you, to make sure you are using the most current Form 10-K cover page, which is here. In addition to the items included on the cover of your recent batch of Form 10-Qs (trading symbol, etc.), the SEC adopted changes that require you to include the following:

   If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ?

   Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ?

4. The SEC also adopted, just shy of 11 years after being required to do so by the Dodd-Frank Act, final rules requiring resource extraction companies to include in an annual report information about payments made to foreign and U.S. governments for commercial development of oil, gas and minerals. The final rule is here.
5. In case the first four items of this alert didn’t do it for you, overviews of considerations for upcoming annual reports and proxy statements are here, here, here, here, here, and here.
6. SPACs, “special purpose acquisition companies,” have been in the news through much of 2020, although much of the news hasn't been good. (Just as a refresher, SPACs are “blank-check” shell companies that raise money through an IPO based on the strength of their management team, theoretically, and then go on the hunt for a company to acquire—call it “large-scale crowdfunding” of a future idea, or maybe a poor-man’s opportunity to invest in an ersatz equity fund.) According to The Wall Street Journal, SPACs rescued Wall Street last year (see here), but also according to the Journal, here, SPACs seriously underperform the market while sponsors nonetheless come out flush because they skim 20% of the value of the acquired company off the top. The 20% structure might be why the SPAC sponsors of LMF Acquisition Opportunities, Inc. picked their name and stock trading symbol: LMFAO; Nasdaq: LMAO (see here). The heads I win, tails you lose structure, along with the unapologetic unwillingness to break stereotypes, might contribute to the high cost of D&O insurance for SPACs (see here).
7. That companies like LMFAO exist as a concept undoubtedly caused many to cheer the multi-billion-dollar losses that some market professionals suffered betting against GameStop, a brick and mortar seller of video games that, based on that description alone, seems a safe “short” bet. Analyses of what the heck happened abound, but here’s our stab: buyers comprising a hodgepodge of believers in GameStop’s business, those who wanted to stick it to hedge funds who had to cover short-sale positions, and those looking to get rich off the mayhem, piled on to drive GameStop’s stock price up higher than makes a lick of sense. Just for fun, here’s a graph of GameStop’s five-year stock price:

    

   

   More in depth analysis of the GameStop oddity is here, here, and here. Related, but more obscure commentary regarding Robinhood and its call to update the process for settling stock trades, is here. If you are an executive bored with running your company’s business and, inspired by GameStop, want instead to focus on how to take advantage of an unlikely irrational run on your company’s stock, see here; while you scheme, however, keep in mind the SEC’s required disclosures when raising money during a period of stock volatility, embedded in its sample comment letter here. Finally, in case you’re wondering whether there are securities laws or other legal restrictions on a bunch of yahoos who drive up a stock price, simultaneously creating and wiping out fortunes for no rationale reason: “no.”

8. It seems inevitable, particularly with the Biden Administration now firmly ensconced, that pressure for the SEC to adopt environmental, governance, and social (ESG) disclosures will increase. In part, pressure may come from corporations and industry groups that desire to stall the ramp of shareholder proposals and to bring some consistency to disclosures. The call for enhanced climate change disclosure, for example, has been around for a decade, and Blackrock continues to push for it (see here). More recently, calls for public disclosure of corporate political spending have grown clamorous, likely spurred by the (let’s face it, temporary) freeze of corporate contributions to (mostly) Republicans (see here). Blackrock recently published its perspective on corporate political activities, here, and a description of increased shareholder interest in finding out exactly what a company hopes to achieve through political contributions is here. (Also interesting, and at least tangentially related to ESG and politics, is recent news that Goya’s board had barred its CEO from talking to the press following his ill-advised remarks to FOX News regarding Presidential election fraud, see here.)
9. Related to the “S” in ESG, Nasdaq proposed a rule, here, to impose board diversity standards on Nasdaq-listed companies. Commentary on the Nasdaq rule is here and here. In typical SRO fashion, the listing standard tries to effect change through embarrassing disclosure: essentially, Nasdaq would require that listed companies have two diverse directors within two years of rule adoption or disclose why they do not. The Nasdaq rule would also require a listed company to disclose in its proxy statement or on its website statistical information about each director’s gender, race, and self-identification as LGBTQ+ and to disclose current year and immediately prior year director diversity statistics. Nasdaq’s rule is chicken feed compared to proposed Oregon House Bill 3110, here, which would require each publicly traded company that has its primary office in Oregon to have one woman and one member of an “underrepresented community” on its board (and a single person can’t do double duty). The law would require public companies to file an annual compliance report with the Oregon Secretary of State and would impose significant penalties for violations—$100,000 for failing to file the required annual report and $100,000 for the first violation and $300,000 each for subsequent violation if the board did not have the required directors serving on its board for at least eight months in its prior calendar year. Oregon’s law looks a whole lot like California’s, which its Governor recognized had questionable Constitutional legitimacy and which is, in fact, being challenged. See here. In typical Oregon fashion, its proposed law goes further. Stay tuned.

Some private offering changes . . .

10. Effective December 8, 2020, the definitions of “accredited investor” and “qualified institutional buyer” changed to encompass a moderately broader swath of investors. The SEC rule is here and a redline that shows changes to the definitions is here. The rule expands the Regulation D safe harbor for sales to:
    1. Individuals with SEC-designated professional credentials that suggest they know what they’re doing investment-wise. Out of the gate, the SEC adopted an order, here, identifying holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons.
    2. A “knowledgeable employee” of an issuing investment company, as defined under the Investment Company Act.
    3. A “family office” with specified attributes and a “family client,” in each case as defined under the Investment Advisers Act.

    The rule also modifies the accredited investor definition to include the concept of “spousal equivalent” whose assets or income can be included in rule thresholds, and clarifies that a limited liability company (in addition to a non-profit, business trust, partnership, and corporation) with assets over $5,000,000 and not formed specifically to invest in securities is accredited (practitioners generally were already comfortable this was the case, but clarity is always helpful).

    Generally speaking, changes to the accredited investor definition are not particularly significant and incrementally expand the safe harbor to those in the securities business. In other words, not much help for typical, cash-starved growth companies or for poor investors clamoring to gamble on private company equities. The changes to the definition of a QIB are also limited, and merely add Rural Business Investment Companies and institutional accredited investors defined in Regulation D.

11. More significant, the SEC adopted rules to facilitate private offerings, here, that are effective March 15, 2021. The weighty, 388-page rule modifies some existing rules incrementally, including communication and disclosure rules; offering limits under Regulation A, Rule 504, and Regulation Crowdfunding; and eligibility rules under Regulation A and Regulation Crowdfunding. But it also adopts integration rules that try to whack through the existing, fairly incoherent analytical framework. Before getting to that, a summary of the easier item in the rule:
    • The rule includes a useful chart of common exemptions, as modified by the rule, starting on page 9.
    • Things that aren’t “offers” or are permitted offers:
      • New Rule 148 states that “demo days” aren’t offers as long as they are held by an "eligible sponsor" that isn’t hawking securities or profiting from the event. Colleges, government agencies, incubators and defined angel funds are eligible sponsors (and are subject to restrictions to ensure they aren’t making money), but broker, dealers and investment advisers are not. Online, but not in-person, participation must be limited to associates of the sponsor, relevant industry professionals, and those reasonably believed to be accredited investors.
      • New Rule 241 allows a generic “solicitations of interest” in an offering as long as the solicitation includes prescribed disclosures and is filed with Regulation A or Crowdfunding filings, or provided to non-accredited investors in a Rule 506(b) offering, if the offer is made within 30 days of the solicitation. We expect this rule will be seldom used, since it may blow up an offering, like a 506(b) offering, that prohibits general solicitation.
      • New Rule 206 allows “test the water” communications in a Crowdfunding offering before a Form C is filed, provided that the communication is filed with the Form C.
    • To meet the verification requirements under Rule 506(c), issuers may rely on reasonable investigations in the prior five years, plus a questionnaire and good faith belief an investor remains accredited. The rule also states the SEC’s view that a questionnaire alone might suffice if the issuer takes into account prior substantive relationships or other facts that make apparent accredited investor status. (Say, to get comfortable that existing shareholders known to the issuer who are asked to vote on an unregistered stock-for-stock merger are accredited … do you believe us now, Sullivan & Cromwell?)
    • The financial statements an issuer must provide to non-accredited investors under Regulation D now match the simpler requirements that apply to Regulation A offerings, including that offerings under $20 million need not be audited, and some Regulation A disclosure requirements are simplified.
    • Offering limits under Regulation A are raised to $75 million for Tier 2 offerings (from $50 million), including $22.5 million of secondary sales (from $15 million); limits under Rule 504 are raised to $10 million from $5 million; and limits under Regulation CROWDFUNDING is raised to $5 million from $1.07 million. (It’s still the case that none of these exemptions is going to be terribly useful, but every little bit helps.)
    • Allows investment vehicles to participate in Regulation CROWDFUNDING offerings without becoming subject to “investment company” regulation.
    • Harmonizes the “bad actor” look-back period for Regulations D, A, and Crowdfunding.
12. The SEC’s tinkering with private offering changes is all well and good, but not hugely important in a macro sense. The table on page 203 of the rule (here) tells you that exempt securities offerings are all about Regulation D, so most of the rule changes are “meh.” The revised integration analysis implemented by the rule is a bigger deal.

    To take a step back, if two securities offerings are “integrated,” the combined offering must satisfy all the exemption criteria of a single exemption. If they don’t, a string of offerings may suddenly be non-exempt, giving every investor rescission rights, branding the issuer a “bad actor” unable to rely on issuer exemptions for two years, and exposing the issuer and other offering participants to liability under federal and state securities laws. Traditional integration analysis is based on five factors: whether (1) different offerings are part of a single plan of financing; (2) the offerings involve issuance of the same class of security; (3) the offerings are made at or about the same time; (4) the same type of consideration is to be received in each offering; and (5) the offerings are made for the same general purpose. The analysis is wickedly difficult to apply, and determinations are guided heavily by an issuer’s (and counsel’s) tolerance for risk. The SEC has occasionally tinkered with making the analysis easier. On the heels of creating new offering exemptions in 2015, including exempt offerings that for the first time permitted general solicitations, the SEC took some (for it) dramatic steps to clarify its integration analysis. (See here.)

    Its latest release provides additional clarity, and gives guideposts to ensure offerings are not integrated and some comfort that if you inadvertently screw up, you may have nonetheless stumbled into a safe harbor or have a good faith argument that offers should not be integrated.

    New integration Rule 152 sets forth a general principal for integration analysis and establishes discrete safe harbors. Rule 152 supplements, and does not overturn, the five-factor test or other established integration analysis guideposts. Under the general principle, if a safe harbor does not apply, an issuer may determine offerings are not integrated if it determines each offer meets exemption requirements:

    • For exemptions that prohibit general solicitation, the issuer must have a reasonable belief that the purchasers in the exempt offering were not solicited (say, by having any purchaser represent that fact and not knowing otherwise?) or established a substantive relationship with the purchaser before the solicitation.
    • For concurrent offers that allow general solicitation, referencing the material terms of the other offering may constitute an offer, which generally means you must include legends, etc. to comply with each exempt offering requirement. The negative inference, perhaps, is that if you don’t discuss the material terms, the offers aren’t integrated. For example, it may be sufficient to say “we’re raising money in another exempt offering, but we’re not going to tell you about it, and will ask you to represent you were not solicited under that offering if you participate in this one.”

    Safe harbors to integration abound:

    • Offerings at least 30 days apart are not integrated, except that if an offering that doesn’t permit general solicitation follows an offering that does, an issuer still must establish a reasonable belief that the purchaser was not solicited by the earlier offer. (Again, we expect a representation from a purchaser and having no reason to believe the representation is wrong, probably suffices.)
    • Offers under Rule 701 (compensation arrangements) or Reg S offerings will not be integrated with other offerings. The Rule 701 exclusion is clear, but the SEC dropped proposed changes to Regulation S, which would have modified the definition of “directed selling efforts.” The upshot of this, read in conjunction with the general integration principles, is likely that if a concurrent U.S. offering does not reference the material terms of a foreign offering, that’s sufficient to ensure you’re not “conditioning the U.S. market” for Regulation S purposes (as intellectually dissatisfying as that conclusion might be).
    • Registered offerings will not be integrated with a terminated or completed 506(b) or 506(c) offering, or any offering completed 30 days before the registered offering.

    Rule 502 specifies when offers “commence” and when they “terminate” for purposes of integration analysis. It also modifies integration clauses in other rules to reference Rule 152.

More on the PPP . . .

13. On December 27, 2020, President Trump² signed additional COVID-19 relief measures as part of the Consolidated Appropriations Act of 2021, here. Stuffed into the 5,593-page behemoth is the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, which among other things authorized another $284 billion for Paycheck Protection Program (PPP) loans and another $20 billion for Economic Injury Disaster Loans. Congress continued to tinker with the PPP and, most significantly, authorized “second draw” PPP loans with some additional restrictions. Both first- and second-draw PPP loans are available through March 31, 2021 or until the program runs out of money again.

    The SBA and Treasury Department are the best sources for information about PPP loans (see here and here), but a few highlights:

    • PPP loans may be used for more uses eligible for forgiveness, including worker protection costs related to COVID-19, uninsured property damage due to looting, and certain supplier costs. SBA interim rules, here, state that a borrower may only receive forgiveness for these new non-payroll costs if the SBA had not yet remitted a forgiveness payment on the borrower’s loan before December 27, 2020. (That doesn’t really seem fair, honestly, but there you go.)
    • PPP loans may be made to some new eligible borrowers, notable news organizations which are also exempt from SBA affiliation rules, but also adds to the list of ineligible borrowers, including issuers with securities listed on a national exchange³ and entities in which the President, the Vice President, the head of an executive department, or a member of Congress, or their respective spouses, holds a controlling interest.
    • Second draw loans are available for those who used prior PPP loans only for authorized uses, have fewer than 300 employees, and can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020. Maximum loans are 2.5x average monthly 2019 or 2020 payroll costs (3.5x for Accommodation and Food Service sector), up to $2 million. (The same “affiliation” carve-outs for restaurants and hotels apply here, which is relevant for the 300 employee limit and allows each restaurant held as a wholly owned subsidiary in a restaurant group to apply for a loan up to $2 million; however, a $4 million “corporate group” cap applies to loans.)⁴
    • First draw loans are available, generally with the same strictures as before. Those who chickened out and gave their original PPP loans back may re-apply for a first draw loan. Although borrowers may not generally apply for multiple first draw PPP loans, in circumstances where it qualifies to borrow more, it may increase its existing loan.
    • The SBA published a number of new interim rules and guidance:
      • Interim final rules on the PPP as modified, here
      • Interim rules on second draw PPP loans, here
      • Loan forgiveness requirements and loan review procedures, here
    • The SBA also published a slew of new forms, including:
      • Updated loan forgiveness applications (regular, form EZ, and a new form for loans less than $150,000)
      • Updated loan application forms
      • A new form that requires 2020 PPP loan recipients to disclose whether Trump, Pence, each head of an executive department, a member of Congress, or their respective spouses, owned at least 20% of the borrower (see here)
      • A new “loan eligibility questionnaire,” here and here, that borrowers must complete to help the SBA assess the “necessity” certification that the borrower made when it originally applied for the loan

Potentially, some late-term Trump Administration regulations may be undone, but probably not SEC rules . . .

14. Unsurprisingly, the Biden Administration issued a regulatory freeze pending review of late-term regulatory action, here. It’s possible that some regulations will be voided under the Congressional Review Act, similar to what the Trump Administration, in conjunction with a Republican-controlled Congress in 2017, did when it overturned 17 late-term Obama Administration rules, including the prior SEC rule on resource extraction disclosure mandated by the Dodd-Frank Act. Analysis of the potential effect on recent SEC rules is here and the report from the SEC’s Office of the Investor Advocate, here, suggesting revisions or rescissions to 14a-8 rules that make it easier to exclude shareholder proposals, rules that subject proxy advisory firms to more regulation, and rules that make private offerings easier and avoid integration with other offerings. That said, it’s not clear that the White House letter applies to the SEC, an independent agency, and we haven’t heard whether the SEC will voluntarily submit late term regulations for review.

And finally . . .

15. As a reward for slogging through the lengthy recap above, or for skipping directly to this item, two bonus hyperlinks:
    • The greatest Zoom court hearing to date is here.
    • Say what you like about incoming Secretary of the Treasury Janet Yellen’s economic policies, she can pop a collar and rock a power bob, here (turn the volume up, let it wash over you).

____________________

¹As a plus, fresh-faced law firm associates will no longer have to speculate why an issuer disclosed it has sufficient liquidity for at least the next 12 months, before eventually deciding the disclosure is negative assurance that the company is a going concern under audit standards. Now the 12-month requirement is RIGHT IN THE RULE!

²To be clear, now “former President Trump.”

³The ineligibility of public companies is a clear reaction to public outrage that “public companies” got PPP loans, which we’ve frankly never understood. (Why do people hate dishwashers who work for Ruth’s Chris?) But even this ineligibility criteria isn’t clear since it applies to “an issuer” and not necessarily to a wholly owned subsidiary of an issuer. Congress specifically instructed the SBA to ignore public issuer affiliation for news and broadcast organizations, which could be read as an invitation for the SBA to apply affiliation rules to all other potential borrowers including those who are currently excluded from affiliation rules like restaurant companies. The SBA did not unequivocally do that, and its interim rules are a bit of a mess and state that a borrower is ineligible if:

“viii. Your business is an issuer, the securities of which are listed on an exchange registered as a national securities exchange under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f) 32 (SBA will not consider whether a news organization that is eligible under the conditions described in subsection 1.f. and 1.g.vi. is affiliated with an entity, which includes any entity that owns or controls such news organization, that is an issuer.”

It’s nonsense for “a business” to be “an issuer,” but that sloppy language could be read to apply affiliation rules to everyone except news organizations. That seems a stretch, however, and it’s certainly not clear (a) whether that’s what was intended with respect to any borrower or (b) even if intended, whether that was meant to override the exclusion from affiliation rules that apply to hospitality companies exempted from affiliation rules under the original PPP statute (we think, "not").

⁴It’s not entirely clear whether the aggregate corporate group cap for first and second draw PPP loans is $24 million or whether the original $20 million corporate group cap applies. The $20 million cap purports to limit “PPP loans in the aggregate” (see the May 2020 interim final rule, here, and the January 2021 interim final rule, here); however, we think the better reading is that the $4 million cap adds to the $20 million cap. That makes aggregate corporate group caps symmetrical to individual borrower caps—$10 million per first draw PPP loan plus $2 million per second draw PPP loan.

July 16, 2020

1. Over the last month, Congress and the SBA have continued to tinker with the Paycheck Protection Program (PPP), most recently extending the PPP loan application deadline to August 8, 2020. As of June 30, 2020, $132 billion remained available under the PPP. The current lay of the land is this: PPP loan terms and loan forgiveness terms are more attractive to borrowers, and taking a loan is less risky after the SBA walked back enforcement action threats. We expect that many borrowers, including those who returned or didn’t accept proffered PPP loans, will reconsider a PPP loan in light of continued economic uncertainty due to increased COVID-19 infection rates and stalled efforts to re-open businesses.

   It is interesting, to say the least, that the PPP morphed from desired, to toxic, and mostly back again in just a few short months. Just for fun, here’s how we got where we are:

   • March 27, 2020: The CARES Act amends Section 7(a) of the Small Business Act to add a new paragraph 36, which authorizes the SBA to guarantee up to $349 billion in PPP loans. The CARES Act also specifies the conditions to have all or a portion of the PPP loans forgiven. The Small Business Administration (SBA) scrambles to prepare guidance on the PPP.
   • April 2, 2020: The SBA publishes loan application forms the day before applications may be made.
   • April 3, 2020: Some banks begin accepting loan applications; others delay because they have no idea what to do or how the PPP works. The SBA publishes its first interim final rule and FAQs about the PPP.
   • April 3-23, 2020: Banks figure out how to process loans and, not surprisingly, give priority to their existing, larger customers (like any rational bank would). SBA loan guaranty authority is used up by April 16. Treasury Secretary Mnuchin throws a hissy fit when criticized because large, well-known or public companies got loans; Mnuchin threatens to throw people in jail for fraud; he says he means business. The SBA continues to trickle out guidance in the form of FAQs, interim rules, and letters.
   • April 23, 2020: The SBA “clarifies” that companies with other sources of funds probably can’t certify that the PPP loan is “necessary,” despite that the CARES Act specifies that unavailability of other sources of credit is not a requirement for a PPP loan, and says it will review all loans over $2 million to determine if the borrower validly certified that the loan was “necessary.” The SBA gives borrowers until May 7 to repay the loan without repercussions (FAQ 31). It says it means business.
   • April 24, 2020: Congress allocates another $310 billion for the PPP, raising the aggregate authorized amount to $659 billion.
   • April 24-May 5, 2020: The SBA continues to dribble out guidance.
   • May 5, 2020: The SBA extends the deadline to repay PPP loans without repercussions to May 14 (FAQ 43), but says it still means business.
   • May 13, 2020: The SBA tells those with loans under $2 million it won’t go after them for representing that their PPP loan was “necessary,” ostensibly to ensure SBA audit resources will be used most effectively. The SBA extends the repayment safe harbor to May 18, 2020 and backs off its threats of enforcement action as long as a borrower repays the loan when the SBA says it didn’t qualify, possibly suggesting it didn’t really mean business earlier and was just caught up in the moment (FAQ 46).
   • May 13-15, 2020: The SBA dribbles out more guidance.
   • May 15, 2020: The SBA publishes the loan forgiveness application, which answers some basic questions, but leaves others unanswered.
   • May 15-June 5, 2020: The SBA dribbles out more guidance, including some interim rules that establish items reflected in the loan forgiveness application, and some other stuff.
   • June 5, 2020: The Paycheck Protection Program Flexibility Act provides for a 24-week covered period, creates a safe harbor for FTE reductions based on compliance with federal guidance, reduces the portion of the loan to be spent on payroll to 60%, pushes out the first loan installment repayment date, and, for new borrowers, extends the loan term from two to five years.
   • June 5-16 , 2020: The SBA publishes interim final rules and guidance that largely make conforming changes to earlier guidance.
   • June 16, 2020: The SBA publishes a revised loan forgiveness application and a new simplified forgiveness application Form EZ for those relying on safe harbor exemptions to forgiveness reduction cutbacks.
   • June 16-26, 2020: The SBA issues additional interim final rules and guidance.
   • July 5, 2020: Congress extends the deadline for PPP loan applications to August 8, 2020.
   • July 6, 2020: After pressure from Congress, the SBA begins to publish information about PPP loan recipients, identifying by name those with loans over $150,000.

   The SBA has issued no new rules or guidance since June 26, despite many aspects of the PPP remaining unclear. That may be by design, but it kicks to the SBA review process critical loan forgiveness decisions. (We are not confident the SBA will make uniform decisions, and everyone should be braced for servicing lenders and the SBA to handle the process poorly.) In part because guidance is lacking, we believe most PPP borrowers will take good faith, aggressive positions to have the maximum loan amount forgiven, and that nearly all who reduced FTEs since February 15, 2020, will rely on the “compliance” safe harbor for those reductions. To help those borrowers document that reduced FTEs were due to direct or indirect compliance with federal guidance, we have compiled references to federal and Oregon COVID-19 guidance here.

   We have published a number of alerts about the PPP, including our latest on the application deadline extension and recent considerations, here. The Treasury Department’s website, here, remains the best place to go for rules, guidance, and forms. A PPP guide we find useful is here.

2. The PPP cycled back into the news this month with the SBA’s release of PPP borrower information here. Everyone loves to hate, and a healthy sense of outrage can be cultivated by reviewing the list to see which of your competitors got loans or by reading accounts of The Undeserving here, here, and here. As a caution, and consistent with everything else about the PPP, there appear to be basic errors in the SBA data, including listing companies who never took out loans, and getting loan amounts and recipient names wrong. See, e.g., here, here, and here. The reported data also includes gobbeldy-gook on “jobs retained,” even though borrowers weren’t required even to speculate about that figure on loan applications. (Many borrowers are justifiably upset that reports show their loans resulted in no job retention, but our favorite: The owner of International Dunnage in Thunderbolt, GA, is credited with saving 500 jobs even though the company has seven employees, see here.) Who knows whether the SBA will iron out its data kinks before the Congressional hearings start.
3. The Main Street Lending Program, a more traditional, federally-backed loan program intended to help mid-sized businesses that didn’t qualify for the PPP, has finally gone live. Our recent client alert, which includes links to a host of resources, is here.
4. The NYSE extended its temporary rule easing shareholder approval requirements for listed company private capital raises, here. Commentary is here and here. In contrast, Nasdaq confirmed, here, that its temporary COVID-19 relief measures expired June 30, 2020, although it will “continue to closely monitor the impact of COVID-19.”
5. Expect a Michigan Court’s ruling on COVID-19 business interruption insurance to be cited in the many, many insurance cases pending around the country (the oral ruling begins at minute 23:15 of the YouTube post of the hearing, here). In the case, the Court, applying Michigan law to the language in the insurance policy, held that “direct physical loss or damage” does not cover loss of use of the property due to government mandates: as the Judge put it, “viruses harm people, not property.” The Court also held that the unambiguous virus exclusion in the policy was just that. Analysis of the ruling is here and here. (Our editorial board, as a side note, is bitterly jealous that a Judge can characterize arguments as “just nonsense” without apparent repercussion—when we do that, even in obvious cases, readers invested in those arguments really seem not to like it. Go figure.)
6. Considerations regarding SEC reporting on COVID-19 matters continue to trickle out:
   • The SEC issued supplemental COVID-19 disclosure guidance, here, and the SEC’s Chief Accountant issued a statement about the continued importance of high-quality financial reporting for investors in light of COVID-19, here.
   • Deloitte’s summary of COVID-19 financial reporting trends is here.
   • FEI reports on the state of internal control over financial reporting here, and the Institute of Internal Auditors reports on the Longer-Term Impact on Internal Audit of COVID-19 here.
   • A suggestion about what the SEC is looking for regarding impairment testing disclosures, including links to an SEC comment letter and response on the topic, is here.
   • A warning about how the effects of COVID-19 in SEC filings can hurt you in other contexts, like, say, as an admission that you have suffered a material adverse change, is here.
   • Analyses of COVID-19 and non-GAAP financial measures are here and here.
   • An SEC roundtable discussion on COVID-19 related disclosures is available here.
7. In perhaps the least interesting U.S. Supreme Court ruling issued this session, it held, here, that disgorgement that does not exceed the net profit a securities fraudster has earned is permissible “equitable relief” under U.S. securities laws. Analysis is here and here.
8. Finally, a few notes on fiduciary duties, politics, public disclosures, and social justice:
   • The D&O Diary reports, here, on a lawsuit against Oracle’s board, claiming it “consciously failed to carry out Oracle’s written proclamation about increasing diversity in its ranks” in violation of its duty of candor and federal securities laws.
   • A GAO report on public company disclosure of environmental, social, and governance (ESG) factors is here. The report, commissioned by U.S. Senator Mark Warner, notes the lack of a standardized ESG framework and the challenges to establish one. The report builds on earlier work by the SEC Investor Advisory Committee, here, which recommends that the SEC wade into an ESG reporting framework.
   • ESG factors are still ridiculed by many, who prefer to have companies focus narrowly on profit and financial measures, and consider them mushy-headed. That generally was the theme of SEC Commissioner Hester Pierce’s comments before the American Enterprise Institute, here. Pierce’s train begins with her first name; and stops at Hester Prynne, the Scarlet Letter, and public shaming; before arriving at a criticism of ESG measures and those who champion them. Commissioner Roisman’s more recent comments on ESG disclosure, here, aren’t as flamboyant as Pierce’s, but generally follow the same track.
   • The U.S. Department of Labor recently proposed rules, here, to bar ERISA plan fiduciaries from investing in vehicles when they understand the vehicle may subordinate returns to pursue non-pecuniary ESG objectives.
   • A review of ESG matters, and analysis of a recent petition requesting that the SEC adopt a narrow requirement that companies disclose the location of their assets so investors can assess the physical risk companies face related to climate change, is here.
   • Most companies with a profit motive prefer to stay out of the culture wars based on a sensible concern with alienating customers. That’s why it’s surprising that Goya’s CEO, Bob Unanue, seemingly chose a side by going on a media tour to defend his earlier public praise of President Trump (see here), praise which led to calls for a Goya boycott by some, see here, and Goya support by others, see here and here. With the benefit of the business judgment rule, even if Goya weren’t a closely-held family business, it’s difficult to imagine a successful breach of fiduciary duty claim against Unanue if Goya takes a financial hit from the boycott. Still, potentially alienating a key customer demographic by praising an unpopular political figure seems dumb (and so easily avoided, say by praising Trump’s leadership on the Hispanic initiative Unanue was at the White House to promote, rather than praising Trump himself). It can be tricky for a company to navigate public opinion in polarizing political times, but a little common sense wouldn’t hurt.

June 11, 2020

1. The Paycheck Protection Program Flexibility Act (PPPFA), here, was signed into law last week. The PPPFA is intended to fix problems with the Paycheck Protection Program (PPP), the keystone of the Coronavirus Aid, Relief, and Economic Security (CARES) Act adopted on March 27, 2020. Our earlier summary of the PPPFA is here.

   The PPP remains a hot mess, and the Small Business Administration (SBA) has its work cut out for it to communicate coherent guidance to borrowers, something it certainly has not done well to date.

   Most commentary on the PPPFA focuses on the extension of the loan forgiveness period – borrowers now may take 24 weeks to spend the PPP loan and potentially have it forgiven – and the reduction of the percentage of the loan that must be spent on payroll costs from 75% to 60%. For our money, the most significant change (potentially, depending on SBA rule-making) is that reductions to forgivable amounts need not be made if a borrower can show “an inability to return to the same level of business activity as such business was operating at prior to February 15, 2020, due to compliance with [federal COVID-19 guidance].”

   In a joint statement published June 8, 2020, here, Treasury Secretary Mnuchin and SBA Administrator Carranza summarize the provisions of the PPPFA and promise that rules, guidance and a modified loan forgiveness application will be issued “promptly.” The SBA’s first new interim final rule, published on June 11, 2020, here, largely makes obvious PPPFA-required conforming amendments to its earlier rules. As we wait for the SBA to tackle more thorny interpretive issues, a few thoughts:

   • The joint statement says that the SBA won’t guarantee loans after June 30, 2020. That position reflects the statement of Congressional intent, here, but contradicts the unambiguous words in the PPPFA. But, well, there you go.
   • The new interim rule makes clear, as predicted, that if a borrower uses less than 60% of the PPP loan for payroll costs, a portion of the loan will still qualify for forgiveness. (The PPPFA language suggested that none of the loan would be forgiven if less than 60% were spent on payroll costs.)
   • The SBA still hasn’t said whether PPP loan proceeds may be spent (albeit not forgiven) after the end of the covered period, which for this purpose is December 31, 2020. This is not as pressing as it was when the covered period ended on June 30, 2020, but it also is not difficult to give guidance. For example: “PPP loan proceeds must not be spent after December 31, 2020; unused proceeds must be retained in a cash account until repaid to the lender.” JUST. TELL. US.
   • The SBA still hasn’t said what “eliminated the reduction” in FTEs and salaries means for purposes of the rehire exceptions to loan forgiveness reductions. Its existing guidance conflates averages over specified periods and numbers at specified points. Providing guidance here also would not be difficult. For example: “For purposes of Section 1106(d)(5)(B)(i), ‘eliminated the reduction’ means that average FTEs in the payroll period that includes December 31, 2020 (or, if the eight-week covered period applies, June 30, 2020) are at least equal to the average FTEs calculated under Section 1106(d)(2)(A)(ii).” This is the most important part of the PPP for many, and the SBA’s failure to provide guidance is abject. JUST. TELL. US.
   • We hope, but are not confident, that the SBA will be generous and clear in its rule-making about the exception to FTE if a borrower can’t return to pre-COVID-19 operating levels due to federal requirements or guidance. (It’s fair to assume for most borrowers that the inability to operate at pre-COVID-19 levels is due to COVID-19. If the SBA loosely ties federal regulation to operating reductions, this exception might swallow the reduction rule. Congress could have cut the Gordian knot of its own unwieldy loan forgiveness provisions by simply eliminating the cutbacks, which would have left a law that simply said: take this loan if it’s necessary, and amounts you spend in a specified period for specified purposes will be forgiven. The SBA isn’t going to go that far, but we hope it takes the opportunity to sever at least several loops in the knot.)
   • Unless an borrower is confident most of its loan will be forgiven, likely the smart play is to delay applying for loan forgiveness at least until SBA guidance is published and possibly until January 1, 2021. At that point, a borrower might better determine whether the eight- or 24-week covered period will result in more loan forgiveness and waiting gives more time to qualify for the rehire exception to forgiveness cutbacks. (There is no deadline by which a borrower must apply for loan forgiveness, and even for those who stick with the eight-week covered period, the rehire deadline is December 31, 2020.)
2. Wells Fargo was hit with the first PPP-related securities class action, which alleges that (a) the bank improperly prioritized loans to larger small businesses, (b) because of that it was sued, its regulatory and litigation exposure increased, and its stock price sank and (c) therefore its public statements were false and misleading. A discussion is here. Recall that Wells Fargo settled in 2019, for about $320 million, a class action suit for creating fraudulent customer accounts. We think it will fare better in this lawsuit because, and stick with us here, there is nothing at all wrong with a bank prioritizing PPP loans in whatever way it wishes.
3. The Federal Reserve published on June 8, 2020, here, updated FAQs and term sheets for each of the three types of credit facilities comprising the Main Street Lending Program:

    

   	Borrower size	Max. debt after loan
   Main Street New Loan Facility	$250,000–$35,000,000	4x 2019 EBITDA
   Main Street Priority Loan Facility	$250,000–$50,000,000	6x 2019 EBITDA
   Main Street Expanded Loan Facility	$10,000,000–$300,000,000	6x 2019 EBITDA

    

   The revised term sheets provide for both a lower minimum for two of the facilities and higher maximum for all of the facilities, and, for all of the facilities, extend the term from four to five years and provide for a deferral of any principal payments for the first two years (the interest deferral, which will be capitalized, remains a one-year deferral). Loans must be made through commercial lenders, which then will sell 95% of the loans (up to $600 billion total) to a special purpose entity formed by the Federal Reserve. The program is not yet active.

4. A host of other COVID-19-related items:
   • Considerations for COVID-19 waivers are here.
   • Going concern qualifications related to COVID-19 are discussed here, here, here and here.
   • The AICPA’s PPP loan forgiveness calculator is available here. (It’s stale, but presumably the AICPA will update it when the SBA publishes the new loan forgiveness application.)
   • Suggestions about how to deal with PPP loans in M&A transactions is here.
   • The SEC adopted temporary relief to Regulation Crowdfunding requirements, here. Summaries are here and here.
   • The SEC’s Division of Enforcement announced it has created a Coronavirus Steering Committee, here, to identify potential market and investor risk, focusing in particular on micro-cap fraud.
   • Several have reported that the SEC is sending letters to public PPP loan recipients in a “sweep” investigation to determine if they were entitled to receive their PPP loans. See, for example, here, here and here. That’s possible, but we are more than a little skeptical of those reports, which, to the extent they cite anything, cite a lone “ThinkAdvisor” article, here, the text of which does not inspire confidence in its accuracy.
   • Intelligize published lessons from early SEC comment letters on COVID-19, here.
5. Effective June 11, 2020, Washington State will join California in requiring public companies to have a minimum number of female directors or to make board diversity disclosures. The changes to the Washington Business Corporation Act are here, and commentary is here and here.
6. The SEC adopted, here, amendments to simplify financial disclosures for sales and purchases of businesses. The SEC’s summary of the changes is here, law firm summaries are here, here, here and here, and a handy two-page summary of prospectus requirements is here.
7. President Trump signed an Executive Order on Preventing Online Censorship, here. The EO reads like a patchwork of tweeted grievances, corrected for spelling and grammar. The substance of the EO risks being obscured by the reason Trump signed it – recent pique that Twitter attached a “misleading” tag to his misleading tweet, and smoldering anger over the belief that “conservative views” are censored on social media platforms. Nonetheless, interesting issues are at play that at least make for good cocktail party chatter. (We imagine, at the kind of cocktail parties we wish we were invited to.)
   • A social media site may be a “public forum” where the government may not unconstitutionally repress free speech. For example, under First Amendment jurisprudence, the government cannot broadly prohibit sex offenders from joining Facebook, which allows minors to join (Packingham v. North Carolina, 137 S. Ct. 1730 (2017)), and a public official who uses a social media account in an official government capacity may not block critical views (Knight Institute v. Trump, 928 F.3d 226 (2d Cir. 2019). But Twitter isn’t the government, and any First Amendment claim directly against it seems doomed to fail. (In contrast, there is a colorable argument that the EO is itself unconstitutional – i.e. the EO is a threat to social media platforms intended to stifle criticism of Trump, and therefore it is a coercive attack on Twitter’s free speech rights.)
   • The EO threatens social media sites with new rules to “clarify” how Section 230(c) of the Communications Decency Act applies. Section 230(c) addressed court rulings that held that if a social media site edits or curates content, it may be a “publisher” of all content on its site and therefore subject to libel and other tort claims. Section 230(c) states that good faith blocking and screening of offensive material does not make the site a publisher. The EO can’t do anything about the law, of course, and presumably its reversal would lead Twitter and others either to ban users that routinely spread false information or label everything they post as potentially misleading. (If they didn’t do that to Trump, for example, many lawsuits would be filed against Twitter related to his posts.)
   • The EO instructs the Attorney General to create a working group to investigate potential enforcement of deceptive trade practices including, in a somewhat Orwellian phrasing, “differential policies allowing for otherwise impermissible behavior by . . . anti-democratic associations.” We suspect this working group will not actually do anything meaningful, but that even it tries it will eventually go the way of the ill-fated Election Commission (see here) – that is, announce that despite finding “substantial evidence” of something, social media platforms were not cooperative and therefore the working group is disbanding.

May 15, 2020

1. Six weeks after enactment of the CARES Act, the Paycheck Protection Program (PPP) remains a mess. On April 24, Congress allocated an additional $310 billion for the program (see here) but made no corrections to the hastily drafted Act. Small Business Administration (SBA) and Treasury Department guidance has lagged and, in some cases, been confusing and even harmful.ⁱ Recall that last month we whinged about the lack of clarity in the PPP and the many basic questions that remained unanswered. For example, how to calculate the loan forgiveness amount which is, to borrowers, kind of a biggie. (Recall, the calculation of the forgivable amount is (a) amount spent for allowable uses in the first eight weeks of the loan, multiplied by (b) the ratio of average FTEEs during those eight weeks over average FTEEs in a historical period, and then minus (c) the amount by which total compensation for an employee during the eight weeks was less than 75% of their compensation last quarter.)

   We’d still love for the SBA to let us know:

   • What are full-time employee equivalents (FTEEs)? 30 hours? 40 hours?
   • Can you hire new FTEEs to juice the ratio, and does it matter that they aren’t paid as much as old FTEEs?
   • How does the “75% of total compensation” provision work? Is the full salary of employees you didn’t offer to hire back counted as a reduction of 100% of the salary? Can we use a prorated salary in the previous full quarter or is it really “total salary”?
   • What does “costs incurred and payments made” in Section 1106(b) of the CARES Act mean? Can payroll costs for work done before, but paid during, the eight-week initial loan period be forgiven? Can payroll costs for work done during, but paid after, the eight-week period be forgiven?
   • How on earth does the SBA think the “re-hire” provisions in Section 1106(d)(5) of the CARES Act work?
   • Can you spend loan proceeds after June 30, 2020 on allowable uses?ⁱⁱ If not, isn’t that silly?
   • Is Congress or the SBA going to scrap the unworkable loan forgiveness provisions created for a theoretical company that doesn’t exist, and adopt provisions that work? (Please call. We have ideas.)

   Instead of addressing those and other questions, the SBA and the Treasury Department seem to have spent most of their time in the last six weeks reacting to, and echoing, public ire toward companies like Ruth’s Chris and Shake Shack (here and here) and taking jabs at the L.A. Lakers (here) and more generally at “large” and “public” companies (see here and here).

   On April 23, 2020, despite that PPP loan applicants are by design exempt from the traditional SBA loan criteria that no other sources of credit be available, the SBA “clarified” that a borrower must consider other potential sources of liquidity before determining in good faith that a PPP loan is necessary. (See FAQ 31, here.) Parroting popular opinion, the SBA continued that “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith” and threatened to audit every loan over $2 million. (See FAQs 31 and 39, here.)

   Hating “corporations”ⁱⁱⁱ is a proud American tradition, to be sure, but a few counterpoints:

   • The CARES Act specifically exempted restaurants like Ruth’s Chris and Shake Shack from affiliation rules and specifically stated that restaurants qualified for loans if they had fewer than 500 employees per location. (“Loophole” does not mean “specifically provided for by law,” so people should stop using that word when referring to loans to restaurant and hospitality groups. See here.)
   • Ruth’s Chris and Shake Shack were eligible for large loans because their payroll costs are large – recall, the maximum loan amount is 2.5x historical monthly payroll costs. Restaurants employ thousands of relatively low-paid workers (the kind who might, say, work in restaurants). 75% of loans must be used for payroll, and loan proceeds must not fund annualized compensation in excess of $100,000.
   • If the point of the PPP is to get money to employees, and because loan proceeds not used in the first eight weeks of the loan must be repaid, the anger is confusing. Forgoing the loans may only mean that Ruth’s Chris and Shake Shack didn’t re-hire largely low-wage workers, which it could have done at scale and presumably more efficiently than “mom & pop” restaurants. Why does the SBA hate dishwashers at Ruth’s Chris? (Similarly, the L.A. Lakers loan wasn’t going to pay basketball players. Admittedly, though, hatred of anyone associated with the Lakers is easier to understand.)
   • Large and public companies are not immune to the COVID-19 downturn. Large restaurant companies were hammered, and shed thousands of employees.
   • Being public doesn’t mean a company necessarily has access to public markets and can easily raise money in a way that is not detrimental to its business. If a company’s public float (shares not owned by affiliates multiplied by market price) is less than $75 million, it is limited in the amount it can raise from equity sales in a 12-month period (see General Instruction I.B.6. to Form S-3, here). More significantly, some public company share prices are in the tank, and if a company taps out its credit and goes to capital markets too early, that may leave no dry powder when additional funds are needed in a few months. (Just a shade naïve to think COVID-19 will have only an eight-week effect on businesses, no?)
   • Arguably, PPP loans were not “necessary” for Ruth’s Chris and Shake Shack since each found alternate financing (although time will tell whether the alternate financing is adequate or whether the sources they tapped will significantly harm their business), but there’s no question the SBA jerked the rug out from under them, and joining the chorus that they “cheated” small businesses seems helpful to exactly no one. (Our view: Each qualified for the loans and would have used the money for intended purposes; nonetheless, they probably concluded that the loans weren’t sufficient in any case, that a big chunk likely would need to be repaid since they were limited in using funds on payroll while their restaurants remained closed, and that the negative publicity just wasn’t worth it.)

   Secretary Mnuchin seems to have since calmed down. On May 13, the SBA published FAQ 46 (here) which states:

   • If a borrower’s PPP loan is less than $2 million, it is deemed to have made the necessity certification in good faith.
   • If its loan is more than $2 million, it need not worry about penalties or enforcement actions and can argue the necessity certification was made in good faith when it requests loan forgiveness.^iv

   Oddly, given the de facto extension of the repayment safe harbor until the borrower applies for loan forgiveness, the SBA also published FAQ 47 (here) to extend the loan repayment safe harbor deadline to May 18, 2020. That would have made sense if the SBA had actually provided additional guidance about what constitutes an adequate basis for the necessity certification. But it didn’t, and we don’t understand why anyone needs four extra days to consider giving back a loan in light of SBA guidance telling them that they either comply or, if not, that they won’t be punished. That’s certainly not the only thing we don’t understand about the PPP or about the SBA’s approach to guidance. Much more to come, we’re certain, on the PPP in the coming weeks.

2. Not to further frighten those who have fretted about potential liability associated with their PPP loans, but the first PPP fraud cases have already been brought against borrowers – see here and here. Arguably, the lesson from these cases is “don’t commit obvious fraud,” which hardly seems a lesson most need. Nonetheless, additional information about the first prosecution of PPP fraud is here, and we remind you:
   • Federal agencies, including the Office of the Inspector General for the SBA, give special scrutiny to “disaster loans” and other transactions intended to provide quick relief, and most investigations are initiated in response to complaints submitted by employees of participants in SBA programs.
   • Whistleblowers can also file complaints on behalf of the government through a qui tam lawsuit under the False Claims Act, and receive a bounty between 15 and 25 percent of the amount recovered.
3. While searching for information about stay-at-home orders, we discovered a few useful resources for state-by-state COVID-19 reopening plans here, here, here, here and here.
4. Nasdaq adopted rules, here, that temporarily modify Nasdaq’s “20% rule” to allow, until June 30, 2020, an issuer to sell up to 25% of its outstanding stock as long as the discount to the higher of book or market price does not exceed 15%. Nasdaq’s summary of the exception is here and another summary is here. Recall that the NYSE temporarily modified its shareholder approval rules in early April to facilitate private equity sales, see here, but those changes brought NYSE in line with then existing Nasdaq rules and did not go as far as Nasdaq’s new temporary rule. Nasdaq (here) and the NYSE (here) each provided listed companies relief from minimum bid price and market capitalization requirements.
5. The SEC issued several COVID-19 FAQs (here) regarding its earlier order (here) that extended filing deadlines.
6. As of April 20, Audit Analytics notes (here) that 16 public companies have listed COVID-19 as the reason for garnering a “going concern” qualification in their audit opinions. We expect that number to rise.
7. In the past, Elon Musk has been a useful foil to caution public companies about what not to do (e.g., tweet that you’re taking your public company private, tweet incorrect production data, tweet about your disdain for the SEC, or, generally, tweet). The lingering effects of earlier ill-advised tweets (see here) have not dissuaded Musk from recently tweeting that “Tesla stock price too high imo,”^v which is credited here with wiping out $14 billion in Tesla shareholder value. We do not recommend that public company executives send similar tweets. Musk also made news for his expletive-laden earnings call responses, during which he referred to measures to fight COVID-19 as “fascist” (see here), his lawsuit against Alameda County, CA, and his threat to move Tesla’s facility to Nevada (see here).^vi Given Musk’s prior and current antics, it may not be surprising that Tesla is apparently unable to buy affordable D&O insurance (see here), and one wonders at what point a director’s casual cocktail-party mention that he serves on the Tesla board will be met with shock and pity rather than admiration and envy.

• subparagraph (36)(A)(iii), which defines “covered period” under paragraph (36) as “the period beginning on February 15, 2020 and ending on June 30, 2020,” and
• subparagraph (36)(F), which provides that “[d]uring the covered period, an eligible recipient may, in addition to the allowable uses of a loan made under this subsection, use the proceeds of the covered loan for [permitted uses].”

• It’s up to the borrower to affirmatively prove its case. That flips the standard from an enforcement action, where the SBA would have to prove the borrower didn’t qualify, which we think would be challenging for the SBA in most cases. We hope companies are now documenting things well for inevitable presentation to the SBA, and we are curious to see whether any will challenge the SBA if it determines a loan must be repaid.
• Repayment when? Immediately upon the SBA determination? On the regular payment schedule (in other words, is the SBA really just talking about denying loan forgiveness)? Will this be negotiable with the SBA (will the SBA really want to cast a borrower into bankruptcy by declaring a default)? The timing of repayment might depend on the note terms and what the bank does – we expect that if the SBA threatens that its guarantee isn’t valid, a lender will declare a default and accelerate the loan (if it can).
• The SBA stated in FAQ 39, here, that “it will review all loans in excess of $2 million … following the lender’s submission of the borrower’s loan forgiveness application.” If it sticks to that, and if the SBA requires accelerated repayment, there may be some strategies regarding when to request forgiveness. For example, maybe wait until you’re down to the actual principal you think will be forgiven, and request loan forgiveness then (that is, if you think only 25% of the loan is forgivable, maybe wait 18 months until requesting forgiveness). The SBA has not specified a process for requesting loan forgiveness, nor imposed a requirement that forgiveness be requested by a specific date.

April 17, 2020

1. Since our last monthly alert, three federal COVID-19 laws were enacted.
   • H.R. 6074: Coronavirus Preparedness and Response Supplemental Appropriations Act. Enacted March 4, 2020. Provided $8.3 billion in emergency funding for federal agencies to respond to the coronavirus outbreak related to developing a vaccine, medical supplies, grants for public health agencies, small business loans, and assistance for health systems in other countries. Allowed for temporarily waiving Medicare restrictions and requirements regarding telehealth services.
   • H.R. 6201: Families First Coronavirus Response Act. Enacted March 18, 2020. Guaranteed free coronavirus testing, established paid leave, enhanced unemployment insurance, expanded food security initiatives, and increased federal Medicaid funding.
   • H.R. 748: Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Enacted March 27, 2020. A $2 trillion coronavirus relief bill, which will send $1,200 to each American making $75,000 a year or less; add $600 per week to unemployment benefits for four months; give $100 billion to hospitals and health providers; make $500 billion of loans or investments to businesses, states, and municipalities; provide $32 billion in grants to the airline industry; and more.

   The Families First Coronavirus Response Act was a big deal for nine days, until the $2.2 trillion CARES Act was signed. Since then, the CARES Act is about the only thing anyone cares about. A few general summaries of the CARES Act are here, here, here, and here.

   Title I of the CARES Act, the Paycheck Protection Program (PPP), a $249 billion SBA loan guaranty program, offered the promise of relief to the broadest swath of the economy, and bankers, lawyers, and real people have been clamoring to figure it out. The initial questions – Do I qualify? Where do I apply? and How much can I get? – have shifted to How do I use this? Am I going to have to repay some of it? and What kind of lunatic wrote this?

   The SBA said, here, that PPP funds were fully committed as of April 16, and that it isn’t processing more loans. The announcement added pressure on Congress to appropriate more for the PPP, which has stalled but which it absolutely will do, probably next week. (See here and here.)

   There are plenty of summaries of the PPP, but below we give ours, along with some resources, highlights, and complaints.

   Resources. Generally, we recommend relying on original sources for information and up-to-date guidance¹ about the PPP (the SBA or Treasury website is best). We also recommend that you print or take a screenshot of any guidance you rely on, and that you double-check before you apply. Last week, guidance was updated every few days and occasionally changed on the fly.

   • Form of Loan Application
   • Form of Promissory Note
   • SBA Interim Final Rule (April 2) (general)
   • SBA Interim Final Rule (April 3) (excluding faith-based organizations from affiliation rules in some circumstances)
   • SBA Interim Final Rule (April 15) (re additional eligibility criteria and requirements for certain pledges of loans)
   • SBA Affiliation Rules Guidance (April 3)
   • SBA Letter re Size Eligibility and Affiliation (April 4)
   • SBA FAQs (updated April 3, 8, 10, 13, 14, 15 . . . )
   • SBA FAQs re Faith-Based Organizations
   • U.S. Chamber of Commerce Guidance (dated, but includes a graphical representation of the loan forgiveness provisions we like)
   • U.S. Department of the Treasury Guidance (repository; check for current materials)
   • Small Business Administration Guidance (repository; check for current materials)
   • SBA Regulations (13 CFR § 121.101, et seq.)
   • Section 121.301 Affiliation Rules (as modified by CARES Act)
   • Text of the CARES Act
   Summary of the PPP.

   The PPP loan application floodgates opened April 3, although many SBA-qualified lenders weren’t ready since rules and the final loan application came out just the day before; independent contractors could apply beginning April 10. Banks were unprepared for the clamor for loans, and were inconsistent in who they served first or why, although almost all favored customers with existing bank loans for obvious reasons (spoiler: solvency of their borrowers). Anecdotal evidence has flooded in from those who applied early with full information and who missed out on the first round of loans. They aren’t happy.

   The loan application is two pages and SBA-mandated underwriting requirements are skimpy (aside from checking the math on loan amount, lenders can rely on borrower certifications), the application lenders must file with the SBA also is short, and most lenders are using a six-page SBA form of note (with supplements that cause varying degree of concern) to make the loans. All loans are two years at 1% interest with no payments for six months.

   Eligible borrowers are those with fewer than 500 employees (full time, part time, temporary, leased) on average in the pay periods in either 2019 or a trailing 12-month period. Small businesses qualified under preexisting SBA standards, some of which, depending on their industry, may have more than 500 employees or may be eligible based on revenue thresholds (see 13 CFR § 121.201).

   A borrower may need to count the employees of “affiliates” under complicated SBA regulations, except that restaurants, hotels, SBA-approved franchises, and some religious nonprofits do not.² (In addition to the links above, guidance on “affiliation” is here: Guidance on Affiliation from GC for Procurement Law to Associate Administrator for Capital Access; SBA Affiliation Rules Guidance; SBA Affiliation Discussion and further SBA Affiliation Discussion.)

   An employer can borrow up to two and a half times the average monthly amount it spent, either in 2019 or in a trailing 12-month period, on “payroll costs” (salaries, wages, tips, medical leave, vacation, etc.; health care costs and retirement contributions; state and local taxes assessed on employee compensation). The maximum loan is $10 million, but consolidated groups that are exempt from affiliation requirements can work around this. (Like Ruth’s Chris Steak House, see here.)

   Loan proceeds used in the eight-week period (the “covered period”) after the loan origination date (which should be the date you get the money but most of the promissory notes we’ve seen have been dated at least a day before any funds hit bank accounts) may be forgiven if used for permitted purposes: at least 75% must be used for payroll costs and up to 25% may be used for mortgage interest, rent, or utilities.

   Unfortunately, the loan forgiveness provisions in the CARES Act are a mess and impossible to calculate with certainty until the SBA issues additional guidance or the CARES Act is amended to make them clear. (Honestly, the provisions read like they were written with a particular business in mind, but the drafters aren’t willing to tell you which one … maybe Larry Kudlow’s wife’s?³) The SBA promised, here, it “will issue additional guidance on loan forgiveness.” It hasn’t yet. We hope guidance will come before anyone actually applies for forgiveness, but as of April 17, we’ve heard from the SBA only that the “banks are the ones who are going to be in charge of making sure that companies have used the money the way they said they would.” Which tells us basically nothing.

   The CARES Act lays out the forgiveness calculation as follows:

   • amount of the loan used for permitted purposes,
   • subtract the amount by which compensation to an employee in the covered period is less than 75% of that employee’s compensation in the last full quarter during which the employee was employed, and
   • multiply that number by a fraction that equals the average number of full-time employees (FTEs) in the covered period over the number of FTEs in a historical period (January 1, 2020-February 29, 2020 or February 15, 2019-June 30, 2019, or another period for seasonal employers).
   Here’s some things about those provisions that seem dumb.
   • The 75% reduction provision literally says if cash compensation paid to an employee in the eight-week covered period is less than 75% of the cash compensation paid to the employee in the last full quarter (12 weeks), you can’t have that “reduced” amount forgiven. That means if you didn’t reduce the employee’s salary in the last quarter and continue to pay them the same amount in the eight-week covered period, a portion of the loan will not be forgiven. For example, if the employee consistently made $100 per week, or $1,200 in the last quarter and $800 in the eight-week covered period, the portion of the loan that must be repaid is $100. (75% of $1,200 is $900; $900 - $800 = $100.)
   • If you had to fire someone, is that a “reduction” of 100% of their salary, or do you only count people you continue to employ? What if you fired them in January? Or in 2019? What if they quit?
   • Why do you use an FTE ratio based on the eight-week covered period and a historical period? What do those have to do with one another, and isn’t it true that the people comprising the FTEs in the numerator and denominator are likely not going to be the same?
   • What does “full-time employee” even mean? 30 hours per week? 40 hours per week?

   We’re confused.

   And that’s even before we analyze the “re-hire” provisions, which purport to let you fix your FTE ratio by re-hiring FTEs before June 30, 2020. The “re-hire” provision says that if, before April 27, 2020, you reduced FTEs compared to your FTEs at February 15, 2020, you can re-hire them before June 30, 2020 and your loan forgiveness will not be affected by the reduction.

   We have questions.

   • Do you have to “re-hire” employees you terminated after February 15, 2020, or employees who make up the FTEs in the ratio denominator (from the period January 1, 2020-February 29, 2020, or February 15, 2019-June 30, 2019), or can you hire new FTEs? What if an employee tells you they’re better off with unemployment insurance and doesn't want the job?
   • We do not believe, as some have reported, that re-hiring FTEs before June 30, 2020 is a get out of jail free card for loan forgiveness. Rather, we think a reasonable interpretation is this: if you get a loan before April 27, 2020, you can cure an FTE deficit in that pre-April 27 period, but you can’t cure a deficit in the post-April 27, 2020 period. Below is an example of how we think this works.
     • Example: Employer had 10 FTEs at February 15, 2020. For purposes of the denominator in the FTE ratio, the same 10 FTEs apply (i.e., by coincidence, average FTEs in the base period January 1, 2020 through February 29, 2020 also equals 10). Employer reduced FTEs to five as of April 27, 2020. It received a loan of $100 on April 15, all of which it used for permitted purposes. The eight-week covered period of the loan is April 15-June 10 (i.e., 8 weeks x 7 days/week = 56 days). Seventeen of the 56 days are subject to the re-hire provisions.
       • Employer keeps five FTEs over the eight-week covered period. On June 29, 2020, it hires five FTEs so that it has 10 total FTEs. Loan forgiveness is calculated as follows: [100 x (17/56)] + [$100 x 5/10 x (56-17)/56] = $30.36 + $34.82 = $65.18
       • Employer hires 10 FTEs on April 27. It keeps them until June 10, then it terminates them. Loan forgiveness is $100.
     Admittedly, this interpretation leaves some holes – the eight-week covered period talks in terms of average FTEs over the period, for example, and the re-hire provision talks about FTEs at fixed points in time. Is it really the case that you can “cure” an FTE deficit by hiring an FTE on June 29 and firing them June 30? Also, this re-hire “cure” is tilted for the privileged few who got PPP loans, and got them early. If an employer gets a PPP loan in round two on May 1, it has no grace period to re-hire employees? And if it can’t snap its fingers and bring all FTEs back on day one of the eight-week covered period, a portion of its loan won’t be forgiven?

   Perhaps Congress or the SBA will clear this all up, but in the meantime there are plenty of traps. For example:

   • An employer with high payroll costs whose loan is capped at $10 million may find an unexpected portion of the loan is not forgivable, because they won’t be able to afford to pay 75% of employee salaries and keep average FTEs in the eight-week covered period high enough.
   • The employer portion of federal taxes paid to employees is not forgivable, so it’s going to cost the employer something to continue to employ people no matter what.
   • An employer who stretched to keep employees employed at their historical salaries while waiting for federal aid may have shot itself in the foot, because (a) it burned cash, (b) it can’t pay everyone 75% of what they got last quarter without handing out bonuses, which it doesn't have the money to do, and (c) it can’t take advantage of the “re-hire” provisions because it didn't fire anyone early enough.

   We hope, in the aftermath of this, that federal regulators are forgiving to those who tried in good faith to comply with the CARES Act and hastily crafted regulations, and we expect that they will be. But, as our litigation colleagues are always reminding us, there is risk, including: (a) whistleblowers can report you, and can collect a 15-25% bounty on any federal recovery against you under the False Claims Act, and (b) a lie on an application, or an overly aggressive position that later looks like a lie, carries a potential penalty of $1 million and 30 years in prison.

   One way to look at the PPP is that it’s simply a substitute for unemployment insurance. If that’s the case, an employer might at least run the calculations to see if its (particularly low-wage) employees are better off receiving unemployment benefits, which includes the additional $600 per week under the CARES Act.

   Another way to look at the PPP is that it’s a cheap short-term loan that doesn’t require guarantees or collateral, and if the portion forgiven is more than the interest payments (and probably even if not), the loan is a win. We think many are reconciling to looking at it this way, rather than as a free cash giveaway. (See, e.g., here.)

   (If you’ve made it all the way through this first item, congratulations. We promise to be more brief, if not more interesting, from here on.)

2. For those with PPP loan proceeds in their pockets, attention likely will turn to the $600 billion Main Street Lending Program, composed of the Main Street New Loan Facility and the Main Street Expanded Loan Facility. Details are scant, and applications haven’t yet been rolled out. To date, commentary on the program has been on why it isn’t going to be useful to many, but presumably that will soon change. (See our summary here, and the Federal Reserve releases here.)
3. SEC Chair Clayton and SEC CorpFin Director Hinman issued a joint statement, here, emphasizing the importance of public disclosure for investors, markets, and “our fight against COVID-19.” We’re not quite sure what is meant by that last bit, but more forward-looking disclosure is what the SEC is angling for in the statement, even though existing rules generally require only historical disclosure. Clayton and Hinman acknowledge that, phrasing their statement as “observations and requests” and noting “we would not expect good faith attempts to provide appropriately framed forward-looking information to be second guessed by the SEC.” The SEC also put out disclosure guidance regarding COVID-19 here. Of particular importance, says the SEC, is assessing the effect of COVID-19 on:
   • financial condition and results of operations in MD&A (and don’t forget, you must disclose “known trends”);
   • capital and financial resources, including liquidity and ability to service debt;
   • assets, and whether there will be significant judgments on determining fair value and impairment; and
   • business continuity.

   Insights from SEC Chief Accountant Teotia on the importance of high-quality financial reporting guidance in light of COVID-19 are here, and Deloitte published “Financial Reporting Considerations Related to COVID-19 and an Economic Downturn” here.

4. At the same time the SEC is asking for more forward-looking disclosure, many are cutting back on earnings guidance. See, e.g., here.
5. The SEC modified its earlier exemptive order, here and press release here, extending until July 1, 2020 the period in which a company may take advantage of the 45-day extension for SEC filings. A new CDI about the exemptive order, and how it applies to timely filing Part III information you omitted from your 10-K, is here. In addition, the SEC adopted a process, see here, to more easily get Section 16 filer codes (allowing you to upload an unnotarized Form ID), and to make Form 144 filings, see here. But don’t get too comfortable, public companies. Chairman Clayton has repeatedly emphasized that the SEC is still a thing, and that issuers still need to make required disclosures. See, e.g., here and here.
6. As noted in last month’s ICYMI, many companies are expected to hold virtual annual shareholder meetings this year. Before you hold, or change to, a virtual meeting, you should confirm compliance with state laws. States are here to help. The Delaware Governor, for example, issued an executive order, here, to clarify that a filing with the SEC is sufficient notice of a change to a virtual meeting for purposes of the Delaware General Corporations Law. California’s governor issued an executive order allowing virtual meetings, here, which otherwise are allowed in California only with the consent of all shareholders. (But see here re the order’s legality.)
7. Nasdaq published information for listed companies about the impact of COVID-19 here. Nasdaq notes: “The Nasdaq Listing Rules allow companies that do not meet specific rules additional time to regain compliance. While at this time Nasdaq has not sought to suspend any Listing Rules, we are closely monitoring the impact of COVID-19, including the resultant market volatility, on Nasdaq-listed companies.” Nasdaq also provided guidance on a number of topics, including that it will review “financial viability exceptions” to Rule 5635 with COVID-19 in mind. The NYSE temporarily suspended, here, continued listing rules that require listed companies to main an average global market cap over 30 consecutive trading days of at least $15 million. In all of this, keep in mind that both Nasdaq and the NYSE are for-profit businesses that make money from listed companies. That is, as stock prices are battered and continued listing standards are tripped, we are confident they will do what they can to ensure they aren’t booting companies off their exchanges.
8. The NYSE also adopted rules, here, to temporarily waive approval requirements for certain PIPE transactions, tipping its hat to the notion that some listed companies will be scrambling to raise money through private equity sales.
9. The SEC adopted final rules, here, to streamline the public offering process for business development companies and close-end investment companies.
10. Former Delaware Chief Justice Leo Strine followed his eye-opening articles about the perils of shareholder supremacy (see ICYMI from November 2029, here) with a co-authored article, here, emphasizing many of the same points for a COVID-19 world.

March 19, 2020

1. If you’re currently sheltering in place, hoping to read something to take your mind off the novel coronavirus, well, sorry. Like the rest of the world, COVID-19 is almost the only thing we’re talking about and we, like you, are suffering from receiving too many communications and not enough information. This entry is certainly more of the former, but here’s hoping it provides some of the latter.

   L&E on the front lines.

   Not surprisingly, labor and employment lawyers are on the front lines of client inquiries, as they field questions like “Oh, dear God, what do I do?!?” A resource hub with materials is here, including links to materials from webcasts our specialists have hosted.

   Restaurants and bars.

   Aside from cruise ships and air travel (and of course the health care industry), the beverage and hospitality industry is likely hardest hit by COVID-19 in the short term, as government agencies order restaurants and bars to shut their doors and move to a delivery and takeout only model, and as customers get thin on the ground as they shelter in place. A resource hub from our industry group specialists, including information on the licenses you’ll need and how to get them as you shift your business model, is here. State agencies have been scrambling to issue new guidance and emergency rules to alleviate some of the hardship food and beverage businesses face, and our specialists continue to post key agency updates to the hub as they roll out.

   We have also fielded questions from clients on how deliveries should be made, what safety precautions and protocols should be taken (make sure staff follows strict hygiene protocols, take no chances with potential illness, leave food at the doorstep), and what liability limitations delivery services should put in place (a prominent liability waiver on your app or restaurant webpage would be a good idea). Some information is here and here.

   The sudden interest in force majeure clauses.

   Force majeure clauses, and common law contract principles of impracticality of performance and frustration of purpose, are top of mind for practically everyone. A client alert on the topic, and contact information for attorneys who can help you analyze your contracts, is here. Other alerts about force majeure clauses are here, here, here, here, and here.

   A new interest in business interruption insurance, and an old interest in enterprise risk management.

   Determining whether your insurer will cover your losses during the pandemic is also of immediate importance, and keep in mind that many of the insurance policies that may provide coverage for business interruption have extremely short deadlines for providing notice of a claim to the insurer. Resources for enterprise risk management are here. Other resources are here and here.

   A New Orleans restaurant has been the first out of the gate to file suit against its insurer, seeking a declaratory judgment (here) that its “all risk” insurance policy covers any civil authority shutdown of the restaurant due to the coronavirus, including coverage for business income losses. The complaint also seeks a determination about whether an order issued from the Louisiana Governor that banned gatherings of 250 or more people triggered a “civil authority provision” in the policy, and points out that the policy does not exclude viral pandemics. Press coverage of the suit is here and here.

   Keep in mind that your Board of Directors has general oversight duties, including with respect to risk management. We expect generally that companies will hold board meetings to document appropriate oversight of management while making sure the Board is not getting in management’s way. The results of a brief survey on the frequency of Board updates is here.

   Public companies scramble.

   Two weeks ago, most public company disclosure about COVID-19 was limited to risk factor enhancements. That has changed, and we expect companies to scour the public filings of early adopters – those public reporting companies with large exposures to China or other early hot zones – for disclosure trends (like, say, this one). Key disclosures and concerns will be:

   • Risk factors, obviously, likely sprinkled with disclosure about the effect COVID-19 has already had. For those who already published their annual reports, when COVID-19 seemed like a distant threat, it wouldn’t surprise us if additional risk factors start showing up in current reports on Form 8-K. The immediate risks – lost revenues, employee absenteeism, etc. – are easy, but we expect the risk of debt covenant breaches and other contract breaches will increasingly be emphasized. Forward-looking statement disclaimers likewise should be reviewed with COVID-19 risks in mind.
   • Management’s Discussion and Analysis of Financial Results (MD&A), where the effect of COVID-19 may be the only thing the investing public actually cares about at the moment, and where you are required to disclose information about “known trends and uncertainties.” (See the rule here, SEC guidance here, commentary here and here, and the most recent SEC enforcement action order on the topic here.)
   • Preparing to respond to COVID-19-related questions on your earnings call, because they will come up. See here, here, and here.
   • Remaining Regulation FD compliant, including considering whether any ad hoc responses during an earnings call in a rapidly changing environment merit a press release or a current report on Form 8-K, and making sure public disclosures are consistent with messaging to employees, analysts, shareholders, customers, and suppliers.
   • Whether trading blackout periods are warranted, for example if material non-public information regarding COVID-19 effects or mitigation efforts are broadly discussed within your company.
   • Items required to be disclosed on Form 8-K – say, for example:
     • specified officer terminations or changes in executive officer or director compensation,
     • terminations or material changes to material contracts,
     • acceleration of financial obligations (say, if you breach debt covenants),
     • goodwill impairments,
     • exit or disposal costs, including costs to terminate employees under FASB ASC paragraph 420-10-25-4, and
     • bankruptcy declarations.
   • Whether to update guidance, and when. We expect a flood of guidance rescissions, except perhaps for those companies that will benefit from COVID-19 (say, food delivery services or – and we still don’t get this – companies that make toilet paper). See here.
   • Inclusion of “subsequent event” disclosures in financial statement notes.
   • The potential for securities fraud lawsuits for those who exaggerate their preparedness or who underplay risks to their business.

   The SEC has issued orders and guidance related to COVID-19.

   • Its order allowing an additional 45 days to file Form 10-Ks and 10-Qs, upon filing a current report on Form 8-K with specified information, is here.
   • Proxy guidance, which includes guidance on holding a virtual shareholder meeting, is here, and commentary on the guidance is here, here, and here. (Even the Council of Institutional Investors, Glass Lewis, and ISS, which all hate virtual meetings, are cool with them this year. See here and here.)
   • Notice of the extension of comment periods on pending SEC rules until at least April 24 is here.

   Some additional resources for public companies are here, here, here, here, and here.

   M&A and HSR.

   We expect M&A activity to grind to a near halt in the near term, much as it did in the financial crisis in 2008-2009. That trend may be tempered somewhat by the extraordinarily low borrowing rates and by federal efforts to bolster the economy, but generally we are skeptical that traditional economic tools will overcome generalized anxiety and government mandates to not go anywhere or do anything. It also may be that, if some companies weather the pandemic well and still have cash, an M&A bargain-shopper boom will follow this summer.

   We expect parties that are negotiating purchase and sale agreements, or who signed but haven’t closed them, are carefully reviewing the agreements to determine whether the effects of COVID-19 will result in the breach of a representation or the failure of material adverse change (MAC) closing condition. Careful review of the definition of MAC or material adverse effect (MAE) is paramount, and we expect sellers will carve out from representations the potential effects of COVID-19. Commentary is here, here, and here.

   For those who are still doing M&A, note that HSR filings are being accepted only electronically and early termination is not going to be granted. More detail, including our own experience with e-HSR filings, is here.

   Rescind dividends to save cash?

   Three preeminent corporate law firms in Delaware issued their joint views, here, on a corporation’s ability to rescind dividend declarations and save cash to weather the effects of COVID-19. Per their analysis, the declaration of dividends creates a debtor-creditor relationship, but it may be possible to defer the record date and payment date, if not already declared, and the corporation should consider whether changed circumstances means a sufficient surplus no longer exists, which would make the payment illegal. A public company whose shares are already trading ex-dividend (that is, the value no longer reflects a pending dividend) should consider whether the juice of short-term cost savings is worth the squeeze of potential lawsuits from recent sellers.

   Litigation.

   Expect it. Securities class action lawsuits were recently filed against a cruise line and a pharmaceutical company. See here and here. More class actions, contract claims, and tort claims will follow. There also are frivolous suits ongoing, including this one, and probably more to come.

   Privacy and data security.

   As remote working quickly becomes the norm, make sure your business adequately manages data privacy and security risks. A checklist of principles and practices is here.

   Federal and state relief.

   Federal and state relief efforts plunge ahead, with the first of several COVID-19 relief bills enacted yesterday. See here. The U.S. government site for COVID-19 resources is here, the SBA’s site is here, and by now we expect every state has a COVID-19 information hub on its website (for example, Washington State’s is here). President Trump determined that COVID-19 constitutes an emergency under the Stafford Act (see here), leading many to ask what payments to individuals might be non-taxable under Section 139 of the Internal Revenue Code, which exempts from federal income tax amounts “to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster.” Stay tuned here for potential guidance on the non-taxability of COVID-19-related disaster relief, and in the meantime peruse our client alert on the tax implications of the law signed yesterday here.

2. In non-COVID-19-related news, the SEC recently amended the definitions of “accelerated filer” and “large accelerated filer,” here . Most significantly, the rule allows smaller companies with less than $100 million in revenues to forgo an auditor attestation on their internal controls over financial reporting (ICFR). The rules modify the cover page for Form 10-K, which the SEC just can’t seem to stop tinkering with, to add a check box for whether an ICFR auditor attestation is included in the filing. The rules also categorize more companies as “smaller reporting companies” so they have the advantage of scaled disclosure, increase transition thresholds for moving from accelerated to large accelerated filer status, and alter the tests for exiting accelerated and large accelerated filer status. The rules are effective 30 days after publication in the Federal Register. (So filers on the verge of filing their Form 10-Ks don’t need to sweat this.) The SEC’s press release, here, summarizes the rule. Commentary is here and here.
3. The SEC also issued final rules that streamline disclosures for certain registered debt offerings, here. Commentary is here and here.
4. The SEC has proposed rules, here, to “simplify, harmonize and improve certain aspects of the exempt offering framework.” A lofty goal, to be sure, and at a whopping 341 pages, the proposal will certainly give you something to do for much of the time you spend in isolation in the coming weeks. The SEC’s press release, here, summarizes the proposed rule. Among other things, the rules would:
   • Clarify how to move between exemptions without triggering integration issues;
   • Increase fundraising limits for Regulation A, Regulation Crowdfunding, and Rule 504;
   • Clarify that “demo days” are not general solicitations, and make more certain what communications do not constitute general solicitations; and
   • Harmonize disclosure and eligibility requirements, including bad actor disqualification provisions, across exemptions.

   Commentary is here, here, here, and here.

5. The SEC approved Nasdaq’s change to its definition of “family member,” here. The definition now excludes stepchildren who do not live at home, which makes Nasdaq’s rule consistent with the NYSE rule. Nasdaq lays out the analytical framework for determining whether a stepchild who doesn’t live at home could affect a director’s independence, and perhaps by proxy whether that stepchild is actually loved, here. In addition to watching your Board engage in this heart-wrenching determination, make sure to update your D&O questionnaire to include the revised definition. (The rule also excludes from the definition of “family member” domestic employees. But no one seems to be in anguish about that.)
6. Finally, we know what you are really clamoring for are words of assurance from a corporate law firm, traditionally a source of great national comfort. Our advice is this: wash your hands thoroughly, socially isolate, follow precautions, keep calm, and be nice to people. Consider how quickly your views on COVID-19 evolved from two weeks ago, imagine what they’ll be like two weeks hence, and get there now. Also, stop hoarding toilet paper.

February 12, 2020

1. The SEC proposed updates to Regulation S-K to modernize, simplify and enhance financial disclosures, here. The SEC’s press release, here, summarizes the changes as well as any law firm memo (but see here and here if you don’t believe us). Per the SEC’s summary, the changes would:
   • Eliminate Item 301 (selected financial data) and Item 302 (supplemental financial data), which certainly are redundant.
   • Add a new Item 303(a), Objective, to state the principal objectives of MD&A.
   • Replace Item 303(a)(4), Off-balance sheet arrangements, with a principles-based instruction to prompt registrants to discuss off-balance sheet arrangements in the broader context of MD&A.
   • Eliminate Item 303(a)(5), Tabular disclosure of contractual obligations, given the overlap with information required in the financial statements and to promote the principles-based nature of MD&A.
   • Add a new disclosure requirement to Item 303, Critical accounting estimates, to clarify and codify existing SEC guidance in this area.
   • Revise the interim MD&A requirement in Item 303(b) to provide flexibility by allowing companies to compare their most recently completed quarter to either the corresponding quarter of the prior year (as is currently required) or to the immediately preceding quarter.
2. The SEC published three Compliance and Disclosure Interpretations on excluding the earliest fiscal year from MD&A, here. The CDIs say:
   • A reference to the location of the omitted disclosure does not incorporate the prior disclosure into your filing.
   • If a discussion of the earliest year is necessary to an understanding of financial condition, change in financial condition and results of operation, don’t omit it.
   • After you file a 10-K that omits the earliest fiscal year, that fiscal year is not incorporated by reference into a later filed ’33 Act report. Slightly longer versions of the above are here and here.
3. The SEC also published guidance, here, on key performance indicators and metrics in MD&A, admonishing companies that disclose KPIs to clearly define the KPI and how it is calculated, indicate why the KPI is useful to investors, and explain how management uses the KPI to manage or monitor its business. And, the SEC continues, your internal controls better be up to snuff on your KPIs. Summaries are here.
4. The SEC Office of Compliance Inspections and Examinations released, here, its observations related to cybersecurity and operational resiliency practices. A review of the results, as a check on your own policies and practices, seems like a very good idea.
5. Climate change warriors that moonlight as securities lawyers, and vice versa, get a charge every year out of BlackRock’s annual shareholder letter. This year’s letter, here, does not disappoint. In it, CEO Fink states that climate change has become a defining factor in companies’ long-term prospects and suggests we are on the edge of a fundamental reshaping of finance (read: BlackRock isn’t going to invest any of the $7 trillion it manages in your company if you don’t address climate change). Among other things, BlackRock mentions with approval standards issued by the Sustainability Accounting Standards Board for reporting “sustainability information across a wide range of issues, from labor practices to data privacy to business ethics” and standards issued by the Task Force on Climate-related Financial Disclosures for evaluating and reporting “climate-related risks, as well as the related governance issues that are essential to managing them.” A slew of CEOs at Davos approvingly referenced a sustainability reporting and measurement system proposed by the big four accounting firms, here. In another sign of the times, CalPERS and CalSTRS filed their first climate change reports in response to California Senate Bill 964, see here, here and here. And a survey of small- and mid-cap companies that make sustainability disclosures is here.

   SEC Commissioner Lee brought up climate change disclosure in her public statement about modernizing Regulation S-K, noting, here, that the investors are clamoring for reliable disclosure about sustainability measures, and that the SEC has failed to address this need in its MD&A proposals. (See analysis of the “heated” debate (… ah, securities lawyers) here).

   Heck, even D&O insurers are getting into the sustainability game, with Allianz Global reporting, here, that ESG (and climate change) will be one of five megatrends that drive D&O litigation and insurance costs.

6. The BlackRock letter concludes with an admonition that “[c]ompanies must be deliberate and committed to embracing purpose and serving all stakeholders—your shareholders, customers, employees, and the communities where you operate. In doing so, your company will enjoy greater long-term prosperity, as will investors, workers, and society as a whole.” Recall our post back on November 13, 2019, where we went on and on (and on) about challenges to the shareholder supremacy model (see here) including from The Business Roundtable (BRT). An analysis of what BRT members actually do, and whether they were just blowing smoke, is here. According to the report, “nope.” We’ve certainly come a long way from the ’80s (see, e.g., here.
7. Goldman Sachs, an unlikely source, jumped into the social justice fray with its announcement, here, that as part of its commitment to diversity, starting July 1, 2020 it will only underwrite IPOs in the U.S. and Europe of private companies that have at least one diverse board member and, starting in 2021, at least two.
8. Last year around this time, we perused a comprehensive review of “The Latest on Proxy Access,” here. A five-year review of proxy access is here. The upshot? For all the hullabaloo, a single shareholder so far has made use of the provision to try to get a director elected. (And the nominee was elected, with the unanimous support of the Board.)
9. We generally avoided larding up last month’s ICYMI with 2019 retrospectives, but at least a few about securities litigation in 2019 are here, here and here.
10. There has been “interesting” action on insider trading early in 2020. Insider trading law, developed through federal courts applying fraud theories to specific fact patterns, generally is a bit of a mess. A task force headed by Preet Bharara, the former NY federal prosecutor most widely known for being purged by Trump, published its report on insider trading here. The report advocates for, among other things, the codification and rationalization of insider trading law. There are signs that Congress might, indeed, take some action: a summary of a proposed law to close the “8-K gap”—to require that companies adopt policies to prevent insider trading during the days between a material event and public disclosure about the event—is here, and the House-passed Insider Trading Prohibition Act is summarized here. Calls for insider trading legislation may be boosted by last year’s 2nd Circuit decision in United States v. Blaszczak, in which the U.S. relied on a criminal statute—18 USC § 1348—to bring claims. The court determined that under the statute a showing that a tipper received a “personal benefit” is not required, and, ironically, the ruling makes a criminal prosecution of insider trading easier than a civil prosecution under Section 10(b) of the Securities Exchange Act.
11. Final Committee on Foreign Investment in the United States (CFIUS) rules adopted in January, see here, go into effect on February 13, 2020. The rules (here) shift the playbook from voluntary pre-approval of foreign investments in U.S. companies, and now mandate filings if an acquired business is involved in critical Technology or Infrastructure or sensitive Data of U.S. citizens (TID Businesses). The rules (here) also expand CFIUS jurisdiction to specified real estate transactions but doesn’t mandate a pre-transaction filing. Summaries of the new rules are here, here and here.
12. Finally, Valentine’s Day approaches and, as always, young security lawyers’ thoughts turn to the timely filing of annual Schedule 13Gs, due February 14. Remember: nothing says “I own more than 5% of a public company’s stock” like a Schedule 13G.

January 15, 2020

1. The SEC proposed to amend the definition of “accredited investor” here. For those who have consciously avoided knowing anything about securities law, and who presumably are reading this client alert by accident, the offer and sale of securities to accredited investors under SEC Regulation D (Rule 506) is the exemption from registration with the SEC and state securities agencies. (An estimated $1.7 trillion was raised in the U.S. in 2018 under Rule 506, dwarfing all other exempt capital-raises, and significantly more is raised in Rule 506 sales than in registered sales.) Considering its importance to U.S. capital markets, any tinkering with the accredited investor definition is potentially a huge deal. But these proposed changes aren’t. That’s because the SEC did not do what some had feared and some had expected – increase the dollar thresholds for the income and net worth tests that tell you when you are rich enough to be accredited. (Roughly speaking, you qualify if you have $200,000 in annual income or $1,000,000 in net worth. Those thresholds haven’t changed since the definition was adopted in 1982, and in the meantime, the percentage of Americans who are accredited investors based on income has grown from 0.5% to 8.9% and based on net worth has grown from 1.4% to 9.4%.) Instead, the proposed rules expand the definition to add entities, including any entity that owns over $5 million in investments, and to add individuals, including those with certain professional certifications, “knowledgeable employees” of investment funds, and those who have a “spousal equivalent” whose income or net worth puts them over the top of quantitative thresholds. The rules also would expand the list of “qualified institutional buyers” to which resales of securities are exempt from registration under Rule 144A. A redline that shows the proposed changes to the definitions is here. Considering how much time the SEC and others have already spent pondering and discussing potential changes to the definition (see, e.g., here, here, here, and here), it would be surprising if the final rules deviate much from the proposed rules.
2. SEC Chair Clayton published a reminder to public company audit committees, here, that they have oversight responsibilities for, well, all kinds of stuff, and specifically should pay attention to management’s use of non-GAAP financial measures, risks associated with the discontinuation of LIBOR, and critical audit matters.
3. Compared to prior months, the SEC has seemed practically spastic in the last month. It:
   • Approved changes to FINRA Rule 5110 intended to make secondary offerings cheaper and easier, here.
   • Proposed changes to auditor independence standards, here.
   • Published guidance about the disclosure of intellectual property and technology risks associated with international operation, here, and confidential treatment requests, here.
   • Proposed Dodd-Frank-mandated rules regarding resource extraction disclosures, here. (Some commentary on the rules, and their tortuous path, is here and here.)
4. We reported last month that the SEC rejected NYSE proposals to make “direct offerings” easier, and predicted that that wasn’t the end of the story for proposed changes. Rarely are we so immediately gratified by our predictions. The NYSE proposed revised rules, here, which are similar to its original proposal but lower from $250 million to $100 million the amount of securities that can be sold to meet the NYSE’s market value requirements. One assumes the NYSE talked to the SEC beforehand to make sure its revised rules address whatever concerns the SEC had.
5. The Committee on Sponsoring Organizations of the Treadway Commission (COSO) released guidance, here, on dealing with cybersecurity challenges and how you can apply COSO’s enterprise risk management framework, here, to protect against cyberattack.
6. The Second Circuit held in United States v. Blaszczak, here, that criminal prosecution of insider trading cases under Title 18 does not require a showing that a tipper received a “personal benefit” from disclosing insider information, which the U.S. Supreme Court held in Dirks v. SEC is required for civil liability under the antifraud provisions of the Securities Exchange Act. Odd, of course, that it may be easier to convict someone of a crime than to find them liable in a civil suit, but recall that the criminal statute was adopted as part of the Sarbanes-Oxley Act in 2002, when congressional tempers were hot. Some analysis of the Blaszczak decision is here, here, and here.
7. Also in litigation news, the U.S. District Court for the Eastern District of Louisiana reminds us, here, that (a) determining whether someone is a Section 16 officer is a substantive inquiry and simply calling someone a “consultant” or “not an officer” doesn’t magically resolve it and (b) although it’s rare for the SEC to challenge a company’s determination that someone is not a Section 16 officer, it can happen. (True, it typically happens when fraud allegations bring it to the fore, but it can happen.) Commentary is here.
8. Finally, a few reminders about recent changes to annual report and proxy statement requirements (which, unless otherwise noted, were made in the final rule release here):
   • Update your Form 10-K cover page to capture technical changes (check it against the current SEC form, here).
   • Change “Section 16(a) Beneficial Ownership Reporting Compliance” to “Delinquent Section 16(a) Reports” but exclude the section altogether if you’ve got nothing to report. (See Regulation S-K, Item 405(a).)
   • Change “Executive officers of the registrant” to “Information about our Executive Officers” in Part I of your Form 10-K (see General Instruction to Regulation S-K, Item 401). You previously could exclude from your proxy statement information about your executive officers as long as you included it in Part I of your Form 10-K, but the revised instruction makes it even more clear you can do that.
   • Exclude, if you dare, the oldest comparative year in your MD&A if you’ve covered it in a prior report, and state that you’re excluding it and where you earlier covered it. (See Instruction 1 to Regulation S-K, Item 303(a). Predictably, adoption of this change has been slow, because “why?!?” and “I’m afraid!” Our own, unscientific informal check of filings to date suggests slightly more than 1/3 of filers have omitted the early year comparison, although a minority of those still include the early year data in a table even though they exclude the narrative disclosure.)
   • Exclude, if you care, the physical property description required by Regulation S-K, Item 102 if the property is not “material” to your business. Or leave it in, because changing what you’ve already done is work. (Previously, you were required to describe “principal ... and other materially important physical properties,” so arguably the revised requirement didn’t change anything.)
   • Change your exhibit page to:
     1. add as Exhibit 4.__ a description of the securities you have registered under Section 12 of the Securities Exchange Act (Regulation S-K, Item 601(b)(4)(vi) and accompanying instructions),
     2. update Exhibit 101 and add Exhibit 104 to reference “inline” data (if you are a large accelerated filer, you’ve got more time to comply if you are not),
     3. consider eliminating contracts without continuing obligations since there is no longer a two-year lookback for material agreements (Regulation S-K, Item 601(b)(10)(i)(A)), and
     4. consider whether you want to omit schedules or exhibits to material agreements (see Regulation S-K, Item 601(b)(5)), and, if you file them, recall that you may omit confidential information pursuant to SEC Rule 83 without filing a confidential treatment request (see Regulation S-K, Item 601(b)(10) and Item 601(a)(6)).
   • Consider the SEC’s guidance about the disclosure of IP and technology risks if you have international operations, here, and think about whether you should modify your risk factors to reference the California Consumer Protection Act.
   • FYI, if you’re a large accelerated filer, your upcoming annual report may be the first in which your auditors must report on “critical audit matters.” See here.
   • Include the new hedging disclosure requirement in your proxy statement by Regulation S-K, Item 407(i) (and see also Instruction 6 to Item 402(b)). See here. Among other things, consider whether to amend your insider trading policy to expand the group of people prohibited from hedging transactions in company shares to “all employees.” Most already prohibit hedging by “officers” or at least “executive officers,” and expanding the prohibition to employees may not harm them, since they may not have the inclination or sophistication to have set up such schemes in any case. That would certainly make your disclosure easy, although it’s also easy to disclose “Our anti-hedging policy does not apply to employees generally, and, except for the [officers and directors], engaging in hedging transaction by employees is discouraged but generally permitted.” Also consider whether to move the anti-hedging disclosure out of your Compensation Discussion & Analysis and instead include that “the policy described in [section x-reference] applies to [directors and officers].” (Moving it out of CD&A means that the policy with respect to general employees is not subject to the “say on pay” vote, but, depending on the policy and because the vote is non-binding, you may not care.)
   • If you considered a director nominee’s diversity (race, gender, etc.) in assessing their qualifications, and if the nominee consents to disclosure, identify those characteristics and how they were considered. (See Compliance and Disclosure Interpretation 116.11 here and, while you’re at it, CDI 133.13 here.)
   • Consider whether you should consider adding disclosure to specifically address proxy voting guidelines issued by (or otherwise try to suck up to) ISS (here) or Glass Lewis (here).

   A host of other guides to 2020 annual report and proxy statement matters are here, here, here, here, here, here, and here.

December 12, 2019

1. The NYSE proposed in November (here) changes to its listing standards to allow “primary” share offerings through a direct listing (see commentary here, here and here). To date, direct listings have been in the form of stockholder share resales (a “secondary offering”) and not a capital-raising sale of company shares (a “primary offering”). The NYSE changes would have eliminated two listing standard obstacles to a primary offering: (1) the outright ban (a pretty big obstacle) and (2) the requirement that the issuer have 400 round lot shareholders when it lists. The SEC, with astounding alacrity, said “nope” (see here and here). The SEC hasn’t explained why it rejected the NYSE’s proposal, but because primary direct listings are of interest to some heavy hitters, and because stock exchanges make money when shares are listed, count on stock exchanges continuing to work with the SEC to make primary direct listings a thing.

   In case you made it to this sentence and are thinking “what?!?”, some background and a primer on direct listings follows.

   A “direct listing” is the direct sale of shares to the public without intermediary sales to an underwriter or others. Ever since Spotify did one in 2018, direct listing has been a hot topic. Among the touted benefits of a direct listing:

   • Avoiding underwriter fees and discounts. (But Spotify still paid $35 million in advisory fees to Morgan Stanley and Goldman Sachs for help with its direct listing. That’s not nothing, but it’s probably lower than the 5-7% discount typically charged by an underwriter in a traditional IPO.)
   • Ensuring (maybe) that any stock market “pop” benefits existing shareholders and not initial IPO investors. (Underwriters typically underprice IPO shares to ensure the stock trades up and that initial IPO purchasers that buy directly from the underwriters, and that underwriters will count on to buy shares in subsequent offerings, make money. That’s just the way it’s done.)
   • More immediate liquidity for existing shareholders, who are not subject to lockups, as they are in a traditional IPO, and who may sell without worrying about Rule 144 safe harbor requirements.
   • A vague sense that you are innovative and an even vaguer sense that by doing a direct listing you are sticking it to the Man.
   Among the detriments:
   • Less market management, and potentially a higher burden on the company to educate analysts and investors. (Although, one presumes at least part of the $35 million paid by Spotify went toward this.)
   • The potential for a choppy entry into public markets since you don’t have pre-arranged initial purchasers.
   • The potential that this is only really an option for well-known companies like Spotify that don’t need to engage in marketing for investors to enthusiastically buy their shares.

   Commentary on direct listings generally is here and here, and a case study on Spotify’s direct listing is here.

   Each of the NYSE and Nasdaq previously modified their listing standards to make secondary direct listings easier for companies like Spotify. Although it had been possible for private companies to list on the NYSE if they could demonstrate that they had $100 million in public float based on an independent valuation and the most recent trading price on an established trading system for unregistered securities, Spotify didn’t have a sufficient record of trading activity under the NYSE’s rules to adequately establish a trading price. That led the NYSE to do what any self-respecting stock exchange clamoring to list Spotify’s shares would do: it changed the rules (here). The changes eliminated the trading activity requirement for a company valued at $250 million or more, but also tightened independence requirements for valuation firms and required that direct listings be made only in connection with a registration statement filed with the SEC, which is subject to SEC review. Nasdaq similarly modified its rules for direct listings in early 2019 (here) and, last week, tweaked them again (here).

   Direct listings are not new, terribly innovative, or actually much different from traditional IPOs: a company still must file a registration statement that contains a lengthy prospectus to register an offering with the SEC, engage in a prolonged due diligence process, spend lots of time and money getting its corporate governance and accounting processes up to snuff, and educate the investing public (but sure, no underwriting agreement or lockup agreements to negotiate). It’s also not clear whether primary direct listings will be used much, even if the NYSE succeeds in making them available, as long as private equity money is a readily available alternatives. Nonetheless, Spotify’s direct listing has made them seem new, and stock exchanges will keep working to accommodate their use in primary offerings. So now you know.

2. In case you feel the need, near year-end, to take a breath and remind yourself what the SEC has accomplished in the last year, check out the SEC rulemaking index here. For those yearning for a glimpse ahead, the SEC published its “active” rule-making agenda, which identifies actions in pre-rule, proposed rule and final rule stages, here. Notable, perhaps, on the active agenda are possible changes to the “accredited investor” definition, the dollar thresholds for which haven’t changed since Regulation D was adopted in 1982. (Recall that the SEC requested comment on the definition when it adopted changes to Rule 506 back in 2013, see here.) To round out the picture, the SEC’s “long-term” agenda is here.
3. Recall that new hedging disclosures are required under Regulation S-K Item 407(i) for annual meetings for the election of directors during fiscal years beginning on or after July 1, 2019 (July 1, 2020 for smaller reporting companies). See here. Companies already disclose hedging policies that apply to executives and directors in their CD&A under Regulation S-K Item 403, so the new disclosure isn’t a big deal for most. Nonetheless, the new disclosure applies to all employees, not just executives, so you may need to modestly change your disclosures and perhaps also your anti-hedging policies. Consider whether to include the new disclosure in your CD&A, which technically brings it into the realm of what shareholders are casting an advisory vote on. (Although if your policy just says “we prohibit it under our insider trading policy for everyone,” it’s hard to care where you locate the disclosure.)
4. In proxy news:
   • ISS published preliminary FAQs on its compensation policies for 2020 here.
   • The SEC began posting selected informal responses to shareholder proposal no-action requests, and will presumably periodically update its posted response chart, which summarizes letters the SEC believes may be broadly useful. See here.
5. The Trump Administration issued two executive orders in October intended to limit regulation by guidance. (Executive orders are directives from the President to executive branch agencies indicating how to manage their operations.)
   • The Executive Order on Promoting the Rule of Law Through Improved Agency Guidance Documents is here.
   • The Executive Order on Promoting the Rule of Law Through Transparency and Fairness in Civil Administrative Enforcement and Adjudication is here.

   Commentary on the orders is here, here and here. As an independent agency, the orders don’t directly apply to the SEC, but may affect its behavior.

6. On the lighter side, Bloomberg reports (here) that SEC Chairman Clayton touted fake letters as evidence that ordinary Americans support recent SEC proxy reform efforts, which generally push the pendulum in a company-favorable direction. Clayton referenced “300 unique letters” in support of SEC efforts and noted: “Some of the letters that struck me the most came from long-term Main Street investors, including an Army veteran and a Marine veteran, a police officer, a retired teacher, a public servant, a single Mom, a couple of retirees who saved for retirement, all of whom expressed concerns about the current proxy process.” An eagle-eyed Bloomberg reporter noticed that several of the cited letters had the same odd digital fingerprint: a random phrase inserted into the SEC’s email address. Bloomberg follow-up calls with the authors of the cited letters revealed none had actually written them. Ghost-written letters are not unusual and arguably the cited letters are just better, small-batch versions of what all lobbyists do all the time (the article notes that the SEC received 18,000 identical form letters opposing proposed SEC changes). But good grief – if you’re going to reference the “authenticity” of supporters of your position, maybe do some diligence?
7. Finally, a reminder that the California Consumer Privacy Act becomes effective January 1, 2020, a scant 19 days from now. If you haven’t yet considered how and whether your privacy notices and practices should change, now is the time to panic. Our own summary of the CCPA, and references for a few lawyers you can panic to, is here.

November 13, 2019

1. The SEC’s “inline XBRL” rules went into effect for large accelerated filers for filings made on or after June 15, 2019. Compliance dates are June 15, 2020 for accelerated filers and June 15, 2021 for all others. The rules require that filers embed data codes directly into their html file, rather than creating a new file with data tags. The result is that online filings are easier to search and relate to other information in the filing. Once you are subject to the rules, you may stop posting XBRL data on your website. The SEC’s overview of the requirements, including a link to the final rule and a video about why inline XBRL is useful, is here. Technical corrections to the final rule are here. The rule amended Item 601 of Regulation S-K to add Exhibit 101 (inline data) and Exhibit 104 (inline data in the cover page), which are confusing and seem kind of dumb. The upshot is that, although inline XBRL data is, well, “inline,” you nonetheless must file one or more exhibits pointing out that fact ... usually. SEC Compliance and Disclosure Interpretations on interactive data, including nine new items published in August that cover the exhibit requirements among others, are here. Per the SEC’s guidance, once you are subject to the rules:
   • Each Form 8-K must include in the exhibit index under Item 9.01(d): “Exhibit 104 Cover Page Interactive Data File (embedded within the Inline XBRL document).” However, if no other exhibits are listed in the 8-K, the SEC staff won’t object if you omit the Exhibit 104 reference. (The SEC might prefer you omit it, since it’s arguably useful for investors to know at a glance when a substantive exhibit is filed and if you always include Exhibit 104, that usefulness goes away.)
   • Each Form 10-Q or 10-K must include in the exhibit index each of the following:
     • Exhibit 101 Interactive Data Files pursuant to Rule 405 of Regulation S-T formatted in Inline Extensible Business Reporting Language (“Inline XBRL”); and
     • Exhibit 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
2. Keep in mind that the FAST Act requires that you file a description of securities registered under Section 12 on an exhibit to your Annual Report on Form 10-K (final SEC rules are here). The requirement applies to Form 10-Ks filed after May 1, 2019.
3. The SEC adopted final rules, here, that allow all issuers to make test-the-waters communications to potential investors. Such communications were previously limited to “emerging growth companies” under the JOBS Act. Commentary on the new rules is here, here, and here.
4. Despite relative regulatory inactivity at the SEC in the last few years, it has come out strong in the last few months to shift influence from public company shareholders and proxy advisory firms:
   • The SEC proposed, here, that to be exempt from proxy rules under an expanded definition of “solicitation,” proxy advisors like ISS and Glass Lewis must disclose conflicts of interest, give public companies the opportunity to review and give feedback on the proxy voting advice before it is issued, and include upon request in their advice a hyperlink to the public company’s views. The SEC’s press release and summary is here.
   • The latest proposal follows the publication of two SEC interpretive releases, one of which (here) said that proxy advisory service advice is usually a “solicitation” and subject to the Rule 14a-9 restriction on false or misleading statements, and one of which (here) described the voting responsibilities of investment advisors and steps advisors should consider if they become aware of errors in a proxy advisor’s analysis. (ISS promptly sued, here, claiming the SEC guidance violates free speech rights, was adopted without hewing to the requirements of the Administrative Procedures Act, and is arbitrary and capricious. Commentary on the lawsuit, and on the original guidance, is here.)
   • The SEC proposed, here, higher ownership thresholds in order to make a shareholder proposal, replacing the $2,000/1% ownership for at least a one year threshold with three alternative thresholds based on owning a specified minimum value of company securities over a continuous period: $2,000 for at least three years; $15,000 for at least two years; or $25,000 for at least one year. The SEC also proposed to apply the “one-proposal rule” to “each person” rather than “each shareholder,” which would effectively prohibit a shareholder-proponent from submitting one proposal in their own name and simultaneously submitting another proposal in a representative capacity; representatives would also be prohibited from submitting multiple proposals, even if the representative were to submit each proposal on behalf of different shareholders. The proposed rule also would increase the current thresholds of 3%, 6%, and 10% for permitted resubmission of matters voted on once, twice, or three or more times in the last five years to 5%, 15%, and 25%, and allow exclusion of a proposal that’s received 25% approval on its most recent submission if it has been voted on three times in the last five years and both received less than 50% of the votes cast and experienced at least a 10% decline in support.
   • The SEC issued Staff Legal Bulletin 14K, here, to provide guidance on when shareholder proposals may be excluded under the “ordinary business” exemption of Rule 14-8(i)(7), including letting a company know its chances of exclusion are better if it includes the board’s analysis of why the proposal is not sufficiently significant to transcend the “ordinary course,” and letting shareholders know that a proposal that includes a detailed process to achieve otherwise permissible ends may be excluded on “micromanagement” grounds.
   • The SEC announced, here, that it may give only oral responses to no-action letters regarding the exclusion of shareholder proposals under Rule 14a-8. That rule requires that a company notify the SEC when it excludes a proposal and justify the exclusion, which in part is why the practice developed to request the SEC’s concurrence in the company’s conclusion.
5. The SEC is also fishing for ideas to improve access to private markets and the operation of secondary trading markets. It:
   • Published a concept release on harmonization of securities offerings, here, which suggests a willingness (although no specific proposals) of the SEC to broaden access to equity and venture capital funds to non-accredited investors.
   • Solicited suggestions for proposals to improve secondary trading in thinly-traded securities, here.
6. ISS and Glass Lewis recently released their 2020 voting guidelines, here and here. ISS also published its updated Governance QualityScore methodology here.
7. The NY City Comptroller announced, here, the third stage of its Boardroom Accountability Project, an initiative to promote diversity on corporate boards modeled on the “Rooney Rule,” which requires NFL teams to consider minority candidates for head coaching and other jobs. The initiative kicked off with letter requests to 56 S&P 500 companies that they adopt such a rule, and will likely continue with targeted shareholder proposals to require that they do so. Meanwhile, a lawsuit challenging California’s SB 826, which requires that public companies that have principal executive offices in California have a minimum number of woman directors, was filed in August, here. Commentary on the California lawsuit is here and here.
8. A few other odds and ends:
   • The GAO published its mandated report on 2018 conflict mineral reports, here, suggesting that 2018 reports were essentially the same as 2017 and 2016 reports. On the requirement that it assess the SEC regulation’s effectiveness on promoting peace and security, the GAO punted.
   • Ernst & Young published its analysis of trends in 2019 SEC comment letters, summary here and full report here (you may need to register). Comments on non-GAAP financial measures continue at the top of the trends list.
9. Several pieces have emerged in the last few months questioning, sort of, the notion of shareholder supremacy in corporate decision-making. The Business Roundtable published what in the corporate world constitutes a bombshell statement to the effect that a corporation’s purpose should be to improve the lot of all constituencies, here. That statement was quickly followed by the Council of Institutional Investors’ publication of “concerns,” here. In a fight reminiscent of the one here, UCLA Law Professor Stephen Bainbridge rebuts recycled criticisms of “sociopathic” (blindly self-interested) corporate decision-making here and notes that (a) the only “law” relevant to director and officer actions is the “business judgement” standard of judicial review (basically, the idea that, as long as directors don’t have a conflict and follow a reasonable process, a court won’t revisit their decisions), (b) corporations have plenty of leeway to consider long-term interests of shareholders over short-term interests, and (c) to the extent advocates believe corporations should consider non-shareholder interests, a benefit company structure allows that (and benefit company charters may specify what other interests must be considered). All of that is, of course, completely true. (Some additional analysis of the Business Roundtable statement is here.)

   Advocates of pushing corporate considerations beyond narrow shareholder concerns may get a boost from just-retired Delaware Chief Justice Leo Strine, a corporate law luminary if ever there was one, who recently published the horribly titled “Toward Fair and Sustainable Capitalism: A Comprehensive Proposal to Help American Workers, Restore Fair Gainsharing Between Employees and Shareholders, and Increase American Competitiveness by Reorienting Our Corporate Governance System Toward Sustainable Long-Term Growth and Encouraging Investments in America’s Future,” available here. Strine suggests corporate governance reforms can and should look beyond the short-term interests of institutional shareholders to the longer-term interests of the human beings whose capital they control, and that the realignment can be achieved with “modest changes” to the laws and regulations that apply to institutional investors.

   Many states, like our own home state of Oregon (see here), have “constituencies” provisions in their corporate codes that specifically allow directors to consider groups other than shareholders when deciding whether to approve a company sale, the point in time when short- and long-term shareholder interests reduce to “how much am I getting,” and typically when director fiduciary duties are most important and most closely scrutinized by courts. Outside a sales context, even absent a constituencies provision, the business judgement rule means directors and officers could defensibly shift dividends to salaries, for example, because focusing on employee retention is in the long-term interests of the corporation and, ultimately, shareholders. That said, it’s difficult to imagine that, absent significant changes to fiduciary duty clauses in state corporate codes, courts will quickly deviate from established case law or directors or executives will push the boundaries to act for the benefit of a group to the detriment of shareholders. At the end of the day, it might be nice if corporations solved social problems, but that’s not what they were designed to do.

10. Even if we can’t count on corporations to fix all of our problems, we can count on them to continue to wade into public policy, because policy affects them and, sometimes, because failing to act makes a political statement that affects their bottom line. And generally that's fine. An NRA-sponsored Walmart shareholder won’t be able to bring a successful claim against Walmart’s Board and CEO for curbing ammunition sales, for example (see here), because they will convincingly claim that the short-term revenue hit (see here) is more than offset by avoiding customer boycotts. (On the flip side, shareholders can’t force Walmart to put to shareholders a vote on what to do about gun sales, as the Third Circuit told us here.) Inevitably, trying to shape policies will drag companies into partisan politics in uncomfortable ways. Witness, for example, the Trump Administration’s efforts to queer the proposed auto emissions pact between California and Ford, VW, BMW, and Honda. (See here, and the downright unsettling news that the DOJ is looking at them here.)
11. Finally, it’s not without satisfaction that we read the many, many articles disparaging WeWork’s IPO (e.g., here), before learning that the IPO had been delayed (see here and here) and its CEO resigned and reduced his voting control (see here). (Adding to the drama, SEC comment letters and responses were apparently leaked and formed the basis for the WSJ story here). It takes a bit of wading through WeWork’s prospectus (here) before you even learn what the company does and how it makes money. Before bothering you with that, WeWork first wants you to know: “We are a community company committed to maximum global impact. Our mission is to elevate the world’s consciousness.” So, that’s nice. If you keep reading, you eventually learn that WeWork enters into long-term leases, renovates leased spaces, and subleases flexible work space on a short-term basis. You might stop reading when you learn that WeWork has $47.2 billion in 15-year lease obligations and that its subleases average 15 months, which might suggest the company will spectacularly implode in an economic downturn. Our reaction to news of slipping valuations and eventual postponement was “thank goodness”: we’ve never understood how the business model Amazon pioneered (we’ll lose money until we take over the world, then we’ll start making money hand-over-fist) works for a company that leases and subleases real estate, and we’ve really never seen any rational relationship between WeWork historical valuations and its prospects. (Heck, we’re not even sure how Uber sold this model to its investors.) But we’re also not billionaires, so take that with a grain of salt.

May 15, 2019

1. President Trump signed an executive order last week, here, designed to impose sanctions on the iron, steel, aluminum and copper sectors of Iran. The operative section of the EO reads like a crazy person Googled “sanctions” and pasted sentence fragments together. Likely the best reading of the EO is that “all property . . . of . . . any person determined by the Secretary of the Treasury . . .” to have done specified business involving the “iron, steel, aluminum, or copper sector of Iran” is frozen “and may not be transferred, paid, exported, withdrawn, or otherwise dealt in.” The EO says all property of a violating company could be frozen, and the company could be prohibited from selling any products, not just those that contain the Iranian metals. Among other things, a company is subject to sanction if it “knowingly engaged . . . in a significant transaction for the purchase, acquisition, sale, transport, or marketing of” Iranian iron, steel, aluminum, or copper, or products made from them. “Knowingly” includes “should-have-known” and the Treasury Department’s Office of Foreign Assets Control has applied know-your-supplier principles in other contexts (see, e.g., here), essentially imposing de-facto obligations for companies to vet the ultimate sources of goods and raw materials. Commentary on the new sanctions is here. Just before the EO was published, OFAC published guidelines for an effective sanctions compliance program, here. Commentary on the OFAC guidance is here, here, here and here.
2. Speedy guidance on the new EO may be stifled by a recent OMB Memo, here, which describes how, under the Congressional Review Act (CRA), administrative rules must be vetted by the OMB’s Office of Information and Regulatory Affairs to determine if they are “major rules” (those likely to have an annual effect on the economy of $100 million or more, cause a major increase in costs or prices for consumers, or have significant adverse effects on competition, employment, investment, productivity or innovation) that must be submitted to Congress along with a GAO report regarding compliance with the rule-making process and cannot be effective for at least 60 days after submission. The memo replaces earlier guidance (here) on complying with the CRA, and includes two important changes.
   • It emphasizes that “rules” include “guidance documents, general statements of policy, and interpretive rules.”
   • It draws independent agencies – those created by Congress, like the Consumer Financial Protection Bureau, the Federal Reserve, the FCC, the FDIC, the FTC, the OCC and the SEC – into the OMB vetting process, from which they previously were exempt.

   For traditional Republicans, the memo is an admirable effort to curb the administrative state and a useful reminder that Congress reigns supreme on matters of legislation; for Trump acolytes, it strikes back at the Deep State hell-bent on his destruction; for Trump foes, it’s another tool he’ll wield to cripple the Government’s ability to help people; for everyone else, it’s just another probably crazy thing Trump did that he’ll ignore or reverse if that serves his immediate purpose.

3. The SEC and billionaire cartoon character Elon Musk settled their latest battle by amending the September 2018 court-approved order to specify the kind of information Musk must run by an experienced securities lawyer before including in a tweet. The revised order is here. Recall that the original order followed Musk’s 2018 tweet – “Am considering taking Tesla private at $420. Funding secured.” – which pumped Tesla stock up 7% on the day before Nasdaq halted trading. The amended order followed Musk’s misleading tweet that “Tesla made 0 cars in 2011, but will make around 500k in 2019,” followed four hours later by the correcting tweet “Meant to say annualized production rate at end of 2019 probably around 500k, ie 10k cars/week. Deliveries for year still estimated to be about 400k.” In contrast to the original order, which included $40 million in fines and removal of Musk as Chairman of the Board of Tesla, the revised order doesn’t do much at all, at least insofar as its list of topic areas that are no-no’s seems a lesson in obviousness. (But, sure, apparently not to Musk.) At least one SEC Commissioner’s (Jackson) dissatisfaction with the latest settlement is referenced here. Although reports are that the settlement resulted from the donning of “reasonableness pants” (see here), those pants seem ill-fitting on Musk, who has an interesting mix of hubris, disdain for the SEC and willingness to make public statements while smoking pot. We assume odd-makers are putting better than even money on Musk and the SEC winding up in court again soon.
4. Commissioner Jackson also was the lone voice of dissent on the SEC vote to propose changes to the definitions of “large accelerated filers” and “accelerated filers,” here. The proposed amendments would exclude from the definitions any smaller reporting company (SRC) with annual revenues of less than $100 million in the last fiscal year, and would align SRC and accelerated filer public float and revenue tests for exiting accelerated filer status (raising the threshold to exit accelerated filer status to match SRC public float requirements and allowing exit if a filer meets the SRC $100 million revenue test). The rule is expected to reduce the number of accelerated filers, who then can avoid the auditor attestation requirement for the management report on internal controls over financial reporting, by 358. Some had hoped that the SEC would have gone further and re-aligned the accelerated filer thresholds with the SRC caps that the SEC raised in June 2018 (here), but the SEC took a middle road that still designates SRCs as accelerated filers if they have annual revenues of at least $100 million and a public float of at least $75 million. Still, the 358 reduces the number of current accelerated filers by nearly 10%, which isn’t nothing.

   In case you are a visual learner, the SEC provides some handy charts.

   The current state of the SRC/accelerated filer overlap:

   

   For the state of overlap under the proposed rule, if you change “Accelerated Filer” in the graphic above to “Accelerated Filer only if annual revenues are at least $100 million,” you’ve got it. But here’s another way of looking at it:

    

   Status	Public Float	Annual Revenues
   SRC and Non-Accelerated Filer	Less than $75 million	N/A
   	$75 million to less than $700 million	Less than $100 million
   SRC and Accelerated Filer	$75 million to less than $250 million	$100 million or more
   Accelerated Filer (not SRC)	$250 million to less than $700 million	$100 million or more

5. The SEC proposed changes to disclosures about acquisitions and divestitures, here. The SEC’s own summary of the rule changes is here and a few other summaries are here, here and here. Generally (you guessed it), the rule change will result in less disclosure. (And, bless him, although he didn’t object to submitting the rule for public comment, Commissioner Jackson once again was the only voice suggesting this is a bad idea, here.)
6. To round off what we suddenly have realized is a Commissioner Jackson-related focus, note the commentary piece he published in the Wall Street Journal last month, here, advocating for GAAP reconciliations if public company executives are compensated based on non-GAAP measures. Commentary is here. The Council of Institutional Investors filed a rule-making petition asking that the SEC make it so, here.
7. Vanguard recently announced it will shift proxy voting determinations to outside fund managers, here, presumably to put voting more closely in touch with managers who picked the stock and, some might argue, also to restore some semblance of diversity to proxy voting (including the Vanguard founder, here). It may at least mean you’ll have to dig a bit deeper to unearth the voting predilections of your large shareholders. News coverage is here and here.
8. The SEC recently re-jiggered the cover pages for Forms 8-K, 10-Q and 10-K to move the new requirement to list the class, trading symbol and national exchange for registered securities. The SEC also modified the Form 10-K cover page to eliminate redundant disclosure about the class and national exchange. The latest forms are on the SEC’s website, here. Word versions of the cover pages are here (8-K), here (10-Q) and here (10-K).

April 10, 2019

1. The SEC adopted final rules, here, to implement “FAST Act” disclosure modifications and improvements. Cynics might view the SEC’s efforts to simplify disclosure as a losing battle, as Congress lards more and more mandatory disclosures onto public companies (pay-ratio disclosure, anyone?), but, well, there you go. Some parts of the rule are already effective, but most are effective May 2, 2019. The changes:
   • Update the cover pages of Forms 8-K, 10-Q and 10-K to require disclosure of the company’s trading symbol and the exchange where its securities are listed for trading. Companies also must now present cover page data with XBRL tags. After May 1, check on the SEC’s website, here, for the most current form of cover page.
   • Allow companies to exclude discussion of the earliest of the three years in MD&A if they covered that year in a prior report.
   • Eliminate the requirement to file immaterial attachments to material agreements.
   • Eliminate the two-year look-back for material contracts that must be filed, except for newly public companies, on the theory that investors can just look at last year’s filings if they care.
   • Allow companies to omit confidential information from exhibits without submitting a confidential treatment request as long as the material is not material and would cause competitive harm. (Generally, this is a shift in process. A company must justify the redaction upon SEC request, which presumably it would do if anyone files a FOIA request for the information.) The SEC published, here, guidance on the new rules.
   • Allow companies to link to information incorporated by reference, rather than file it.
   • Allow companies to provide disclosure about physical property only to the extent it is material to the company.
   A smattering of law firm summaries of the new rules are here, here and here.
2. The SEC also proposed rules, here, to make the public offering process for investment companies easier by giving them the same advantages available to operating companies, including well-known seasoned issuer status.
3. In the midst of proxy season . . .
   • CalPers, which administers the pensions of California state employees and is, as you might imagine, therefore an investment juggernaut, released a recap of 2018 proxy season outcomes and its voting guidelines for next year, here. Among other things, CalPers says it will start voting “no” not just on say-on-pay proposals (it voted against 43% of such proposals), but also eventually against Compensation Committee members if pay fails under CalPers’ model.
   • Glass Lewis announced a pilot Report Feedback Statement service through which targets of GL reports can pay to have their views of GL reports delivered to GL investor clients. The program is intended to facilitate “informed dialogue among all stakeholders” and not, certainly, to build an additional revenue stream for GL. To participate, you must buy the GL report on the company and pay a fee to distribute your feedback. The merits of the RFS are extolled by GL’s CEO here.
   • The Wall Street Journal reports, here, that the SEC is gearing up to regulate proxy advisory firms, which many public companies believe have too much sway over shareholder voting. The WSJ doesn’t exactly win an award for investigative journalism on this one--proxy advisory firms were the subject of roundtable discussions at the SEC last year (see here) and SEC Chair Clayton foreshadowed forthcoming regulation in testimony to the U.S. Senate Banking Committee here. A plea from target companies to require proxy advisory firms to address conflicts of interest, accuracy and transparency of standards is here. Additional commentary is here, here and here.
4. The U.S. Supreme Court recently endorsed a broad view of “scheme liability” in Lorenzo v. SEC, here, finding that an investment banker could be liable for securities fraud under Rule 10b-5 for sending emails that contained false statements copied and pasted from his boss’s email. The decision resolves uncertainty in the application of securities liability, and, by holding that Rule 10b-5 subsections (a) and (c) create liability even if a person only “disseminates” and does not “make” a misleading statement, gives a whiff of aider and abettor liability that the Court, in Janus Capital v. First Derivative Traders and in Central Bank of Denver v. First Interstate Bank of Denver, suggested did not exist in a private right of action. (More than a whiff, according to the two dissenting Justices.) Roughly one billion law firm memos have summarized the case and its effect. A few summaries are here, here and here. Commentators generally dive into the nuance of the potential effect of the Court’s “shift,” and how in particular the decision may affect civil lawsuits. When the dust settles, though, the case may simply stand for the proposition that repeating a lie is still lying. And in a securities law context, that’s what we lawyers refer to as “bad.”
5. Deloitte’s Board Practices Report, which offers insights into what some boards are worried about these days, is here.
6. Elon Musk’s ongoing battle with the SEC, and with securities laws generally, has long-since devolved into the People’s Magazine of securities law news. And it would be reasonable to assume a high-brow publication like ours would refrain from commenting, since nothing useful has happened since our entry last month, and since most readers don’t need the lesson (but again, see here). We are disappointed to foil those expectations. The SEC’s response to Musk’s response to the SEC’s original filing is here. A few articles about the latest are here, here and here.

March 13, 2019

1. Heaping further empirical evidence on the postulate that self-indulgence trumps common sense, Elon Musk is at it again, now charged by the SEC with violating his earlier settlement agreement, which required that he pre-clear material non-public disclosures about Tesla through an internal process. According to the SEC’s complaint, here, Musk inaccurately tweeted to 24 million people that “Tesla made 0 cars in 2011, but will make around 500k in 2019.” (Musk later tweeted: “Meant to say annualized production rate at end of 2019 probably around 500k, ie 10k cars/week. Deliveries for year still estimated to be about 400k.”) Musk’s response to the SEC complaint claims the information wasn’t material, that he has cut back on tweeting generally and therefore has complied with the settlement agreement, and that, in any case, enforcement infringes his free speech rights. Setting aside the fundamentally dumb argument that the SEC can’t hold you accountable for speech that violates U.S. securities laws, to say nothing of a settlement agreement you voluntarily signed, it’s tough to see how a statement that Tesla will make 25% more cars than it will actually make is not material and misleading. As for the argument that Musk “diligently attempted to comply with the order in a reasonable manner,” it’s also difficult to see how evidence that he has cut back on tweeting outrageous things means he shouldn’t be accountable for what seems a pretty clear violation of the settlement agreement. Because Tesla’s fortunes appear inextricably linked to Musk (see here), it has got to be rough to be on Tesla’s board, charged with reining in a nut without damaging your enterprise.¹
2. Audit Analytics reports, here, on the SEC’s recent enforcement action against four public companies for repeated failure to address weaknesses in internal controls (see SEC press release, here). Unusual, AA notes, is that the SEC brought the enforcement action primarily for internal control problems and not, as is the norm, for a material accounting issue or for fraud. Of the four companies, only one had to restate financial statements. Just in case anyone needed the reminder: a public company must have internal controls over financial reporting, and continually disclosing that they don’t work isn’t sufficient. At the risk of sending mixed messages, a bill to extend the five-year deferral of auditor attestations on internal control reports for small cap companies with little revenue is discussed here.
3. As a reminder for those who haven’t yet filed their annual report on Form 10-K, or to engender stomach-dropping angst for those who have, recall that the cover page for Form 10-K has changed to incorporate rules that no longer require a company to post interactive data files on its website and that expand the definition of “smaller reporting company” (see here) that may now qualify for scaled disclosure.
4. Perhaps also in the category of changes that might slip through the cracks, note that Item 407(i) of Regulation S-K is effective March 8, 2019 and requires disclosure of anti-hedging policies in upcoming proxy statements. (Many already disclose this to placate ISS and Glass Lewis, or pursuant to Item 403 of Regulation S-K or Rule 16.)
5. As the 2019 proxy season looms, a few items:
   • The SEC published a CDI regarding board diversity disclosure, noting that Regulations S-K Items 401(e) and 407(c)(2) require that a company disclose how the board considered the diversity attributes of a specific nominee and how it considers diversity attributes generally under its diversity policies. See here. Meanwhile, a preliminary study on the effect of the California law that requires that public companies with their principal executive office in California have female directors is here.
   • At least one commentator went out of its way to announce there is nothing to learn from last year’s pay ratio disclosures. See here. The SEC apparently made no comments, suggesting perhaps that it thinks, as we do, that the disclosures are silly, or perhaps that everyone did a fantastic disclosure job. (Sometimes knowing there isn’t anything to know is, itself, knowledge.)
   • The NY Comptroller garnered attention for going straight to court to compel inclusion of a shareholder proposal regarding climate change reporting, rather than fighting about it in the SEC no-action letter process, which is the norm. Is this the new norm, at least for the NY Comptroller? It succeeded (see here), so maybe.
   • Delaware Chancellor Leo Strine published his thoughts, here, on the “fiduciary blind spot” of Blackrock, Vanguard, State Street and Fidelity for failing to prevent “the illegitimate use of working Americans’ Savings for Corporate Political Spending.” Might this admonition, from a corporate governance luminary, fuel the push to require public companies to disclose political spending? (See here.)
   • An early look at 2019 U.S. shareholder proposals – climate change and political activity disclosures are the top two – is here.
   • Consistent with shareholder proposal results so far, according to a recent institutional investor survey, here, 85% of respondents claim that climate change is their most important engagement topic. A summary of the report is here.
6. The SEC proposed rules, here, to allow any issuer, and not just emerging growth companies, to have “test the water” discussions with potential investors it reasonably believes are qualified institutional buyers or institutional accredited investors. Comments on the proposed rule are due April 29, 2019.
7. Nasdaq published an immediately effective rule, here, clarifying its rules for a “direct listing” – a listing on the exchange so shareholders can start trading without an underwritten IPO. Nasdaq’s rules follow NYSE rules adopted in early 2018 to facilitate direct listings on the NYSE (see here). Spotify garnered attention for its direct listing in 2018 and for its deviations from typical practices, including no six-month lockup for insiders (see here). On the heels of Spotify’s listing and NYSE and Nasdaq rule changes, are direct listings a thing now? According to Matt Levine, in an article titled Direct Listings Are a Thing Now (here), “yes.”
8. Finally, and also in the vein of non-traditional ways to go public, an article about the apparent rise in popularity of “at the market” offerings – traditional IPOs but without a negotiated sales price for sales to institutional investors – is here.

---------------------------

¹Any suggestion that this is an allegory for the Republican party is, while dead accurate, entirely coincidental. Please do not complain to our editorial staff about the political nature of this post.

September 12, 2018

1. Much has been written about what on earth Elon Musk was thinking when he tweeted last month: “Am considering taking Tesla private at $420. Funding secured.” The tweet led to a 9% spike in Tesla’s stock price and to a temporary halt to Tesla stock trading. For securities law wonks, the focus has been whether the tweet violated Regulation FD (“Fair Disclosure”), which prohibits the intentional release of material non-public information selectively to specified groups that may most easily reap financial gain from the information (analysts, institutional investors, and shareholders), and whether the tweet was materially misleading in violation of Securities Exchange Act Section 10(b).
    
   • On the Regulation FD issue, almost certainly there was no violation. As noted here, Tesla arguably announced that people should follow Musk’s twitter feed if they wanted to be kept up to date and, even without that, the fact that Musk apparently has 22 million twitter followers suggests his tweets are sufficiently public.
   • On the 10(b) claim, Musk has a problem and, not surprisingly, class action claims (see here) and an SEC investigation (see here) were not long in coming.
   Tesla’s lawyers (presumably) went into damage control mode almost immediately after the tweet, ghost-writing (presumably) a calming statement to Tesla employees (here) and, a few days later, a statement (here) claiming that the tweet was Musk’s way of complying with Regulation FD (see “Why did I make a public announcement?”) and explaining why the tweet wasn’t misleading (see “What happened so far?” and “Why did I say ‘funding secured’”). Time will tell whether the statement reflects reality, and whether that reality was accurately captured in Musk’s tweet, or whether it’s a self-serving post hoc rationalization of an ill-conceived tweet.
   
   It has certainly been a rough month for Musk, which included a steep Tesla stock price drop after its CFO quit and after Musk smoked pot during a live YouTube interview (see here). To the extent Musk is tired of the negative limelight, though, he must take at least some comfort knowing:
    
   • If you Google “Egomaniac’s asinine tweet”, he likely doesn't even crack the top 1,000,000 results.
   • It’s only a matter of time before a Google search for “Musk disaster” consistently yields this as its top result.
2. Depending largely on your political views, a California bill presented to the Governor for signature on September 10 is poised to strike a long-overdue blow for gender equality or to cement California as the poster child for state over-reach in private business affairs. Senate Bill 826 (here), would mandate that women serve on the board of each public company with its principal executive office in California. The mandate would phase in – one woman must be on the board by the end of 2019 and, by the end of 2021, women must comprise at least 1 of 4 or fewer, 2 of 5, or 3 of 6 or more directors. SB-826 detractors cast it as unnecessary, pointing to private efforts to recruit female board members and to push for board diversity, and unlawful under the U.S. and California constitutions and the California civil code. Media coverage of SB-826 is here, here, here.
3. California’s bill gives a nice segue to environmental, social and governance (ESG) issues generally. A few items:
    
   • Ceres’ nagging survey, Disclose What Matters, which analyzes the sustainability disclosures of the world’s largest companies, is here.
   • A brief guide about responding to requests from ESG surveys is here.
   • A report on ESG reporting fatigue is here.
   • A suggestion that time and effort spent on ESG disclosures will result in garbage ESG ratings in any case is here.
   • Commentary on Delaware’s voluntary sustainability certification law, a type of voluntary reporting system any Delaware entity can opt into, is here (the law, which takes effect October 1, is here).
4. The SEC continues to do very little, but not nothing. It recently:
    
   • Eliminated “redundant, overlapping, outdated, or superseded” disclosure requirements, here. (Helpfully, the SEC also published a redline version that shows the actual rule changes, here.)
   • Issued a concept release and request for comment, here, about expanding and simplifying the registration or exemption of securities under compensatory plans (Form S-8 and Rule 701).
   • Amended Rule 701(e), here, to raise the threshold that triggers additional disclosures to investors from $5 to $10 million in aggregate securities sales in a 12-month period.
   • Amended the definition of “smaller reporting company,” here, to include registrants with a public float of less than $250 million.
   • Proposed rules to tinker with the SEC’s whistleblower bounty program, here.
   • Foreshadowed, in a speech by SEC Chair Clayton, here, ways the SEC plans to help companies raise capital, including forthcoming modifications to auditor attestations of internal controls under Section 404(b) of the Sarbanes-Oxley Act.
   Last week, the U.S. Senate confirmed SEC Commissioner Elad Roisman, bringing the SEC Commission to a full five members at least until the end of the year, when Commissioner Stein is slated to end her term. Does this herald more action at the SEC? Probably not.
5. Davis Polk published its annual survey of corporate governance practices in IPOs, here, despite that such things are becoming increasingly unimportant, apparently, given the decline in the number of public companies generally (see here). Proviti’s annual report benchmarking SOX costs, hours and controls, here, (spoiler alert: “still high”) doesn’t help. (But see here for a positive view of trends in the last few quarters.)

June 13, 2018

1. Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act, the acronym for which doesn’t spell anything pithy, late last month. The EGRRCPA (ugh!), here, pulls back regulations implemented by the Dodd-Frank Act and does a few other modest things. Law firm memos describing the EGRRCPA generally and the likely effect of specific provisions abound.
    
   • General summaries are here, here, and here.
      
   • A description of the likely prod to bank M&A activity that should result from raising from $50 billion to $250 billion the quantitative definition of “systemically important financial institutions,” which are subject to enhanced regulation, is here.
      
   • A description of the provisions that allow public companies to use Regulation A+ to raise money, and why that’s probably unimportant because public registration on Form S-3 is an even easier way to raise money – sort of the whole point of being public, actually – is here.
      
   • The EGRRCPA also includes a provision that directs the SEC to increase from $5 million to $10 million (and inflation adjust) the Rule 701 threshold at which a company must provide enhanced disclosures to employees. Analysis is here.
      
2. Irrespective of our skepticism about the usefulness of Regulation A+, a recent study, available here, suggests it may actually be helping companies to raise money. Huh.
    
3. The SEC hasn’t engaged in much substantive rule-making in the last, say, 509 days. It has, though, taken care of a few housekeeping items, including replacing earlier “telephone interpretations” with CDIs.45 new CDIs related to proxy rules are posted here, and an analysis of interpretations that were substantively changed in the conversion from telephone interpretations to CDIs is here.
    
4. Notwithstanding what we just said about SEC inaction, the SEC, along with the Treasury Department, the Federal Reserve, the FDIC and the CFTC, recently proposed amendments (here) “to simplify and tailor” the Volcker Rule, which prohibits insured banks from proprietary trading and investing in hedge funds and private equity funds, “to increase efficiency, reduce excess demands on available compliance capacities at banking entities, and allow banking entities to more efficiently provide services to clients.” A summary of the proposed rule is here.
    
5. Although the 2018 proxy season is largely in the rearview mirror, note that Institutional Shareholder Services has updated its FAQs for U.S. Proxy voting policies and procedures, here, including updates on how to engage with ISS and updates on a handful of substantive issues. A summary is here.
    
6. Finally, if you are still sitting on the cryptocurrency/ICO sidelines, missing out on can’t-lose investment opportunities, check out the website here, like, immediately! Act now to invest in Howeycoins! (Honestly, working on the site must have been the best staff assignment at the SEC ever. The SEC’s press release about the site is here.)
    

May 9, 2018

1. Pay equity advocates were undoubtedly disappointed that inaugural disclosure of the ratio of CEO pay to median employee pay fizzled. See, for example, here. CEO pay has, of course, been publicly disclosed forever; only the median employee’s pay was new information for investors. And despite all the hand-wringing about the requirement in the several-year run-up to disclosure, nobody seems to know what to do with the new information, or to care much about it, except to marvel that people at Facebook get paid a lot (as here) or to scratch their heads when they realize that even comparing median pay between competing companies may not be useful, as here.
    
2. The SEC proposed an honest-to-goodness rule, here, which has been a relatively rare occurrence under the Trump Administration. The rule intends to “refocus” the analysis to determine whether a lending relationship foils auditor independence, generally backing away from bright-line rules that may not actually impair an auditor’s independence. A summary of the proposed rule is here.
    
3. The SEC also proposed “Regulation Best Interest,” here, which seeks to establish a standard that broker-dealers act in the best interest of customers, mandate that broker-dealers and investment advisers disclose information about their relationships with their clients on a new Form CRS (customer relationship summary), and clarify standards of conduct for investment advisers.
    
4. Kind of, sort of related to Regulation Best Interest is the Department of Labor’s Field Assistance Bulletin No. 2018-01, here, in which it fires shots across the bow of retirement fund managers that invest based on environmental, social or governance (ESG) issues and cautions that (a) “[f]iduciaries must not too readily treat ESG factors as economically relevant” and must “always put first the economic interests of the plan in providing retirement benefits” and (b) “[i]f a plan fiduciary is considering a routine or substantial expenditure of plan assets to actively engage with management on environmental or social factors, either directly or through the plan’s investment manager, that may well constitute the type of ‘special circumstances’ that the IB 2016-01 preamble described as warranting a documented analysis of the cost of the shareholder activity compared to the expected economic benefit (gain) over an appropriate investment horizon.” Perhaps stated differently: Lay off basing your investments on climate change criteria, California! (See here).
    
5. It seems unlikely that the DOL’s bulletin will significantly curb the focus on ESG issues, however, and more likely that ESG proponents will keep the pressure on. For example, the Financial Stability Board and the Climate Disclosure Standards Board recently announced the release of tools, here, to help companies make recommended climate-related disclosures. Yahoo Finance recently rolled out its free online “sustainability score” for public companies on its site, see here. In the meantime, the GAO released its report to Congress on the SEC’s steps to clarify the disclosure of climate-related risks, here.
    
6. The hot topic of cybersecurity continues to simmer, as it has for years. The SEC released interpretive guidance on the topic at the end of February, here, admonishing companies to do a better job identifying and reporting breaches, and followed that with its first-ever settlement of an action based on the failure to disclose a cybersecurity breach, here. The $35 million settlement, against Yahoo, followed allegations that it sat on a known and massive data breach for two years, disclosing only that such a breach was a risk and not that one had occurred.
    
7. Despite the action on cybersecurity, and in addition to the relatively slow pace of SEC rulemaking, 2017 SEC enforcement actions are down from the prior year (see here). But not to fret – accounting class action lawsuits were apparently way up (see here), so there’s that.
    
8. On the topic of enforcement action, the SEC reminds us that “there is no exemption from the anti-fraud provisions of the federal securities laws simply because a company is non-public, development-stage, or is the subject of exuberant media attention.” The SEC’s press release about its settlement of claims against blood “testing” company Theranos and its founder, Chairman and CEO Elizabeth Holmes is here, and analysis about the settlement from the D&O Diary is here. As the D&O Diary suggests, some might view a $500,000 fine for a $700 million swindle as lenient. Yep. On the upside, in addition to the fine, Holmes also must give up voting control of Theranos, which we can all assume will at least hamper Theranos’s efforts to collect all six infinity stones.
    
9. As another reminder that the SEC can take action against private companies, and its focus on the fast and loose ways of some Silicon Valley-based companies (see here), read about the SEC’s enforcement action against Credit Karma for failing to make required disclosures required by Rule 701 here.
    

January 10, 2018

1. The little bird who suggested to us (see last month's ICYMI) that the Oregon Secretary of State would clarify new requirements for Oregon company articles of incorporation and articles of organization (effective January 1, 2018) sang true. See here. The guidance should help law-abiding Oregon companies avoid some significant, unnecessary pain.
2. In the wake of the Tax Cuts and Jobs Act (the acronym for which, disappointingly, doesn’t even spell anything), the SEC issued a statement, here, alerting public companies to guidance in Staff Accounting Bulletin 118, here, that covers treatment of deferred tax assets, among other things, and sets forth the SEC’s expectations for disclosure. The SEC also adopted new Compliance and Disclosure Interpretation 110.02, here, which gives public filers comfort that they have not already blown their obligation to report a material impairment to deferred tax assets under Item 2.06 of Form 8-K. Summaries and commentary on the guidance are here, here, and here. A few thoughts on other public company disclosures related to tax law changes are here.
3. Also of interest in the TCJA (see? terrible!) to corporate governance and public company types are changes to Internal Revenue Code Section 162(m), which addresses the deductibility of compensation paid to public company executives. The law was changed:
   • To include the CFO in the scope of employees covered. Previously, through a quirk in referencing the old definition of “named executive officers” in SEC regulations, the CFO slipped through the cracks.
   • To provide that, once a covered employee, always a covered employee, even if you are fired or die. Previously, the group of covered employees changed depending on who was a “named executive officer" in any given year.
   • To eliminate the performance-based compensation exemption from the $1 million cap on deductibility. Many companies previously designed performance compensation around this exemption.
   • To extend the $1 million cap to companies required to file SEC reports under Securities Exchange Act Section 15(d). Previously, only companies with publicly traded equity were subject to 162(m). This is important because those who issue public debt are now subject to the rule; public debt issuers must file Exchange Act reports for at least a year after the sale and then may exit the reporting requirements if they have fewer than 300 holders of record at year-end and make the right filings to terminate the filing obligation. That means some public debt issuers may jump in and out of the 162(m) limits, which is weird.
   Binding contractual payments in place on November 2, 2017 are grandfathered. Modestly lengthier summaries of the changes to 162(m) are here and here. A collection of early proxy statement disclosures that describe the changes in 162(m) is here.
4. The TCJA also imposes a tax on “excess” compensation and “excess parachute payments” paid to a “covered employee,” which is any of the five highest-compensated employees of non-profit organizations . Like IRC Section 162(m), once you’re a covered employee, you stay a covered employee even if you fall out of the top five. The new law echoes provisions in IRC Sections 162(m) and 280(G) but, because it’s a non-profit that doesn’t otherwise pay taxes, the law works a bit differently – rather than prohibiting deductions or imposing a hefty excise tax on the employee, the non-profit must pay a 21% tax on compensation in excess of $1 million and on “excess” severance benefits (if severance benefits are more than three times annual base compensation, the tax applies to all benefits in excess of one times annual base compensation, even if three times the covered person’s base pay is not very much). We’re not entirely sure what the point is with this tax law change. According to the Charity Navigator, here, of the 4,587 charities in its 2016 report on non-profit CEO compensation, 10 rewarded CEOs with more than $1 million in compensation, including one-time payouts, and in the grand scheme of things, 21% of not very much is not very much. Of course, the laws will affect some entities one might not consider “traditional” non-profits, like health care providers (but compensation paid to doctors and veterinarians for providing medical services is excluded) and schools (look out, football coach). Of course, it is unconscionable that a non-profit executive should make anything resembling what a private company executive makes, so maybe that’s the point? (That’s sarcasm. It’s not unconscionable. We have no idea why people get worked up about it.) Summaries of the effect of the tax bill on nonprofits are here (compensation) and here (general).
5. To round out our coverage, some general summaries of the TCJA are here, here, and here.
6. Perhaps as notable as the Trump Administration’s push to fill federal courts with young conservatives (see here) has been its slow progress in filling administrative positions. Minor progress, at least, was made in late December when Robert Jackson and Hester Peirce were confirmed as new SEC Commissioners, filling two slots that have gone unfilled since before Trump took office. See here and here. Will that mean a renewed spate of SEC rule-making, say to implement lingering requirements of the seven-and-a-half-year-old Dodd-Frank Act? No. (See the Long-Term Actions agenda, aka the “don’t hold your breath” agenda, here, which among other things lists action on clawbacks, pay-for-performance disclosure, and stock hedging.)

December 13, 2017

1. A few months ago, we reported on Oregon House Bill 2191, here, a law designed to curb abuses by “shell entities” that is effective January 1, 2018. A summary of what it does (maybe) and what all Oregon companies must do beginning January 1 (maybe), in super helpful Q&A format, follows.
   
   Question: I know what “shell” companies are - companies with no assets or operations. That must be what HB 2191 means, right?
   Answer: Uh, no. A “shell entity” under HB 2191 is an entity that is used or formed (1) for an illegal purpose, (2) to defraud or deceive a person or agency, or (3) to fraudulently conceal a business activity from a person or agency.
   
   Question: Wait, what? Didn’t JP Morgan recently defraud some people? Does that mean it is a “shell entity” because it was “used” to defraud?
   Answer: Beats us. Was it “used to defraud” a person, or did it, as a distinct legal person under the law, just do that on its own? Thank goodness JP Morgan has steered well clear of Oregon and doesn’t have to grapple with these existential issues.
   
   Question: I’m a warped, frustrated old man buying up properties to build shacks in a development I plan to call “Pottersville,” just as soon as I run the confounded local Building & Loan out of business. I don’t want the local do-gooder to catch wind of my scheme, so I set up “Angelic Bells Property, LLC” to buy the property. That OK?
   Answer: Maybe. There’s nothing wrong with forming the entity. But a court could subsequently determine Angelic Bells is a shell entity because it was formed “to deceive a person.”
   
   Question: Oh. If Angelic Bells is determined to be a shell entity, what’s the worst that can happen?
   Answer: Angelic Bells could be fined, its charter could be revoked, or it could be administratively dissolved. Also, as an officer, director, employee, or agent of a shell entity, you may be personally liable for damages to a person that suffers “an ascertainable loss of money or property.”
   
   Question: So the local do-gooder could sue me?
   Answer: Sure he can sue you. This is America.
   
   Question: Don’t sass me. You know what I meant - will he win?
   Answer: Probably not. First, it’s not even clear that local do-gooder can bring an action to get a court to declare Angelic Bells a “shell entity.” “Shell entity” is defined by reference to code sections that allow the Attorney General to bring suit to dissolve the entity, so maybe only the AG can get a court to make the initial determination. Second, it may be hard for do-gooder to make out a claim for “an ascertainable loss of money or property” if Angelic Bells didn’t take his money or property. But if do-gooder convinces a property seller to sue and say she would not have sold to Angelic Bells if she had known you were the force behind it . . .? Hmmm. (Although he never went to college, we understand do-gooder is pretty clever, and local townspeople are always giving him money to get bank regulators off his back, so he may be able to afford to hire some lawyers to test this.)
   
   Question: Dash it all! Why did Oregon adopt this monstrosity?
   Answer: Oregon was called out in the Portland Business Journal, and in the national press, as a state where shell companies have done bad things. And when NPR calls out liberal Portland (here), stuff happens. (Oregon’s corporate code is modeled on the Model Business Corporation Act, like the corporate codes of about half the states in the union, so it’s a bit of a mystery why Oregon was singled out.)
   
   Question: Terrific. Any other good news about this law?
   Answer: Yes. Beginning January 1, 2018, all corporations and limited liabilities companies must include in their articles of incorporation (or articles of organization, for LLCs) filed with the Oregon Secretary of State (1) the initial physical address of the entity and (2) the name and address of an individual who is a director or controlling shareholder (or member or manager, for LLCs) or “an authorized representative with direct knowledge of the operations and business activities of the [entity].” Also, the person signing filings must now declare, above their signature and under penalty of perjury, that the document does not fraudulently conceal or misrepresent the identity of the signer or any officer, director, employee, or agent of the entity on behalf of which the person signs.
   
   Question: Ugh. My articles don’t have any of that stuff! Do I have to amend them?
   Answer: No. Although you can’t pick that up just from the text of the new law, we have it on good authority that the Oregon Secretary of State’s Office will adopt an interpretive rule (see proposed rule to “clarify requirements to comply with House Bill 2191,” here), that says an entity will be deemed to comply with the new information requirements:
   1. if it includes the information in articles filed after January 1, 2018,
   2. if it was formed before January 1, 2018 and does not file amended articles, restated articles, articles of conversion, or articles of merger after January 1, 2018,
   3. if it was formed before January 1, 2018 and includes the information in amended articles, restated articles, articles of conversion, or articles of merger it files after January 1, 2018,
   4. if it includes the information in an information change form (here) filed with the Secretary of State, or
   5. if it includes the information in an annual report filed with the Secretary of State (see here, typically renewed online).
   Under the interpretation, an entity formed in 2017, for example, need not disclose anything unless it subsequently amends its articles. We suspect many companies will choose to comply with the new requirements by relying on their annual report, which already has spaces to fill in the physical address of the entity and the name and address of the President and Secretary (corporation) or member or manager (LLC). If a corporation relies on the annual report to comply, it is implicitly stating that its President or Secretary is “an individual with direct knowledge of the operations and business activities of the corporation.” If those individuals don’t have the required direct knowledge, the corporation must comply in some other way. Note too that the requirement is to list “an individual.” Listing an entity as the LLC’s manager won’t cut it, but presumably listing an individual who can sign on behalf of the manager would. For example, you might list the manager of an LLC as “LLC Manager, Inc. (John Smith, CEO).” It also is relatively easy to comply by filing a change form, here, which is free and which has line items that track the statutory language. We expect the final interpretive rule will be posted, possibly on January 1, 2018, here, and that the Office of the Secretary of State will update its analysis of HB 2191, here.
   
   Question: That was super confusing. What do I have to do?
   Answer: Nothing. If Angelic Bells never amends its articles of organization, it will never have to do anything. If Angelic Bells does amend its articles, but it has already listed its physical address and the name and address of an individual who is its manager in an annual report or information change form, Angelic Bells won’t need to include that information in the amendment to its articles.
   
   Question: If I just move Angelic Bells outside Oregon, I don’t have to deal with any of this, right?
   Answer: Sort of. Angelic Bells could still be determined to be a shell entity, and the Secretary of State could revoke its foreign business qualification, see here, after a hearing, but it need not disclose the physical address and authorized representative information in any filings with the state.
   
   Question: But at least the good citizens of Oregon don’t have to worry about shell company fraud anymore, right?
   Answer: Yes they do. Shockingly, Oregon already had laws prohibiting fraud and all kinds of other dangerous and unconscionable behavior (see, e.g., here). Hard to imagine the new law will matter that much to someone who intends to commit fraud anyway.
   
   Question: Not that I don’t trust you, Poindexter, but is there a more authoritative source than you that tells me what this law means?
   Answer: The Office of the Oregon Secretary of State provides a summary here.
    
2. Revenue recognition continues to be a hot topic. The SEC will, apparently, slow walk comment letters on revenue recognition as companies implement the new standards (see here). Nonetheless, FEI published, here, “lessons learned” from the 21 comment letters the SEC has issued on revenue recognition standards to date.
3. In other accounting news, the SEC approved the PCAOB’s new audit reporting standards, AS 3101, here, which must include the auditor’s views on critical accounting matters (although CAM discussions are not required for a few years). A significant change for audit reports.
4. The SEC adopted Staff Legal Bulletin, SLB 14I (here), regarding when a company may exclude a shareholder proposal under the “ordinary business” exception of Rule 14a-8(i)(7). The SLB suggests both that a shareholder must meet a higher burden of tying social or ethical issues to a significant effect on a company’s business and that a company might exclude the proposal if it submits a well-developed analysis to the SEC about why a particular proposal is better left to the board, with its fiduciary obligations. Analysis of the SLB is here and here. Apple is the first company to seek to exclude a shareholder proposal to establish a Human Rights Committee under the new guidance. See here.
5. And speaking of shareholder proposals, ‘tis the season for proxy updates (isn’t it always):
   • Glass Lewis policy updates for 2018 are here, and its statement that it will not, at least in 2018, incorporate the pay ratio disclosure into its assessment and analysis of say-on-pay proposals is here.
   • ISS 2018 policy updates are here (summary of changes here), preliminary FAQs about its U.S. Compensation policies are here, and information on its updated “QualityScore” methodology is here.
   • Each of ISS and Glass Lewis signed onto the Best Practices for Shareholder Voting Research, here, on which the organizing group is seeking feedback, here.
6. Finally, and as a special holiday treat, there are no substantive entries in this month’s ICYMI about the congressional tax bill, what’s in it, whether it will be enacted, and what that means for the fate of the Republicans and the Republic in 2018. (God bless us, every one.)

October 11, 2017

1. Institutional Shareholder Services published its 2017-2018 Global Policy Survey Summary of Results, here. Investor and non-investor survey respondents disagreed on dual class stock (investors don’t like it, non-investors do), who should control share issuances and stock buybacks (investors say shareholders, non-investors say the board) and whether virtual-only meetings were acceptable (investors say no, non-investors yes). Investors and non-investors did agree that lack of women on a board is a problem, but investors think it’s a bigger problem. (The NY Comptroller, who led the charge in proxy access proposals, also thinks board diversity is a problem and may lead a focused activist drive on that topic too. See here. So stay tuned for more action on this topic.)
2. ISS also identified eight key trends from the 2017 proxy season, here, including the continued appeal of shareholder proxy access proposals, support for climate change and political contribution disclosure proposals, lower director support from shareholders from prior years and a whopping 7% uptick in average CEO compensation (led by improved markets). A joint report from Broadridge and PWC on proxy trends, which largely echoes ISS’s findings, is here.
3. In its annual proxy voting report, here, Vanguard foreshadowed increased engagement with portfolio companies and emphasized the importance of climate change disclosures and board diversity. Perhaps, skeptics might think, the report is at least in part the result of negotiations with its own activist shareholders, which recently pushed a proposal to require Vanguard to review its voting practices on climate-related issues. See here.
4. Apropos climate change disclosures, a smattering of climate change items are here (climate disclosure guide), here (building “sustainability competence” on the board), here (leveraging the COSO internal control framework to improve confidence in sustainability performance data), here (preparing for activist investor proposals on climate change) and here (the rollout of the horribly named “Climetrics,” a climate impact rating system for equity funds).
5. For those with lingering hopes that the Trump Administration would act in time to get rid of pay-ratio disclosure rules, it is finally time to give them up. The SEC issued interpretations here, supplemental guidance here and modified CDIs on the new rules here (128C.01 and 128C.06). The SEC releases seek to ease the compliance burden on reporting companies, and emphasize that a company can use “reasonable estimates, assumptions, and methodologies and statistical sampling” to identify the median employee whose compensation must be compared to the CEO’s compensation.
6. Perhaps not surprisingly, given some of the items above, more public companies are disclosing shareholder activism as a risk factor, citing the expense and management distraction of increased activism. See here. More companies are also citing cybersecurity concerns as risk factors. See here. Many are just a tad late to the party, but expect the party only to grow as high-profile hacks hit the press, including the SEC’s own data breach in which hackers gained access to non-public company information and private data on at least a few individuals. See here and here.
7. Also not surprisingly, given all of the items above, it isn’t much fun to be a public company these days. “It seems like a way of living in hell without dying,” is how a founder of one public company candidate described it, here. A possible resurgence of SPACs, public shells created to acquire a company, making it instantly public, is discussed in the same article. Plus, with all the private money floating around and increased opportunities for investor liquidity, who needs to go public? PWC’s guide to secondary transactions that provide private company investor liquidity is here, and Nasdaq’s private company liquidity update, which indicates that the first half of 2017 was the busiest period ever for private company liquidity programs on the Nasdaq Private Market platform, is here (but calm down, there are only 19 programs on the private exchange).
8. There hasn’t been a heck of a lot coming out of the SEC or other executive agencies charged with public market regulation since Trump took office, but, in addition to pay-ratio disclosure guidance, a few things to note:
   • The SEC updated CDIs on Rule 147, Reg D and Reg A . See here.
   • The SEC’s Office of Chief Counsel clarified that the linked exhibit table, required in SEC filings since September 1, may appear only before the signature blocks and need not be repeated as a separate exhibit list. See here.
   • The SEC Advisory Committee on Small and Emerging Companies issued its final report last month, here, which focuses again on ways to improve private and public capital formation by smaller companies. Generally, the report repeats earlier recommendations: improve registration exemptions, scale public disclosure for smaller companies and improve secondary trading markets. The report also makes detailed recommendations for changes to Rule 701, on which private companies rely to offer stock incentives, summarized here. (Re the “Final Report,” we know what you’re thinking, but fear not, in December 2016 Congress approved a successor standing committee, the Small Business Capital Formation Advisory Committee, that will continue to issue reports for the foreseeable future.)
   • The Treasury Department issued 232 pages of recommendations, here, to streamline the regulation of capital markets, some of which require congressional action and some of which don’t. A summary of some of the more interesting (to us) items is here.
9. Finally, “Delaware Dethroned as Best State Lawsuit Climate” blares a release from the U.S. Chamber of Commerce, here, citing the former First State’s lag in tort reform and that the Delaware legislature has sided with plaintiff’s lawyers over business interests. The CoC also recommends 101 ways a state can improve its litigation climate for business, here, for those eager to start gunning for the new number 1, South Dakota.

August 9, 2017

1. A review of 2017 proxy season activity, including the trend toward adoptions of proxy access bylaws, is here. A suggestion that the big news of the 2017 proxy season was climate change proposals and the shift in Blackrock, Vanguard and Fidelity voting policies to generally support them, is here (although if you’re not an oil company, you might not have much to worry about – yet).
2. 2017 proxy results also suggest that things may get rougher for public company directors and public companies:
   • Investors seem more willing to express disappointment with directors, see here.
   • Shareholder activism is becoming the “new normal,” according to a JP Morgan report here (summary here). (But see here for a suggestion that the SEC may try to stanch the flow of shareholder proposals.)
   • Evidence that some passive investors rely solely on ISS voting recommendations, making ISS’s often opaque considerations even more frustrating, is here.
3. Although it seems like proxy season just ended (and it did), it’s never too early to start thinking about next year. Apparently. We are here to help. ISS opened its 2018 Governance Principles Survey, here. The survey solicits views on:
   • dual class structures,
   • director gender diversity,
   • share repurchases for cross-market companies (where the home jurisdiction requires a shareholder vote),
   • virtual shareholder meetings, and
   • issuer views on how pay-ratio data should be analyzed and used by shareholders.
   For good or ill, ISS strives to remain relevant and it really can only do that if it changes things up once in a while, even though presumably “good” corporate governance principles haven’t changed in centuries. To the extent there are tea leaves to read, the ISS survey may set the stage for changes to its voting policies or governance ratings scores in the areas listed above.
4. “Proxy access” will likely remain a trend in shareholder proposals. The Council for Institutional Investors released, here, its updated views on proxy access best practices, including a chart that shows where its recommendations differ from what has seemingly become “the norm”: 3% of a company’s outstanding shares held by no more than 20 shareholders for three years may nominate up to 20% of the directors. In 2017, activists proposed to “fix” proxy access bylaw provisions, and the SEC said that a company could not exclude some of the fixes on the basis that they were “substantially implemented.” See here and here. Keep in mind, of course, that although proxy access remains a focus of shareholder activists, most of these hair-splitting proxy access “fix it” proposals fail.
5. As an example of the growing disdain for dual class stock (see Item 1 above, if you believe in tea leaves), S&P and FTSE Russell announced they would exclude new dual class stock companies from their indices. See here. (How does that make you feel if you’re an index fund investor and the policy removes the hot stock from your portfolio?) Some commentators are lauding the holding in CalPERS v. IAC, discussed here, in which Delaware’s Chancery Court held that IAC directors had breached their fiduciary duties by approving the creation and issuance of new non-voting stock to preserve the IAC Chairman’s control of the company (a la Google, sort of, here).
6. Recall that beginning in September public registrants must hyperlink to each exhibit listed in the exhibit index, including each exhibit incorporated by reference. The update to the SEC’s EDGAR manual is here.
7. The Center for Audit Quality asks, here, that its members focus on the adequacy of management’s disclosures about the potential effects of accounting principle changes.
8. Finally, a brief foray into M&A, sort of:
   • Delaware reminds us in The Mrs. Fields Brand v. Interbake Foods, here, that “material adverse effect” means the same thing in a commercial contract that it means in the M&A context, developed most significantly in IBP, Inc. Shareholders Litigation, i.e. for a change to be material and adverse it must (a) be unexpected, (b) substantially threaten the earnings potential of the target, and (c) last a long time (but maybe not as long as in an M&A context). Perhaps even more significantly, the case introduced us to the concept of “cookie confusion,” which certainly sounds like a problem with potential widespread effect.
   • In DFC Global v. Muirfield Value Partners, here, Delaware Chief Justice Strine opined that, although he was not willing to accept a presumption that the deal price is the fair value of shares, if the sales process was robust a judge better have a darn good reason for deviating from that value. The lack of such a presumption may not be all bad for acquirers – the Delaware Chancery Court also recently ruled that a company’s fair value was less than half of the acquisition value, here.
   • In Chicago Bridge v. Westinghouse, here, the Delaware Supreme Court (Strine again!) held that a purchase price adjustment provision, in the context of the entire purchase agreement and based on the language of the provision, only allowed a plaintiff to recover for changes to a seller’s business between signing and closing, and the fact that components of the seller’s working capital calculation did not comply with GAAP was not a separate basis for a claim. At issue in the case was a potential $2.5 billion swing in the purchase price. Yikes.

July 13, 2017

1. The SEC’s Division of Corporation Finance announced, here, that it will allow all IPO companies, and not just “emerging growth companies” (EGCs) with less than $1 billion in revenue, to submit confidential registration statements if they commit to file, as EGCs are required to do, all registration statements and amendments 15 days before their road show or, if no road show, 15 days before effectiveness. A company may also confidentially submit:
   • An initial Exchange Act filing to register its shares, effectively making it possible to use the confidential process to register shares for trading by filing a Form 10 and “go public” without an initial public offering. (There has been noise about this since Spotify indicated that is what it might do, see here.)
   • A follow-on offering within 12 months of the IPO, although in that case only the initial registration statement is confidential and not amendments to respond to SEC comments.
   The SEC issued 18 FAQs about the expansion of this popular JOBS Act provision, here. Like the JOBS Act, the move is intended to facilitate capital formation. But also like the JOBS Act, don’t expect much. The decline in the number of public companies and the lackluster IPO market in the last several years (see here) weren’t helped by the 2012 JOBS Act “On-Ramp” provisions, like the confidential submission provision. Although the decline has many singing the blues, see here, Ernst & Young puts a positive spin on less is more, here, at least if less is bigger and more stable.
2. One JOBS Act change that appears to be gaining some incremental traction is Regulation A+ offerings , which we’ve talked about ad nauseam in prior ICYMIs. Now the first Regulation A+ company, Myomo, has listed its shares for trading on the NYSE MKT, the New York Stock Exchange’s small-cap market, see here and here. Will Regulation A+ become a viable stepping stone for small-cap companies to go public?
3. The SEC adopted updates to its EDGAR system, here, including that beginning September 1, 2017 large accelerated and accelerated filers must file reports in html and hyperlink the exhibit list entry to the actual exhibit. Other filers have until September 1, 2018. This is a welcome requirement for those who frequently access public company exhibits (lawyers), although perhaps not for anyone else. A new EDGAR release is supposed to come out July 17 (which should show up here).
4. The Second Circuit analyzed in Stadnick v. Vivint Solar, here, when a financial stub period must be publicly disclosed. In Stadnick, Vivint’s registration statement was effective on the last day of its third quarter and class action plaintiffs alleged that failure to disclose third quarter results was misleading because they constituted an “extreme departure” from prior reported results, the test articulated by the First Circuit in Shaw v. Digital Equipment Corp. in 1996. Instead of applying the Shaw test, the Second Circuit applied what seems pretty clearly to be the right test – whether the omissions significantly altered the total mix of information from the perspective of a reasonable investor. “Nope,” concluded the Court. And for good measure it affirmed that even under the “extreme departure” test, the plaintiff would have lost since its cherry-picked financial metrics were not fair indicators of the performance of Vivint’s business model and since Vivint’s third quarter results were within normal fluctuations. In addition to the stub period claim, the Court dispensed with plaintiff’s claim that the company failed to disclose known trends that would have a material impact on its financial condition or results of operations, pursuant to Regulation S-K Item 303, stating that the regulatory risks at issue were adequately disclosed in Vivint’s risk factors.
5. And speaking of S-K Item 303, a recent SEC Order, here, noted a shipping company’s failure to disclose trends in billing issues, and how these contributed to cash flows and, ultimately, compliance with its debt covenants. While the Order may simply stand for the proposition that when you see a credit default coming (the company defaulted by the next quarter), you better let people know, a lengthier analysis is here.
6. The D&O Diary discusses, here, the U.S. Supreme Court’s pending hearing on whether subject matter jurisdiction exists for state courts to hear Securities Act liability lawsuits . States, in particular California, have become a favored forum for plaintiffs to litigate such claims, and a finding of exclusive federal jurisdiction might curb that trend. More analysis on the case is here.
7. Finally, a bit of news from our own little corner of the world: recent legislation in Oregon awaiting the Governor’s signature , here, will impose additional requirements on Oregon corporations and their agents, including lawyers. The Act, which we’re told will “rein in abusive, anonymous companies,” likely has some consequences unintended by the drafters, unless they were just being jerks. For example, it requires that an Oregon company’s articles of incorporation set forth “[t]he name and address of at least one individual who is a director or controlling shareholder of the corporation or an authorized representative with direct knowledge of the operations and business activities of the corporation.” The law will be effective January 1, 2018, which may mean Oregon corporations have about five-and-a-half months to amend their articles to comply with the requirement. That is inconvenient, to say the least, for Oregon’s public companies and for other companies with many shareholders, who must have shareholders approve this type of amendment to the articles. Compounding this issue, it’s possible a corporation must update the articles whenever the named director or other person ceases to have a role with the company. Among other things, Oregon’s move may add some additional incentive for companies, particularly public companies, just to incorporate in Delaware and be done with it.

June 14, 2017

1. The U.S. House of Representatives passed the Financial CHOICE Act, here, on a partisan-but-for-one-Republican basis. An executive summary of the bill from the Republican staff of the Financial Services Committee (it sounds terrific!) is here. According to pundits, however, the bill is DOA at the Senate and has been ever since it passed out of Committee (see here, here and here).
    
2. With no sign of real movement on financial reform, pay-ratio disclosure rules don’t seem close to repeal despite SEC Interim Chair Piwowar’s odd re-solicitation of comments on the rule (here). Unless repealed by Congress or somehow delayed by the SEC, most SEC-reporting companies must disclose 2017 pay-ratio information in their 2018 proxy statements. A recent reminder of the ordinance adopted in our own home town of Portland, Oregon, which is related to pay-ratio disclosure, is here (see our December 2016 post on the Portland Ordinance here).
    
3. The Department of Labor’s change to the definition of “fiduciary” took effect June 9, after Labor Secretary Acosta confirmed he could find no principled legal basis to delay the rules, which don’t align with the Trump Administration’s deregulation agenda. This was confirmed in a “Temporary Enforcement Policy,” here, and FAQs, here. In connection with the DOL rules, the SEC also solicited comments, here, from retail investors and others on standards of conduct for investment advisers and broker-dealers .
    
4. To round out political news, even we’re not entirely sure why we found the introductions at President Trump’s first open cabinet meeting last Monday so disturbing. Perhaps simply because they reminded us of this and this. That’s what we get for being snowflakes, I guess. (Irrespective of your political views, let’s face it – Senator Schumer’s parody of Trump’s meeting, here, was pretty funny even if Schumer was picking the lowest hanging comedic fruit.)
    
5. The U.S. Supreme Court unanimously held, here, that SEC-imposed disgorgement constitutes a “penalty” and is therefore subject to a five-year statute of limitations. The decision resolves a Circuit Court split and overturns the Tenth Circuit’s holding that disgorgement is remedial because it merely restores the status quo.
    
6. Suggestions about why exclusive forum bylaws are not being invoked in Delaware (because of a shift toward federal securities law claims with respect to which exclusive state forum provisions are ineffective and because defendants may find it quicker and cheaper to settle outside of Delaware) are here.
    
7. Finally, in accounting news :
    
   • The PCAOB adopted, here, rules that would significantly expand audit report requirements for public companies. If approved by the SEC, some of the less interesting rule requirements will apply to fiscal years ending after December 15, 2017 (this year!) and the more interesting requirements, namely your auditor’s views of your critical accounting matters, would apply to fiscal years ending after June 30, 2019 (for large accelerated filers) or December 15, 2020 (for others). Summaries of the rules are here, here and here.
      
   • The PCAOB proposed auditing standards for accounting estimates, including fair value measurements, here.
      
   • The PCAOB proposed amendments to auditing standards for the auditor’s use of work of specialists, here.
      
   • An admonition to take a good, hard look at revenue recognition disclosures is here.
      

May 10, 2017

1. The SEC has been relatively quiet since November because it has been without a chair or a full board. At least one of those issues was resolved last week when Jay Clayton was sworn in as the SEC Chair. See here. Nine Democrats and one Independent Senator joined 51 Republicans to approve the nomination. That puts Clayton roughly in the middle of the pack for Senate confirmation votes for Trump nominees, with Devos (Education, 51-50), Mulvaney (OMB, 51-49), Sessions (AG, 52-47), Price (Health, 52-46) and Pruitt (EPA, 52-46) on one side of the spectrum and Shulkin (Veterans, 100-0), Mattis (Defense, 98-1), Haley (UN, 96-4) and Chao (Transportation, 93-6) on the other. On the heels of Clayton’s confirmation, the SEC announced, here, that Bill Hinman will be the head of the SEC’s Division of Corporation Finance. Hinman, a former partner at Simpson Thacher in the Bay Area, like Clayton, has transactional rather than litigation experience.  
2. To ensure we land in the new SEC Chair’s good graces, a summary of SEC comments on non-GAAP disclosures since the SEC’s May 2016 guidance (in which the SEC told you it was going to get tougher on these disclosures), published by his erstwhile law firm, is here. The big seven failings, from over 500 comments analyzed, are, in order:  
   • Prominence of GAAP measures;
   • Explanation of usefulness of non-GAAP measures;
   • Misleading adjustments;
   • Presentation of income tax effects;
   • Revenue recognition;
   • Misleading titles; and
   • Per share liquidity measures.  
3. The annual IPO study published by Proskauer Rose, available here, noted, in addition to discernible trends, an anemic IPO year in 2016.  
4. In proxy statement news:  
   • Recall that you must disclose your board’s determination of how frequently to hold say-on-pay votes in light of the shareholder vote on say-on-pay frequency . We think a good practice is to just get the board determination done immediately after the shareholder vote, particularly if your shareholders’ vote followed the board’s recommendation, which usually is for an annual say-on-pay. If you didn’t do this, you must amend the 8-K that announced voting results to add this disclosure. Failing to make the disclosure could foil your ability to use Form S-3 for a year. (Check out Item 5.07(d), here.)  
   • According to Reuters, here, Institutional Shareholder Services has grown less kind to endorsing shareholder-activist proxy proposals.  
   • An analysis of shareholder request no-action letters, up in 2017 compared to last year, is here.  
5. In last month’s ICYMI, we cited case law on the serial comma, to the delight of grammar nerds everywhere. To further emphasize the importance of commas generally, we note this sign at a recent event we attended. (There were surprisingly many takers for these.)  
6. Under the heading “things to be afraid of” or “finally, justice,” depending on your worldview:  
   • It’s not just disgruntled employees that will rat you out to the SEC. A story of two analysts who reported fishy numbers to the SEC, and who may get a $2.5 million whistleblower pay day for it (in addition to whatever they may have made by shorting the stock), is here.  
   • An analysis of the “clawback” of Wells Fargo’s executive compensation in the wake of its fake customer account scandal, is here. A particularly interesting point – the scandal did not result in a restatement and therefore would not have required a clawback under the Sarbanes-Oxley Act or the Dodd-Frank Act. Wells Fargo’s clawback policy is broader. A not particularly interesting point – huge financial incentives may encourage risky or even illegal behavior. (As a reminder, the clawback rules proposed by the SEC in July 2015, here, are still just that, “proposed.”)  
   • Although little has been done on the rule-making front, and despite fears that the Trump Administration wouldn’t enforce anything against anyone, SEC enforcement action through the end of March 2017 remained strong. See here.  
7. Last month we described the SEC guidance that it won’t seek enforcement action against companies that don’t comply with the source and chain of custody due diligence requirements in Item 1.01(c) of Form SD. Pushback from NGOs, that urge companies to ignore the SEC guidance, is reported here. Meanwhile, the annual GAO report on conflict minerals reporting (here) says that progress on confirming the sources of conflict minerals has in any case been slow. Whatever the form of your conflict minerals report, it’s due on May 31.  
8. Finally, for a bit of fun reading (at least if you have a warped sense of what is fun), an annual report for the U.S. Government, as reported on Form 10-K, is here. Risk factors and everything.

April 13, 2017

1. A host of things happened in the last few months regarding Conflict Minerals, although likely not much that will affect what a public company reports on its Form SD, due May 31. (Spoiler alert: The same thing companies have reported in the last two years, only maybe less.):  
   • The SEC’s Division of Corporate Finance issued a statement, here, that confirms that the SEC won’t seek enforcement action against companies that don’t comply with the source and chain of custody due diligence requirements in Item 1.01(c) of Form SD because, as acting SEC Chair Piwowar says here, the only purpose of the “extensive and costly due diligence” was to make the disclosures that the D.C. District Court found unconstitutional. Commentary on the guidance is here and here.  
   • The conflict minerals rule guidance followed Piwowar’s re-solicitation of comments on the rules, here, and he made no bones about his view, here, that the rules were a terrible idea and were doing more harm than good in Africa.  
   • The D.C. District Court entered its final judgment that Section 1502 of the Dodd Frank Act, SEC Rule 13p-1 and specified sections of Form SD are unconstitutional, just recently. See here.  
   • As reported here, the U.S. State Department is apparently getting into the Conflict Minerals game. A link to general materials at the Office of Threat Finance Countermeasures, which doesn’t really work as a title but certainly sounds cool, is here.  
2. Piwowar requested a similar review of pay equity disclosure rules, here, a move that raised the ire of Senate Democrats, who penned a letter (here) questioning whether Piwowar could actually do this. Although the disclosure of pay ratios may be silly and unhelpful, the rules were required by Congress and haven’t been ruled unconstitutional, and the SEC has already issued guidance that appears to make it fairly easy to comply with the disclosure rules at a reasonable cost, so it’s not clear what additional guidance might be forthcoming. In case you want to obsess about this, however, the comments received to date are here. Commentary on the unusually active role Piwowar has taken as an Acting Chair is here.  
3. Piwowar’s unbridled reign of terror is likely to end soon. Jay Clayton took a step closer to confirmation as the new SEC Chair, passing out of the Senate Banking Committee largely on a partisan vote (see here) on his way to confirmation by the full Senate likely later this month. Even with Clayton, the Commission will still be two (of five) commissioners light, and those slots likely won’t be filled by Hester Peirce or Lisa Fairfax, the two nominees left in limbo by Democrats last year. (And the expiration of Commissioner Stein’s term on June 5, 2017 may make it three commissioners light again.)  
4. Although it seems like much of the executive branch has been in limbo in the last three months, the rest of the SEC hasn’t been entirely inactive since Trump’s election in November, and did the following:  
   • Amended Regulation Crowdfunding to inflation-adjust the maximum that can be raised from “not very much” to “not very much plus 7%” (see here) and published a pair of new CDIs about Regulation Crowdfunding (Question 201.02 and 202.01, available here). (Apropos of crowdfunding, although not directly related to Regulation Crowdfunding, an article that, gasp, suggests there is fraud risk when buying stock in startup companies over the internet, is here).  
   • Adopted inflation adjustment rules for other self-executing provisions of the JOBS Act, including that revenues of “emerging growth companies ” now must not exceed $1.07 billion, a 7% increase.  
   • Adopted new CDIs about Regulation A+, available here.  
   • Adopted final rules, here, that require submission of exhibits in HTML format and the inclusion of hyperlinks to the filings in exhibit lists. The new filing requirements apply to filings made on or after September 1, 2017. Adopted rules, here, changing the standard T+3 stock sale settlement period for most broker transactions to T+2 .  
5. On the accounting front:  
   • A review of SEC actions on the use of non-GAAP numbers, which focus on the equal prominence of comparable GAAP numbers, is here.  
   • A heads-up on the difficulty many will face when implementing FASB’s new revenue recognition rules is here and a summary of where companies stand on adoption is here.  
6. For whistleblowers, a few items of note in the last few months:  
   • In Wadler v. Bio-Rad Laboratories, here, the federal court for the Northern District of California ruled that Sarbanes-Oxley whistleblower protections trump attorney-client privilege, which opened the door to a former general counsel’s recovery of $8 million in a jury trial for retaliatory firing.  
   • A suggestion that the plaintiffs’ securities bar is noodling on how to spin the SEC’s crackdown on severance agreements that impede whistleblowing (see here) into litigation gold is here. (You can find our original post about the SEC crack-down, from April 15, 2015, here.)  
7. The D&O Diary reports, here, that the plaintiffs’ securities bar is also active in bringing class action securities lawsuits , which in the first quarter is on pace to set new litigation records.  
8. Grammar nerds rejoiced when the First Circuit issued an opinion, here, that suggested that the Oxford (aka “Harvard,” aka “serial”) comma always makes things clearer. At issue was the state of Maine’s wage law, which said that overtime pay was not required for the following activities:

   The canning, processing, preserving, freezing, drying, marketing, storing, packing for shipment or distribution of: (1) Agricultural produce; (2) Meat and fish products; and (3) Perishable foods.

   Maine dairy workers argued that they should be paid overtime for distribution of dairy products because, without the serial comma, the exclusion from overtime pay should apply only to “packaging . . . for distribution” and not to distribution in its own right. The Circuit Court agreed, overturning the District Court’s ruling. Sharp-eyed readers may be thinking this: isn’t the Circuit Court dead wrong? For its reading, you must ignore the absence of a conjunction after the last comma. The Court would be right if the last clause read “, or packaging for shipment or distribution of,” but it doesn’t. The Court acknowledges this in its opinion, but notes the rare “asyndeton” technique in which conjunctions are omitted from a list (we’ve never heard of that either, but apparently it’s a thing). The Court then balances the omission of the conjunction against the consistent use of gerunds (nouns that end in “ing”) in the list and the plaintiffs’ argument that if “packaging” wasn’t meant to qualify “distribution,” the drafters would instead have used “distributing.” Ultimately, the Court throws up its hands and looks to statutory intent to reach its conclusion. If this entry still doesn’t sate your appetite, read more on the serial comma here.  
9. The White House issued guidance, here, on what it meant in its January 30 Executive Order (here), which requires that an agency that proposes a new regulation must identify two for repeal . (Hello regulations promoting the Ivanka Trump line of perfume, goodbye regulations on font size and margins on federal applications!) The interpretation adds some nuance, like in the way it talks about “regulatory actions” instead of regulations, but basically, new regulations are supposed to have a net zero cost effect. The guidance doesn’t answer the basic question: “effect on whom?”  
10. So far, the Trump Administration is most notable for the things it has failed to accomplish and for the spectacular way in which it has failed to accomplish them – health care, immigration, terrorism, you name it. (But if you’re a fan, chalk that statement up to fake news – he’s actually doing SUPER! Gorsuch got confirmed, after all.) Now we read, here, that a coherent reform of the Dodd-Frank Act is not in the near-term cards. To be fair to Trump, who knew financial regulation was so complicated? For those continuing to hope, at least take heart knowing that if meaningful Dodd-Frank reform fails, it will not be the fault of the President but rather, in this order:  
    • Democrats;
    • the failed policies of the Obama Administration;
    • the Deep State;
    • the failing media which focuses way too much on policy failures and not enough on the fact that Trump won the election last November;
    • Republican factions in Congress;
    • Republicans;
    • Paul Ryan;
    • Steve Mnuchin, who unfairly misled Trump into thinking he was qualified (listen, I’m just repeating what a respected FOX News analyst said! Go talk to him!);
    • Other cabinet members; and
    • Nobody, reform a HUGE success. (Fake news!) Just watch Hannity! @RealDonaldTrump.
     

January 11, 2017

1. The SEC published a white paper about Regulation A+, What Do We Know So Far?, here. Since changes to Regulation A in June 2015, there have been 147 Regulation A offerings, seeking $2.6 billion, that have raised about $190 million. The SEC also published a report about the outcomes of investing in over-the-counter stocks here (generally, “poor”). Meanwhile, the North American Securities Administrators Association published for public comment a model statute and rules for Tier 1 Regulation A offerings, here.
2. The Sustainability Accounting Standards Board, which is not in any way shape or form associated with the Financial Accounting Standards Board, published its first State of Disclosure Report on the disclosure of environmental, social and governance issues (see here). You must purchase a full-access pass to get the full report, which we’re not doing, but the gist is:
   • Lots of companies (81%) include some disclosure about SASB topics, which SASB claims is “a clear indication that companies acknowledge the majority of the sustainability factors identified in SASB standards are currently having—or are reasonably expected to have—material impacts on their business.” (Our suspicion is that most disclosures are in the risk factors section of businesses, and thinking that reference to these factors is a clear acknowledgment by issuers of their materiality is wishful.)
   • Most disclosure (53%) is boilerplate and not specific to the issuer.
3. The Financial Stability Board, also in no way related to FASB, released its recommendations on climate-related financial disclosures here, generally suggesting that disclosures be improved and made more useful to understanding risks.
4. The Department of Labor issued guidance, here, that among other things clarifies when ERISA plan fiduciaries may consider environmental, social and governance issues when voting or otherwise engaging companies. Basically, whenever there is a “reasonable expectation that such monitoring or communication with management, by the plan alone or together with other shareholders, is likely to enhance the value of the plan's investment in the corporation, after taking into account the costs involved.”
5. Although many are anxious about Trump appointees and the havoc they anticipate his Administration will wreak on the environment, at least some are hopefully pointing to SEC Chair nominee Jay Clayton’s name on a client alert published by Sullivan & Cromwell, in which clients are advised to consider whether their disclosure about climate change is adequate, as a sign that he may not be all that bad. See, e.g., here. Although horrified at the idea that someone, somewhere might predict our editorial staff’s political views based on prior summaries of SEC rules ("Snarky comments about conflict mineral disclosure rules suggest ICYMI staff likes Congolese warlords!”), we are not horrified by Mr. Clayton’s nomination. A transactional lawyer at a respected law firm familiar with how SEC rules work and affect public companies, investors and capital formation . . .. OK. Mr. Clayton will likely endure criticisms from the left for representing large companies and not “the little guy,” working on Wall Street, having a spouse affiliated with Goldman Sachs, and generally being successful; but who knows, perhaps Democrats will instead elect to keep some outrage powder dry for Trump nominees who deserve it, or for the next infantile Presidential tweet that (unless you can’t chug the Kool-Aid fast enough) you just know is coming.
6. Generally, we don’t spend much time speculating about potential legal and regulatory changes, but plenty of people do. A few resources that predict what, exactly, a Trump Administration might do to achieve its well-considered goal to Make America Great Again are here, here and here (corporate governance and securities regulation); here, here, and here (tax plan); here (estate tax); here (export tax); here (financial services industry); here (insurance industry); here (FCPA); here (private equity outlook); and here (Dodd Frank repeal).
7. A view on the volatile M&A environment—uncertainty about potential Trump policies and their effect on foreign investment (see, e.g., here), say, or Brexit and worldwide political unrest—and speculation on whether MAC-outs will be an increased focus of dealmakers is here. And speaking of, a survey of MAC clauses in acquisition agreements is here.
8. Other looks ahead to 2017 include:
   • E&Y’s top priorities for boards in 2017, here.
   • Preparation for the 2017 proxy season, here and here.
   • Potential changes to executive compensation practices, here.
   • FINRA’s 2017 Regulatory and Examination Priorities Letter, here.
9. Institutional Shareholder Services and Glass Lewis served up a host of items in the last month, including:
   • Updated voting policies, see here.
   • Updated ISS FAQs on equity compensation plans, here and executive compensation policies, here.
   • A summary of ISS’s methodology for evaluating equity compensation plans here.
10. The new year always occasions retrospectives about the significant events of the prior year. Just a few:
    • The top 10 D&O stories of 2016 are here.
    • A brief look back at 2016 M&A activity, and a look forward, is here.
    • Three key securities litigation developments in 2016 are here.
    • A review of the IPO market in 2016 is here.

December 14, 2016

1. As the SEC as we know it labors through its last five weeks, we note the following activities:
   • Publication last week of 35 CDIs, here, covering a host of topics, including Regulation S and qualified institutional buyer status under Rule 144A.
   • Publication in November of guidance on tender offers, here.
   • Publication in November of CDIs about Regulation A (182.12-.14) and Regulation D (256.34), here. The Regulation D interpretation – that there are no integration issues if a 506(c) offering is commenced within six months of a 506(b) offering – is significant.
   • Updates to the SEC’s financial reporting manual, here, to add guidance to Topic 606 (revenue from contracts with customers), Topic 842 (leases) and Topic 944 (disclosure of short-duration contracts).
   • A report on modernization and simplification of Regulation S-K, here.
   • The announced departures of SEC Chair Mary Jo White, see here, SEC Enforcement Director Andrew Ceresney, here, and SEC Corporation Finance Director Keith Higgins, here.
2. The U.S. Supreme Court issued its opinion in Salman v. United States, here, in which it held that tipping a friend or relative about material non-public information satisfies the “personal benefit” requirement of Dirks v. SEC and that the government need not prove a “tangible benefit” to the tipping insider to support an insider trading conviction for the tippee. Commentary on the holding is here, here and here. Securities lawyers get all atwitter when the Supreme Court rules on anything related to securities laws, and the number of law firm memos about the case reflects that. To condense the overarching lesson from the decision: don’t count on technical legal arguments to duck liability for unscrupulous insider trading, you dip.
3. Not unexpectedly (see, e.g., here), several commentators note (see here and here) the advent of Trump risk factors, generally of the “coming trade wars” and “regulatory uncertainty” variety. As the world turns, we expect some variation of the following will become standard: “Donald Trump may call us out in a tweet because we, or a company with a name similar to ours, have criticized his policies, lack of experience or hair. We are not able to predict what might set him off. Such a tweet may cause a temporary drop in our stock price. Also, if he starts a trade war, that will be bad for our business; if he starts a nuclear war, that probably will be even worse.”
4. On the shareholder services/activism front:
   • Institutional Shareholder Services and Glass Lewis issued their 2017 policy updates, respectively here and here.
   • Glass Lewis announced public companies may access a data-only version of the Glass Lewis report before it completes its analysis and proxy voting recommendations. Sign up is here.
   • The Government Accountability Office issued a report on proxy advisory firms’ role in voting and corporate governance here.
   • A review of shareholder activism in 2016 is here.
   • A review of shareholder activism in 2016 for Bay Area companies, including Silicon Valley, is available here.
5. Oh, Portland. In what at least three Portland City Council members, probably a majority of Portlanders and most lunatic Trump and Sanders voters will characterize as a daring blow for income equality, and almost everyone else will characterize as harebrained populism, Portland’s City Council last week adopted a city tax surcharge tied to public CEO-to-median employee pay ratio disclosure (see here). Under the ordinance, any company that discloses in SEC filings a pay ratio of 100:1 but less than 250:1 pays an additional 10% in city tax, and anyone who discloses a ratio of 250:1 or more pays an additional 25%. Articles about this first-of-its kind tax are here, here, here and here. The tax would apply beginning January 1, 2017. Some additional information, and a whole lot of editorializing, follows.
   • As a reminder, the SEC requires that beginning in 2018 a public company disclose the total prior-year compensation of its CEO and its median employee (including foreign, part-time and temporary employees) and the ratio of the CEO-to-median employee pay. This disclosure rule may be repealed with the rest of the Dodd-Frank Act, which we have all recently learned was only enacted by Democrats in a malicious and concerted effort to ruin this once-great nation and not as a result of any kind of then-extant financial crisis. So thank goodness. Repeal of the disclosure requirement would vitiate the taxsurcharge. (But see here.)
   • The Council recognized this move is largely symbolic, and notes in its adopting statement that if every city adopts a similar law, “shareholders may realize that extreme [] pay ratios reduce their profits and, with this result in mind, make changes to their pay structure.” Presumably once that happens, voila – income equality. Of course, this ignores that more than 99% of U.S. businesses are private and not subject to the additional tax. It also ignores other things, like differences among industries (say, a retail business that employs lots of minimum-wage high school kids compared to a software company that employs highly skilled programmers), that providing disincentives to going public may further concentrate wealth among the few, that (gasp!) many CEOs are actually worth the money even though they are paid much more than you, and that perhaps the public company shareholders who pay the salaries are better positioned than Portland to judge whether their CEO is overpaid. Ultimately, the ordinance may come only to symbolize Portland’s disdain for business, and we anxiously await Seattle’s forthcoming “Not as crazy as Portland” campaign to lure companies away.
   • No less symbolic, perhaps, the posed photo of outgoing Councilman Steve Novick in the New York Times piece about his ordinance (here) makes him look heroic. Kind of like Superman. (But to assume this is about him, and not the greater good, is cynical and absurd. Shame on you.)
   • In addition to not working and being a bit silly, there’s plenty of legal room to challenge the new tax law assuming a company is bold enough to withstand the pitchforks and name-calling if it does. A dormant commerce clause claim, say, or maybe even an equal protection claim. (Yes, that’s right, the U.S. Constitution. The same document that could be the last refuge of our editorial staff for the snide fake risk factor they included above, after the Sedition Act of January 23, 2017 is signed into law.)
   • In a rational world, where thoughtful people articulate and discuss meaningful policy ideas and land on what more or less makes sense in a range of reason, Councilman Novick’s proposal would not have been adopted. Ah, to live in that world.

November 9, 2016

1. Wow. Goodness knows what changes might start flowing after January 20, or how quickly repeal of Dodd-Frank will be proposed. Just for fun, here are two law-related predictions:
   • Senator Warren’s nutty call to remove SEC Chair White because she hasn’t yet adopted campaign contribution disclosure rules, here, will be replaced by President Trump’s nutty removal of Chair White because she doesn’t have an SEC Chair look ... or stamina, or whatever; and
   • Senator Cruz’s malleable core principles, if not his unmalleable policy preferences, will be on display as he quickly admonishes any attempt to stall confirmation of a Supreme Court nominee (here).
2. In its continued effort to remain relevant, Institutional Shareholder Services (ISS) unveiled the November 21, 2016 launch of QualityScore, fka QuickScore, fka Governance Risk Indicators (GRId), fka Corporate Governance Quotient. QualityScore has 15 new factors for ISS to rate, including a bunch that relate to proxy access. A summary is here. Note that you have a scant two days left to correct any ISS data that is wrong lest it lower your QualityScore! You can go here to check your data.
3. Two days seems like a luxury, since you have only one day to comment on ISS’s draft policy changes , here. For the U.S., the proposals include:
   • Possibly recommending “no” votes on directors of companies that go public with dual class stock, and pushing for specified sunset provisions.
   • Recommending “no” votes on governance committee members if company bylaws unduly restrict shareholders’ ability to amend the bylaws.
   • For non-U.S.-based companies listed in the U.S., (a) recommending in favor of general share issuances up to 20% of outstanding shares, a common practice for non-U.S.-based companies whose home rules require shareholder approval for all share issuances, and (b) aligning voting policy on executive pay between an issuer’s home country and the U.S.
4. The SEC adopted final rules, here, to facilitate intrastate and regional offerings. The rules:
   • modernize the intrastate offering exemption under Rule 147;
   • establish a new intrastate offering exception as Rule 147A that is similar to Rule 147 but has no restrictions on offers that may leak to out-of-state residents (like through that new-fangled contraption my kids refer to as the “Internet”) and does not require the issuer to be organized in the state where the offering is made;
   • amend Rule 504 under Regulation D to increase the $1 million offering limit to $5 million and add “bad actor” disqualifications like those that currently apply to Rule 505 and Rule 506 offerings; and
   • delete Rule 505 under Regulation D, which is supplanted by revised Rule 504.

   The SEC’s own summary of the rules is here.

   Although Rule 147 is, with the adoption of Rule 147A, superfluous for federal exemption purposes, Rule 147 was retained so that states would not need to amend their crowdfunding rules. State intrastate crowdfunding laws reference offerings exempt under Section 3(a)(11), which does not allow offers outside the state, and Rule 147. Rule 147A is a broader exemption than is permissible under Section 3(a)(11).

   The SEC’s Rule 504 changes are described as facilitating “regional” offerings because the North American Securities Administrators Association's coordinated blue sky review program is administered by region (see here). (Rule 504 does not preempt state blue sky laws.)

   Rules 147 and 147A are effective 150 days after publication of the rules in the Federal Register, Rule 504 changes are effective 60 days after publication, and you may still rely on Rule 505 for 180 days after publication.

   Nothing in Rule 147A or Rule 504 preempts state blue sky law, so expect Rule 506 (which does) to continue to be the overwhelming favorite way to raise money.

5. The SEC’s tinkering with private offering exceptions made us wonder, what’s going on with crowdfunding these days, since we haven’t heard much or received many client inquiries in a while. “Not much,” is the answer, here.
6. 2017 marks the first year in which that elusive median employee’s compensation must be compared to an issuer’s chief executive officer. That is to say, 2017 compensation is compared, but disclosure will not be made for year-end filers until sometime in 2018. Some resources as you ponder your approach to pay-ratio disclosure:
   • Helpful SEC CDIs (128C.01-.05) about how to identify the median employee are here (discussion here, here and here).
   • The final SEC rule, just so you have it handy, is here.

   After initial hand-wringing and concern about how difficult and expensive it will be to identify the median employee, turns out it probably won’t be, particularly for issuers with simple pay structures for most employees.

7. The SEC issued a few other CDIs in the last month, including:
   • An unnumbered CDI, here, to let issuers know they no longer must provide seven print copies of the glossy annual report to the SEC, as long as they post it on their website.
   • A reminder that combining offerings to avoid offering size restrictions is a no-no is here (116-25).
   • CDIs on Rule 701, here re continued reliance on Rule 701 when a private company is acquired by a public company (271.04) and re when Rule 701(e) information must be provided to RSU recipients (271.24).
   • CDI on the Rule 144(d) holding period, here (532.24), re tacking the holding period of shares received as promissory note interest.
8. The SEC’s 243-page proposed proxy rule amendments, which among other things would require a universal proxy card that allows proxy voters to vote on individual directors and not just on opposing slates, as they can at an actual shareholder meeting, and would require that shareholders be allowed to vote “against” and not just “withhold” on director nominees, is here.
9. To supplement last month’s treasure trove of non-GAAP financial measure resources, a post-mortem on the SEC’s comment-letter push to rein in non-GAAP financial disclosures is here, noting in particular that “equal prominence,” the descriptions of why NGFMs are useful to management, and proper labelling of NGFMs were the biggest SEC target areas.
10. October was National Cybersecurity Awareness Month , see here. As a belated celebratory gift, a roundup of cybersecurity regulation releases is here.
11. Finally, we find interesting the 2016 BDO board survey, here, of director views on appropriate corporate governance practices. (We have more surveys of actual corporate governance practices than we know what to do with, but few on what directors think.)

October 12, 2016

After a one-month hiatus, we find ourselves with much to catch up on. Brace yourself.

1. The SEC . . .
   • announced, here, that it no longer requires Tandy language, generally an acknowledgment in SEC comment responses that the issuer will not raise as a defense in securities litigation that the SEC reviewed the filing or declared a registration statement effective. It’s not entirely clear why the SEC felt the need to have an issuer explicitly acknowledge this in the first place, which seemed a solution in search of a problem. But, anyway, you don’t have to do it anymore.
   • proposed rules, here, mandating that EDGAR filings include links to exhibits , certainly making them easier to find when they are incorporated by reference.
   • proposed, here, shortening the “T+3” stock trade settlement time to T+2 , reducing the exposure to events and shenanigans.
   • published no-action letters about “substantially implemented” proxy access proposals , see discussion here.
   • requested comments on its disclosure effectiveness project , here. Most comments to date suggest that the SEC mandate climate change disclosure. In entirely related news, our fatigue with the use of public company disclosure as a substitute (dumping ground?) for substantive social policy increased just a little bit.
2. After foreshadowing a crack down on the use of non-GAAP financial measures, the SEC issued a batch of comment letters on NGFMs, see here. In other NGFM news:
   • IOSCO issued a statement on non-GAAP financial measures, here.
   • Audit Analytics published, insight on how errors in reported non-GAAP financial measures should be corrected, since these unaudited measures don’t necessarily trigger requirements under Form 8-K or disclosure about internal control deficiencies.
3. Even without additional rules, the march to voluntarily include additional public disclosures about Audit Committees continues, as reported by E&Y here.
4. Some news on the “hot” topic of Cybersecurity:
   • Material on cybersecurity disclosure practices (mostly in risk factors in periodic reports) is here and here.
   • New York’s Department of Financial Services proposed (see here) the first-ever state cybersecurity requirements for banks, insurers and financial services companies.
5. And speaking of the officious intermeddling of states, a new California law, here, will require CA public pension plans to disclose information about fees, expenses, rate of return and carried interest charges of those that administer plan investments.
6. The U.S. Supreme Court heard oral arguments in Salman v. United States, a case on review from the Ninth Circuit, to consider the kind of “personal benefit” necessary to give rise to “tippee” insider trading liability and whether a close family relationship is all that is needed. See here. A decision is expected in the spring. A brief refresher on tipper/tippee liability is here.
7. In another Ninth Circuit case, SEC v. Jensen, here, the Court held that Section 304 of the Sarbanes-Oxley Act, the CEO/CFO clawback provision, applies when misconduct of any issuer personnel, and not personal misconduct of the CEO or CFO, leads to a financial restatement. The Court declined, however, to clarify what “misconduct” means. In the same ruling, the Ninth Circuit held that signing a 302/906 certificate could create liability for false claims, which stands for the remarkable proposition that if you certify something you must actually believe it.
8. Some whistleblower news emerged in the last two months:
   • Interim OSHA guidance on Section 806 of the Sarbanes-Oxley Act, in which it deems problematic any provision that purports to waive a government whistleblower award, is here.
   • The SEC went after another company for impermissible language in severance agreements that prohibited filing whistleblower claims here. Recall our previous coverage of this issue in our May 15, 2015 ICYMI here.
   • A summary of a case holding that you actually have to blow the whistle to be a whistleblower is discussed here.
9. Recall that say-on-pay rules (here) require that a public company determine every six years whether say-on-pay advisory votes are taken every one, two or three years. For public companies that held their first vote in 2011, that means 2017 proxy statements should include a refresh of say-on-pay frequency .
10. Finally, because we often link to Warren Buffet’s folksy annual letter to shareholders, we feel justified in linking to his response to Donald Trump’s claim, used as both defense and offense, that “[m]any of [Clinton’s] friends took bigger deductions. Warren Buffet took a massive deduction.” Not that it, or apparently anything at this point, will affect election results much, but in a normal world Buffet’s statement , here, would be an abject lesson on talking out of school about America’s favorite rich Midwestern grandfather. (Our Editorial Board certainly has views about the presidential candidates. Oh, do we. But, for the record, we don’t care if Trump took legal tax deductions. We cringe, however, at the claim that he is a tax genius for doing so and therefore the only one who can “fix the tax code.” That’s like saying I am a genius for following the TurboTax prompt that allows me to deduct mortgage interest, a fat-cat home owner loophole that only I can fix. “ICYMI Editor-in-Chief 2020”?)

July 13, 2016

1. The SEC adopted a rule required by the FAST Act, here, that, we guess, confirms that an Annual Report on Form 10-K may include a summary. The SEC prescribes no rules about where a summary might appear or what it may look like, other than that it be “brief,” which some might argue is the sine qua non of summary. The rule does require that any summary include a hyperlink to the material summarized
2. And speaking of rules that will have no effect on most, the SEC approved, here, Nasdaq’s “golden leash” rules, here, which require that a company make annual disclosure about the material terms relating to compensation or other payments between a person other than the issuer and a director or nominee. “No effect on most” because non-exempt third-party payments to directors are uncommon and the rule requirements are met if disclosure is made in a company’s proxy statement, which it often already is.
3. After several warning shots across the bow of the SS Look-How-Much-Better-I-Am-If-You-Adjust-These-GAAP-Numbers, the SEC published new and revised CDIs about impermissible non-GAAP financial measures, here. A redline that identifies the changes to prior CDIs is here. Among other things, the SEC makes clear that cherry-picking exclusions from GAAP and tailoring your presentation to make yourself look better may be misleading even if not specifically prohibited by Regulation G or Item 10(e) of Regulation S-K. Some additional color on the CDIs, from Corp Fin Chief Accountant Mark Kronforst, is here, and SEC Chair Mary Jo White could not be more clear in her speech, here, that high on the SEC Staff’s (non-existent, we are always told) checklist of review focus items are non-GAAP financial measures.
4. In other non-GAAP financial measure news, a PCAOB paper discussing the auditor’s role regarding non-GAAP measures, and whether auditors should be responsible for information outside the financial statements, is here. (Auditors are already responsible to ensure the accuracy of other information in documents containing audited financial statements under AU Section 550, including reviewing MD&A in annual reports to ensure presented information is consistent with the audited financial statements.) A Center for Audit Quality publication on questions Audit Committees should be asking about the use of non-GAAP measures is here. A general expression of frustration with the resurgence of non-GAAP numbers is here.
5. The SEC also issued new CDIs about:
   • Rule 701, here (a summary of the CDIs, which are mostly M&A-related, is here).
   • A/B Exchanges and Form S-4, here (CDI 111.02) and here (CDI 125.13).
6. In addition to adoption of some seemingly unimportant disclosure rules and its CDI activity, the SEC has taken a host of other actions in the last few weeks, including:
   • Proposed rules, here, to re-define “smaller reporting companies” as those with a public float of up to $250 million, rather than $75 million. Companies that fall into the expanded category would benefit from scaled (i.e., “less”) disclosure.
   • Final rules, here, requiring disclosure of payments by resource extraction companies. (Recall the prior final rule was stricken by the D.C. Circuit Court.)
   • Proposed updates, here, to Item 102 of Regulation S-K regarding disclosure by mining companies. The proposed revisions would replace Industry Guide 7 and “modernize” and consolidate disclosure requirements relating to mine reserves and other items, and generally align disclosure with the standards embodied in the Committee for Mineral Reserves International Reporting Standards.
7. SEC Chair White foreshadowed, in a speech titled “Focusing the Lens of Disclosure to Set the Path Forward on Board Diversity, Non-GAAP, and Sustainability,” here, that:
   • The SEC will likely propose amended rules to require “more meaningful board diversity disclosures on . . . board members and nominees where that information is voluntarily self-reported by directors.” Recall that Item 407(c) of Regulation S-K requires that a company disclose whether, and if so how, it considers diversity when identifying director nominees and, if it has a policy, a description of the policy and how its effectiveness is measured.
   • The SEC is “poised to act [on non-GAAP financial measure presentations] through the filing review process, enforcement and further rulemaking if necessary.”
   •  “There is . . . more work and thinking to be done on sustainability reporting at the SEC, and by companies and investors, including on whether, when, where, and how to provide disclosure and what precisely should be provided.”
8. Two recent reviews of the 2016 proxy season are here and here.
9. Finally, a brief foray into litigation:
   • The challenge by Montana and Massachusetts to the SEC’s exemption of Tier 2, Regulation A offerings from state regulation failed, here.
   • The SEC is “poised to act [on non-GAAP financial measure presentations] through the filing review process, enforcement and further rulemaking if necessary.” 
   • The U.S. Supreme Court unanimously held in Merrill Lynch v. Manning, here, that exclusive federal jurisdiction over a securities law claim arises only if the claim “arises under” the Securities Exchange Act or if the state law complaint, as in Manning, necessarily raises a disputed and substantial issue about the Exchange Act’s meaning. If you, like we, are thinking “duh,” note that the decision resolves a circuit court split. The decision will make removal of securities claims to federal court more difficult, if well pleaded.

May 11, 2016

1. The SEC, along with the Department of the Treasury, the Federal Reserve System, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, and the National Credit Union Administration, proposed a joint rule, here, intended to curb compensation practices that encourage inappropriate risk-taking at financial institutions. The proposed rule replaces a 2011 rule proposal that generated over 10,000 comment letters, and its 488-page length hints at how difficult it may be to get your arms around what is “inappropriate” and where the balance lies between storing all the bank’s cash in the vault and betting big on Nyquist to win the triple crown.
2. The SEC published a concept release, here, about modernizing the disclosures required under Regulation S-K, generally the compendium of non-financial public disclosure requirements from which various SEC forms pick and choose disclosure items. The SEC gives 90 days for comment on 340 specific requests for comment, and there is lots of stuff crammed into the 341-page release. SEC Chair White’s comments on the concept release are here.
3. The SEC completed mandated JOBS Act rulemaking when it adopted final amendments, here, to rules to reflect new thresholds that govern when a company must begin public reporting, and when it may terminate registration and suspend public reporting. The rules also change the definition of “held of record” to exclude securities received under employee compensation plans.
4. Recall that Regulation CROWDFUNDING, adopted in October 2015, is effective on May 16, 2016! The first crowdfunding portal application available on EDGAR is here. Yay!
5. Twenty-eight law firms issued joint guidance, here, in the aftermath of two court decisions that interpreted the Trust Indenture Act to prohibit indenture amendments that would impair an issuer’s ability to pay amounts due on debt securities, even if the indenture expressly permits amendment. The firms tackle the issue of whether an unqualified legal opinion on an indenture amendment may be delivered in a debt restructuring or when the issuer is in financial distress. (Spoiler alert: Yes, sort of.)
6. The Consumer Financial Protection Bureau proposed rules, here, that would prohibit covered providers of consumer financial products from using agreements that mandate arbitration of future disputes or bar the consumer from participating in class action lawsuits.
7. Just in time for May 31 Conflict Mineral reports, the OECD issued its updated due diligence guidance for conflict minerals supply chains, here.

April 13, 2016

1. Lest you think the pending U.S. Supreme Court nominee is the only nominee-casualty of partisan politics, the Wall Street Journal reports, here, “a revolt” by U.S. Senate Democrats to block the appointment of two Obama SEC Commissioners until, and admittedly we’re a little hazy here, either the SEC proposes rules that require public companies to disclose political spending or the nominees commit to doing so. What mandate, you may be thinking, does the SEC have to require campaign spending transparency by public companies, at least if they aren’t financially material or directly tied to risk? Well, none, really. But that’s not to say such disclosure won’t eventually go on the pile of burdensome guck placed on public companies when substantive law-making fails.
2. Despite occasionally making public company disclosure a dumping ground for failed law-making, Congress also occasionally wrings its hands over the smooth functioning of capital markets and over eliminating barriers to raising money and to investing, the preferred way to get rich quick in America. The U.S. House-passed H.R. 2187, here, which now sits in the Senate, would expand the definition of “accredited investor” to add a new category based on professional acumen. By far the most-used issuer exemption from registering securities is sales to accredited investors under Regulation D, so any potential change to the definition is therefore a big deal. Also recall that Dodd-Frank requires that the SEC periodically review the accredited investor definition, which for natural persons is based on measures of income and net worth. The first Dodd-Frank report is here and SEC Chair Mary White has suggested, for example here, that rulemaking on the definition is likely, perhaps alluding to the same type of investment acumen standard embodied in H.R. 2187. Also of note, in the same speech, Ms. White mentions “open investigations” into the “reasonable efforts that issuers have to make to determine that who they’re selling to are accredited investors and either just not doing it at all or doing a job that clearly doesn’t pass muster” under Regulation D.
3. The U.S. Attorney General wrote to the Speaker of the House, here, that the SEC would not appeal to the U.S. Supreme Court the D.C. Circuit Court’s decision in National Association of Manufacturers v. Securities and Exchange Commission, in which it held that the portion of Conflict Mineral Rules that requires a company to declare whether or not its products have been found to be “DRC Conflict Free” is compelled speech that violates the First Amendment. The upshot: the SEC will go back to the drawing board to try to fix this aspect of the rule in a way that is both constitutional and compliant with the Congressional mandate. Despite this setback to fans of the conflict minerals rules, there are suggestions that some companies are taking the use of conflict minerals seriously and using their purchasing power to push suppliers to change, like here.
4. In PCAOB news:
   • The PCAOB’s latest standard-setting agenda is here.
   • “Staff observations” about auditor communications with audit committees are here.
   • A request for comment on engagement quality review is here.
   • Proposed amendments relating to audits involving other auditors are available here.
5. And speaking of accounting news
   • The FASB issued an update on stock-based compensation.
   • Some speculate that the SEC may act to further restrict the publication of non-GAAP financial measures, see here, and the PCAOB suggests, here, the proliferation of non-GAAP financial measures is a “warning sign.”
6. Some interesting tidbits this proxy season:
   • The SEC issued additional no-action letters in March that make clearer when a shareholder proxy access proposal has been “substantially implemented” and may therefore be excluded from a company proxy statement under Rule 14a-8(i)(10). The letters, summarized here, suggest at least some permissible deviation from the number of directors shareholders may elect and the number of shareholders who may aggregate holdings as a group to elect directors. Earlier no-action letters suggested that requiring holdings of 5% did not “substantially implement” a proposal requesting a 3% threshold.
   • Reliance on Rule 14a-8(i)(10) to counter proxy access proposals gained traction when the SEC limited the use of Rule 14(a)-8(i)(9) for that purpose, stating that exclusion of a shareholder proposal is only permitted if “a reasonable shareholder could not logically vote in favor of both proposals.” An SEC no-action letter, here, suggests that an acceptable tactic under 8(i)(9) may be to propose that shareholders ratify through an advisory vote the status quo, irrespective of the shareholder proposal. By definition, a vote not to change directly conflicts with a shareholder proposal to change. (Clever. Oh, so clever.)
   • The SEC issued a CD&I, here, reminding public companies that vague descriptions of shareholder proposals (like “Shareholder Proposal”) on a proxy voting card are not cool.
7. The U.S. Treasury issued temporary regulations on April 4, here, designed to eliminate the tax benefits of “inversions” and to blow up the Pfizer transaction (see here). At the same time, the Treasury proposed regulations, here, to constrain intercompany debt transactions, which inverted companies can use to reduce U.S. income tax liability, generally through issuance to the related foreign entity of a debt obligation. (The interest is deducted by the U.S. entity and taxed to the foreign entity at a lower rate.) The proposed regulations would recharacterize these types of “earnings-stripping” loans as equity, thus eliminating the tax benefit of deducting interest payments for U.S. tax purposes. The proposed regulations have an effective date that is retroactive to April 4. Although targeted at inversions, the broad scope of proposed regulations cover more than earnings-stripping, including cross-border lending, debt-push downs in connection with mergers and acquisitions, and the issuance of some types of related party debt. The proposed rules:
   • Treat certain related-party debt as equity, including intra-group loans with no cross-border facet.
   • Impose record maintenance requirements for some instruments to be respected as debt.
   • Allow the IRS to treat instruments as part debt and part equity, rather than wholly one or the other.
   The proposal rules were unexpected and are significant, so expect many comments and criticisms over the next few weeks. Treasury’s summary of the temporary regulations and the proposed new rules is here . External commentary is here, here, here, here, here, here, here and here. For some history on debt-equity regulations from the last time regulations were proposed under IRC Section 385, way back in 1982, see here.
8. Finally, some editorializing on Oregon’s Initiative Proposal 28 (IP28), which likely will appear on November’s ballot. (Fair warning: I hate Oregon’s initiative system and tire of those who lecture on the merits of direct democracy, as if people with day jobs have the time, inclination or insight to make sense of sometimes silly but often monumentally significant one-off, out-of-context changes to complex legal codes. Let me also admit, as Oregon balances on a two-legged tax stool that topples every few years, that I am a fan of implementing a broad-based sales tax. That’s right, I said it.) IP28 would replace the upper tiers of Oregon’s version of the alternative minimum corporate tax to require that a C-corporation with more than $25 million in Oregon sales pays 2.5% on the excess. From proponents of IP28, Oregon voters will soon hear that the tax is only levied against corporations, which we all know from Bernie Sanders are evil, and, in any case, only against really rich corporations who have the temerity to sell more than $25 million worth of stuff to Oregonians! (The gall!) Besides, proponents will continue, it funds stuff people really like, like schools and puppies. Ads in opposition will say simply “It’s a sales tax!” IP28 is a tax on “Oregon sales,” so yes, it’s a sales tax. And while I think I’ve been open about my love of sales taxes, this one stinks. It’s dishonest because it’s invisible to customers at the cash register, and it’s unfair because it applies differently to companies in the same industry. For example, Whole Foods would pay the tax because it’s a C-corporation but New Seasons would not because it’s a limited liability company. The tax is particularly bad for low-margin C-corporations, like grocery stores and other retailers, because it’s based on sales and not profit. And unlike a typical sales tax that is charged only on the final retail sale (and that also, by the way, often exempts necessities like food), IP28 applies when a C-corporation manufacturer sells goods to an Oregon retailer and also when the C-corporation retailer sells those goods to a customer. For some, IP28 may make it simply unprofitable to do business in Oregon. It’s such a bad idea.

March 9, 2016

1. For those gearing up for the 2015 conflict minerals report, due June 1, 2016, note that nothing on the legal front has changed. The D.C. Circuit Court’s ruling that requiring a company to state whether its products are “DRC conflict free” violates free speech, and the SEC’s stay of that part of its rules, continues pending the SEC’s possible appeal to the U.S. Supreme Court, the deadline for which was recently extended to April 7, 2016, see here. The upshot: we expect conflict minerals disclosures to look remarkably similar to last year’s, with almost none making statements that would trigger the obligation to have an independent private sector audit of the conflict minerals report. Nonetheless, review of trends in last year’s disclosures suggest to some that more reports will include smelter lists, and some may begin to feel more pressure from customers and, possibly, non-governmental agencies, to more thoroughly investigate their supply chains.
2. CalPERS announced, see here, its intent to engage its portfolio companies more on climate change issues (whatever that means). Similarly, the Financial Stability Board (whatever that is) announced, here, that it will establish an industry-led (whatever that means) task force on climate-related financial disclosure. In the meantime, the GAO issued a report, here, on the SEC’s plans to determine if additional action is needed on climate-related disclosure and on how these plans have evolved. Reading between the lines, “slowly.”
3. The Financial Accounting Standards Board issued, ASU 2016-02, Leases (Topic 842), late last month. The new standard will apply to public companies for fiscal years beginning after December 15, 2018 and to private companies for fiscal years beginning after December 15, 2019. The new standard requires that a company report its lease obligations and its use rights as offsetting liabilities and assets on its balance sheet. We’re no experts, but the rule requirements sound like no fun at all. Expert commentary is here and here.
4. On February 12, the SEC issued 18 no-action letters that suggest when it will consider a proxy access proposal “substantially implemented” and therefore excludable from a company’s proxy statement under SEC Rule 14a-8(i)(10). Generally, as long as a proposal does not provide a higher ownership threshold than that requested by the proponent (typically 3%), you are probably fine, according to analysts parsing the 15 successful no-action requests and the three unsuccessful requests. See here, here, and here. 14 of the 18 companies adopted proxy access bylaws after receiving a shareholder proposal and, one assumes, after failing to negotiate a rescission of the shareholder proposal. This may suggest companies are more likely taking the “prepare for peace” approach suggested here, particularly since the Vanguard Group recently announced its support for the standard 3-3-20 proxy access proposal, here. Time will tell whether Fidelity, the other mutual fund giant, will hop on the proxy access train (see here). An analysis of proxy access support by mutual funds in 2015, and a suggestion on how votes would have turned out with both Vanguard and Fidelity voting in favor, is here. A summary of companies that have adopted proxy access bylaws so far.
5. In crowdfunding news, the first equity crowdfunding platform filed to register with the SEC, heralding the next wave of investment opportunities for entrepreneurs across America, which will stimulate the economy and create jobs, at least according to the platform’s CEO, here. (Ah Ron Miller, you optimistic old so and so—we knew we could count on you to save us!) The filing follows the effectiveness of FINRA rules regarding crowdfunding, here. An SEC guide on how to register your own funding portal is here, and an SEC investor bulletin to wave off investors from your portal is here.
6. Somewhat related, kind of sort of, is a notice issued by the North American Securities Administrators Association requesting public comment on proposed model rules and uniform notice filing forms to facilitate Regulation A – Tier 2 offerings, here. Recall that “Tier 2” Regulation A offerings are exempt from state regulation, but states still may require filings and enforce anti-fraud laws in connection with Tier 2 offerings.
7. The Delaware Court of Chancery revealed its disdain, in In re Trulia, here, for disclosure only settlements in shareholder derivative suits, at least in circumstances where the new disclosure isn’t meaningful and is, dare we suggest, merely window dressing to cover that these cases are really about legal fees for plaintiff firms. One might think this heralds the end of frivolous law suits in Delaware, and eventually, by influence, in the rest of the country. Time will tell whether what it really heralds is the end of a defendant’s ability to settle these lawsuits quickly and cheaply. Commentary on the case is here, here, here, and here.

January 13, 2016

1. The SEC (re)proposed Resource Extraction Disclosure Rules last month, here. Recall, these rules are required by the Dodd-Frank Act and were adopted in 2012, vacated in 2013 by the U.S. District Court in D.C., and the subject of a lawsuit and court order that the SEC adopt revised rules in 2015. A more detailed history is here and here, as is speculation that the new rules will be challenged again.
2. And speaking of Dodd-Frank, the first Dodd-Frank-mandated accredited investor study is here. In addition to a review of the history of the definition of “accredited investor,” the report reviews alternatives to the accredited investor definition and recommends that the SEC revise financial thresholds (unchanged since 1982), introduce investment limits, and adopt other measures of financial sophistication. The recommendations echo the SEC’s Investor Advisory Committee recommendations from October 2014, here. Any change to the accredited investor definition, for good or ill, will be a big deal, and emerging companies will continue to watch potential SEC action on this topic with a wary eye.
3. Apropos potential securities law changes, the SEC issued an advanced notice of proposed rulemaking and a concept release, here, to seek public comment on changes to rules governing transfer agents, which haven’t changed since 1977. Among other things, the proposal suggests transfer agent restricted stock departments may become even more difficult to deal with by formalizing requirements that they have policies and procedures designed to achieve compliance with securities laws and regulations. (A noble goal, to be sure, which often suffers in the implementation by the 22-year-old working in the transfer agent’s restricted stock department, in our experience.)
4. Last month, we reported on securities law changes in the FAST Act (where else, but in a transportation bill?). The SEC provided its own summary of FAST’s securities law changes, here, and issued a few Compliance and Disclosure Interpretations, here.
5. The PCAOB adopted, here, new rules to require additional disclosure about a public company’s audit engagement partner and other accounting firms that took part in the audit. Subject to SEC approval of the new rule, auditors must file a new Form AP with the PCAOB for each audit within 35 days after the audit report is first included in an SEC filing (10 days for an IPO filing).
6. The New York City Comptroller issued 72 more proxy access proposals, see here, including repeat proposals for 36 of the 75 companies it targeted in 2015. The Comptroller released a 2015 post-season report on its shareholder activist activities, here. (Recall our summary of the results of its proxy access proposals from July 2015, here.) The Comptroller cites a CFA Institute study, here, and an SEC study, here, as evidence that proxy access increases shareholder value. Keep in mind, the Comptroller’s 2015 proposals were precatory, which is to say company shareholders voted on a proposal to ask the board to propose a bylaw amendment for the following year, although some boards just went ahead and adopted proxy access bylaw provisions rather than submit them for a shareholder vote in 2016.
7. ISS’s views on board implementation of proxy access proposals are included in FAQ #30 and its views on evaluating proxy access nominees are in FAQ #60 (we particularly like the phrase “additional analytical latitude,” which probably sounded sophisticated to the report drafter at the time), each one of 78 FAQs ISS published on its U.S. proxy voting policies, here. ISS also released 69 FAQs relating to executive compensation, here, and 52 FAQs on equity compensation plans, here.
8. Meanwhile, Nasdaq and the Center for Capital Market Competitiveness published a 2015 proxy season survey on public company experience with proxy advisory firms, here, perhaps in an effort to highlight frustrations with the penchant of proxy advisors to get things wrong.
9. Cornerstone Research and NYU law school released a report, here, noting the increase in SEC administrative actions against public companies since 2010, and the concomitant constitutional challenges to the SEC’s ability to bring them.
10. If the increase in administrative actions weren’t depressing enough to public companies, the U.S. District Court in Northern California suggested in Wadler v. Bio-Rad Laboratories, here, that directors responsible for firing an employee while knowing he had reported Foreign Corrupt Practice Act violations might be “agents” of the company or the “employer” under federal whistleblower laws and therefore personally liable for retaliation.
11. And finally, to cap our foray into litigation news, the Oregon Supreme Court upheld a Delaware corporation’s adoption of exclusive forum bylaws, by board action immediately before announcing a merger transaction, in Roberts v. Triquint Semiconductor, here. The case is notable because Oregon may be the first state outside of Delaware to rule on the issue and because the Supreme Court’s decision corrects a contrary ruling by the lower court.

2015

1. As anyone even vaguely familiar with how legislative sausage is made might suspect, interesting changes to U.S. securities laws are embedded in the casing of the recently enacted FAST Act (Fixing America’s Surface Transportation), here, which started its journey through Congress as the Hire More Heroes Act and the DRIVE (Developing a Reliable and Innovative Vision for the Economy) Act. See here. Among the various provisions carefully and coherently designed to whisk you more swiftly to your domestic U.S. destination, the Act includes:
   • Some gifts for emerging growth companies (EGCs), including reducing from 21 to 15 days the minimum pre-road show public filing of confidential registration statements, a grace period to allow those who start an IPO as an EGC but then cease to qualify as an EGC to complete the IPO (subject to time limits) under the more relaxed EGC rules (Section 71002) and potential omission of some financial information from confidential filings (Section 71003).
   • Permission for filers to include a “summary page” for Form 10-K (Section 72001) and a mandate for the SEC to make Regulation S-K better in the next 180 days (Section 72002) and also to complete a study of how to make Regulation S-K better in the next 360 days and implement study recommendations in the 360 days after that (Section 72003).
   • Amendments to Section 4 of the Securities Act of 1933 (Section 76001) to codify, sort of, the 4(a)(1-1/2) exemption that securities law practitioners made up. (Seriously! Section 4 amendments! Just shoehorned into a transportation bill!) This one really is interesting, so we’re showcasing it below in Item 2.
   • A Mandate that the SEC revise Form S-1 to permit a smaller reporting company to incorporate by reference in a registration statement any documents the company files with the SEC after the effective date of the registration statement (Section 84001).
   Other summary of these FAST Act provision is here.
2. The FAST Act amends Section 4 of the Securities Act of 1933 to add subsections (a)(7), (d) and (e), which codify the “4(a)(1-1/2)” exemption developed through case law and SEC no-action letters. Section 4 as amended is here. Before describing the new law, some background:
   • Section 4(a)(1) of the Securities Act exempts from registration sales of stock by anyone other than an issuer, underwriter or dealer. Sellers typically rely on the safe harbor of SEC Rule 144 to confirm they are not an “underwriter”; in addition, the SEC adopted Rule 144A to allow non-registered resales by underwriters to qualified institutional buyers (QIBs), and resales by QIBs to other QIBs, and subsequently allowed general solicitation under Rule 144A as long as ultimate sales are made to QIBs. (The SEC apparently considered codifying the 4(a)(1-1/2) exemption more broadly way back when, but settled on adopting Rule 144A instead to address the need for this specific transaction by underwriters.)
   • Section 4(a)(2) of the Securities Act exempts from registration offers and sales of securities by the issuer not involving a public offering. Only an issuer can rely on this exemption, and practitioners typically look to the safe-harbor requirements in Regulation D to determine when offers and sales are private.
   • Many characterize the “4(a)(1-1/2)” exemption as living somewhere between these two statutory exemptions. According to the SEC, the exemption is “a hybrid exemption not specifically provided for in the 1933 Act but clearly within its intended purpose . . . so long as some of the established criteria for sale under both Section 4[(a)](1) and Section 4[(a)](2) . . . are satisfied.” (See footnote 178, here.) Generally, the issue resolved by the 4(a)(1-1/2) exemption is that a recipient of shares may look like an underwriter, either because he recently purchased the shares or is an affiliate of the issuer, but a truly private resale doesn’t look like a “distribution” that defines an underwriter (per Section 2(a)(11) of the Securities Act, “the term 'underwriter' means any person who has purchased from an issuer with a view to…distribution”). Although the Securities Act doesn’t define “distribution,” law and lore equate it with “public offering.”
   • The SEC says “some” of the 4(a)(1) and 4(a)(2) criteria must be satisfied for a 4(a)(1-1/2) exemption to be valid, but determining which criteria of the exemptions must be satisfied is the rub, and this has generally been developed through no-action letters, when the SEC has deigned to issue them, and by guessing.
   • The SEC’s Advisory Committee on Small and Emerging Companies recommended in June 2015, here, that the SEC formalize the 4(a)(1-1/2) exemption in part because of the expense involved in getting legal opinions that cover it, which, the Committee claims, typically require that the purchaser be accredited and that there be no general solicitation. Congress didn’t wait for SEC action and instead amended the law.
   New subsection 4(a)(7) of the Securities Act exempts from registration resales of securities if (a) the buyer is accredited, (b) the seller doesn’t engage in general solicitation, and (c) for non-public companies, buyer and seller get specified information from the issuer. The exemption is not available for some, including if the seller is a subsidiary of the issuer or a “bad actor.” (Again, check out the amended text here).The FAST Act also amends Section 18 of the Securities Act to define securities sold under the exemption as “covered securities” not subject to state regulation.

   The new safe-harbor requirements in 4(d) are somewhat restrictive in that they allow sales only to accredited investors, require delivery to sellers and buyers of issuer financial statements that may not be readily available, and block sales by some sellers and sales of some types of issuer’s stock. Sellers might have preferred no safe harbor, since it describes circumstances that everyone already knew qualified for the exemption and because courts may pull the contours of the exemption toward what has now been established as safe. (To its partial credit, Congress recognized this possibility in its awkwardly-phrased addition of subsection 4(e), which tells us that “subsection (a)(7) shall not be the exclusive means for establishing an exemption from the registration requirements of section 5.”)

3. The SEC announced, see here, that voluntary disclosure of FCPA violations is now a sine qua non, but not the ne plus ultra, for deferred prosecution and non-prosecution agreements. SEC Enforcement Division Director Ceresney’s speech unveiling the policy, here, leaves many asking: Res ipsa loquitur, sed quid in infernos dicet.
4. Proxy advisers released a host of stuff in the last few weeks, including:
   • ISS QuickScore 3.0, here;
   • 2016 Proxy Voting Guidelines, here (ISS) and here (Glass Lewis)
   • FAQs on ISS’s Equity Plan Scorecard, here.
   • Summaries of ISS and Glass Lewis actions are here, here, here, here, here and here.
   Recall that proxy advisers offer the opportunity to verify data and update peer groups, including:
   • Data used to calculate the ISS QuickScore.
   • Data about equity plans. 
   • Updates to peer groups for executive compensation comparisons (see here and here).
   If your board cares about ISS and Glass Lewis ratings, it’s worth taking time to verify the data they use.
5. As the end of 2015 draws near, we begin to get questions about 2016 proxy disclosure and whether new disclosures are required in 2016. The short answer is no. But for those who crave more, and as a useful reminder about the status of various SEC rules:
   • We expect no D&O Questionnaire updates, unless your auditor insists on ferreting out more information about related party transactions under PCAOB Auditing Standard No. 18 (here).
   • Final pay ratio disclosure rules (here) cover 2017 compensation, so disclosure isn’t required until your proxy statement filed in 2018. 
   • Proposed SEC clawback rules (here) are not yet final, and clawback requirements will be implemented through exchange listing standards, which will take time to propose and implement even after the SEC adopts final rules.
   • Proposed SEC pay versus performance disclosures (here), which would require companies to disclose the relationship between executive pay and the total shareholder return of the company and its peer group, are not yet final.
   • Proposed SEC hedging disclosure rules (here), which would require that a company disclose whether it permits its directors, officers and employees to engage in hedging transactions, are not yet final. (Most already disclose hedging transactions and this additional disclosure isn’t a big deal.)
6. The SEC released its fourth annual whistleblower report to Congress, here. The Office of the Whistleblower received more than 3,900 whistleblower tips in 2015, a 30% increase since 2012, which the SEC attributes to increased public awareness of the program due to Dodd Frank’s implementing rule awarding 10 to 30 percent of a securities violation when the penalty is greater than $1 million.
7. Nasdaq solicited general comments, here, on its shareholder approval rules. The comments may lead to future proposals to modify the rules but nothing specific is proposed.
8. Cast us as climate change disclosure skeptics (go ahead, we can take it), but we groan whenever interest renews in forcing public disclosures about the potential effects of climate change. (As opposed to, say, adopting substantive laws.) The latest comes from the New York Attorney General’s use of the Martin Act against Exxon Mobile, which he claims misled the public about the perils of climate change. See here, here, and here. Recall that, unlike federal securities laws, the Martin Act does not require a showing that a company intended to defraud investors, just that it misrepresented material information to investors. The Exxon investigation follows the NY AG’s settlement with coal company Peabody Energy, see here, which agreed to disclose projections of long-term coal use from the International Energy Agency, enhance disclosures about the impact on its business of more strict regulation of coal use, and stop saying it can’t reasonably predict the economic effect of potential new regulation. Peabody’s updated disclosures are here. Recall that the SEC issued climate change disclosure guidance way back in 2010, here; more recently, congressional Democrats asked the SEC to report how it has ensured compliance with the guidance here.
9. We aren’t sure whether to feel validated or marginalized that colleagues are tumbling to our view on crowdfunding (generally, a loser) after publication of the Wall Street Journal article here.

1. The SEC has finally adopted Regulation Crowdfunding, here, which was required by the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosures Act of 2012 (. . . seriously). Its 686 pages belie the elegant simplicity of the rule and its combination of cheap, speedy equity raising and simultaneous guarantee that no investor ever will lose money. Or at least that’s what we assume would be disclosed by a more thorough reading than we are willing to give it. A summary of our speedy review:
   • Annual investment limits. Annual capital raises are limited to $1 million, but offerings are not integrated with other exempt offerings. Depending on annual income and net worth, an investor may invest between 5% and 10% of annual income or net worth, with a minimum of $2,000 and a maximum of $100,000. The investor limit applies to all crowdfunding offerings in the 12-month period, not to a specific offering. The rule allows debt or equity issuances.
   • Intermediaries. Offerings must be made only on the Internet by a single registered funding portal or registered broker-dealer, and advertising is limited to information to draw potential investors to the intermediary’s offering page. The offering platform must have specified functionality, including the ability of potential investors with accounts to communicate with each other. Funding portals must register on a new Form Funding Portal. Intermediaries have obligations to watchdog issuers and offerings, including responsibility to monitor issuer and investor compliance with the rules and to ensure investors acknowledge investment risks. An intermediary also must make specified disclosures, including about its compensation and financial interest in an issuer, and its system must adhere to specifications about accepting, processing, confirming, and cancelling investments.
   • Excluded issuers. Some issuers can’t use the rule, including those subject to the public reporting requirements of the ’34 Act, investment companies, foreign issuers, “bad actors,” those who failed to maintain crowdfunding reporting requirements, and development stage companies with no defined business plan.
   • Issuer disclosures. Issuers must file a Form C, which includes disclosure of use of proceeds, targeted offering size, price, business, directors and officers, ownership, indebtedness, related party transactions, other exempt offers by the issuer, risk factors, transfer restrictions, financial statements (the requirements for which vary depending on the target size of the offering), and MD&A. Material changes must be reported on a Form C/A, and annual reports on a Form C-AR are required 120 days after the end of the issuer’s fiscal year. An issuer may terminate its C-AR reporting obligations in specified circumstances, including if it has filed one C-AR and has fewer than 300 holders of record or if it has filed three C-ARs and has $10 million or less in assets.
   More summaries are here, here, here, here, and here. Our favorite law firm client alert on the topic is the following, largely because “Chiller” font really grabs the eye but also for its brazenly honesty assessment.  
2. The same day it published final crowdfunding rules, the SEC also proposed rules to modify Rule 147 and Rule 504 to facilitate small capital raises , here.
   • Rule 147, which is a safe harbor for “intrastate” offerings exempt from federal registration, has been of limited value because adverting that leaks to neighboring states foils the exemption. The SEC’s proposed rule would allow general advertising and solicitation as long as sales are made only to intrastate residents and as long as no more than $5 million is raised in a 12-month period, and specified limits on individual investors apply.
   • The SEC also proposed to increase the maximum capital raise under Rule 504 from $1 million to $5 million and to prohibit “bad actors” from relying on the rule.
   SEC action could be viewed as acknowledgment that the SEC’s crowdfunding rules are too burdensome to be particularly useful, but as evidence that the SEC won’t stand in the way of state crowdfunding exemptions, and, by the way, that Regulation D is a much better exemption. Commentary is here.
3. To emphasize that Regulation D is a much better exemption than Regulation Crowdfunding, or any other exemption, the SEC also updated its report on unregistered securities offerings in the U.S., here.
4. In the wake of the 2015 proxy season:
   • Some law firm resources on what happened and what might happen in 2016, with such dire titles as “ Is Proxy Access Inevitable,” are here, here, and here.
   • Shearman & Sterling released its 13th Annual Survey on Corporate Governance & Executive Compensation, a review of practices by the 100 largest U.S. public companies, here.
   • The SEC published Staff Legal Bulletin 14H, here, to address when shareholder proposals may be excluded from a proxy statement under 14a-8(i)(7) and 14a-8(i)(9) following the turmoil from the Third Circuit’s decision in Trinity Wall Street v. Wal-Mart Stores, Inc. and the SEC's own earlier refusal to take a position on Whole Foods’ request to omit a shareholder proxy access proposal in favor of its own proposal. On the former, the SEC stated that it agreed with the concurring judge’s views regarding the “significant policy exception” to the ordinary business exclusion in Trinity and not with the new two-part test adopted by the majority. According to the SEC, “a proposal may transcend a company’s ordinary business operations even if the significant policy issue relates to the ‘nitty-gritty of its core business.’” On the latter, the SEC said it will only allow exclusion “if a reasonable shareholder could not logically vote in favor of both proposals.” In other words, proposals won’t be found conflicting unless they “directly conflict,” for example if the proposal by the company is to vote “yes” and the shareholder proposal is to vote “no.” Basically, the SEC changed is analytical framework so that very little will be excludable under 14a-8(i)(9). Commentary is here.
   • The SEC published two new CDIs on “unbundling” under Rule 14a-3(a)(3) in the M&A context, here.
5. The D.C. Circuit Court of Appeals denied, the SEC’s and Amnesty International’s petitions, for an en banc rehearing of the Court’s earlier affirmation that requiring a company to disclose that its products were “not found to be DRC conflict free” is compelled speech that violates the First Amendment. The SEC also reacted to the U.S. District Court for the District of Massachusetts requiring the SEC to file an expedited process for resource extraction rule-making but doing just that. The SEC says it will adopt rules within 270 days, but emphasized that it is going to be super hard, in part because it is silly for Congress to push these types of rules onto the SEC to implement in the first place. (Fine, it didn’t actually say that, but we sense that’s what it meant.)
6. In accounting news:
   • The Center for Audit Quality published its transparency barometer, here, noting that companies are increasingly disclosing more about the selection and oversight of their independent auditors.
   • PWC published its 2015 annual director survey, here.
   • The PCAOB’s Division of Registration and Inspections issued a “Staff Inspection Brief,” here, noting it will focus on three big areas of deficiency: internal control over financial reporting; assessing and responding to risks of material misstatement; and accounting estimates, including fair value measurements. It will also focus on areas affected by risk factors like issuer and industry characteristics, likely accounting issues encountered by the issuer (revenue recognition, you software companies), location of operations (like in shady areas of the world), considerations related to particular audit firms (what did we call PWC out on last time), and other relevant information (whatever else they like).
   • FASB issued proposed updated guidance on “materiality” in financial statement reporting. In an attempt to draw interest, it has titled one release “Qualitative Characteristics of Useful Financial Information,” and the other “Assessing Whether Disclosures Are Material.”
7. Issuers have only until 8 p.m. EST November 13, 2015 to review and correct any erroneous data that ISS uses to calculate their Governance QuickScore, see here. Some commentary on QuickScore updates is here and here. ISS released its draft voting policies, available here, regarding board actions without shareholder approval, “overboarding,” and compensation at externally managed issuers. ISS previously released its policy survey results, available here. Notably the draft voting policies do not capture policy survey results on proxy access. A summary of the policy survey is here. Other commentary on ISS’s policy survey is here, here, and here.
8. The U.S. Court of Appeals for the Second Circuit ruled, here, that an employee is protected under SEC whistleblower rules if fired after internally reporting a whistleblower claim. That diverges from the Fifth Circuit’s view that a report to the SEC is required before the protections apply. It also highlights that it’s a pretty good idea for the SEC to issue interpretive guidance to correct Circuit Court rulings: “We conclude that the pertinent provisions of Dodd-Frank create a sufficient ambiguity to warrant our deference to the SEC’s interpretive rule, which supports [former employees’] view of the statute.” Note too that a California District Court, here, followed the earlier Fifth Circuit holding in Asadi, here.
9. The Network, which provides compliance software and services, released a White Paper, here, about whistleblowers, suggesting that you give them a hug. (And noting that 92% first report misconduct inside the company, only 20% report outside the company, and only 9% report to the government, and then mostly when they feel the company has retaliated against them.) The best thing about the report is, of course, the cover, because, we assume, being a whistleblower is quite like perching on a sun-dappled rock in the Scottish Highlands.
10. Finally, and because when you’re important enough even the things you don’t do are a big deal, we note that the U.S. Supreme Court declined to hear the appeal of United States v. Newman, here, an insider trading case that held that the government must prove that a tippee knew or should have known of the personal benefit received by the tipper and that the benefits were sufficiently “consequential.” Some analysis of Newman and developments since it was decided is here. And just for the heck of it, an explanation of the classical theory of insider trading is here.

1. As foreshadowed by the recent publication of supplemental analysis on the effect of its proposed rules, the SEC adopted final pay ratio rules, here. The first covered reporting period starts in the first full fiscal year beginning on or after January 1, 2017, which means a calendar year company would include disclosure in its proxy statement in 2018. So calm down; you’ve got some breathing room. Among the items that make this fairly dumb rule less painful: (a) the final rule retains the proposed flexible approach that allows sampling and assumptions to select the median employee; and (b) the rule adds that the selected median employee can be used as the benchmark for three years, which, considering the cost of running the analysis to find the median employee, probably results in fantastic job security for that guy.

   Commentary abounds, and more will follow. Some resources are here, here, and here. Suggestions that, even though time-consuming and expensive, this rule will be a bust are here and here.

2. D.C. Courts have recently battered the SEC for rulemaking relating to resource extraction.
   • The D.C. District Court ordered the SEC, here, to file an expedited schedule within 30 days for final rulemaking to require oil, gas and mining companies to disclose payments to foreign governments or the federal government. The original rules, held to be defective because the SEC did not consider its discretion to allow non-public disclosure only to the SEC and because it acted arbitrarily and capriciously in not considering an exemption for countries where publication of such information is illegal, were remanded to the SEC to be fixed in July 2013 and have sat there since.
   • The D.C. District Court’s slap follows the D.C. Circuit Court’s smack, here, when it affirmed that requiring a company to state that its products are not “conflict free” violates free speech rights. The ruling casts further uncertainty on when a third-party audit of a conflict minerals report might be required, since that requirement is premised on some of the same language the Court struck down. (See Corporation Finance Director Higgins’ statements, here, that “Pending further action, an [independent private sector audit] will not be required unless a company voluntarily elects to describe a product as ‘DRC conflict free’ in its Conflict Minerals Report.”) Possibly, more SEC guidance will be forthcoming.
3. In other conflict minerals news, the Government Accountability Office released a report on 2014 conflict minerals disclosures, here, noting that almost nobody could actually figure out where their conflict minerals came from. In some ways, the report merely echoes what activists have been decrying—“these reports aren’t very useful.” Yep.
4. The SEC issued new Compliance and Disclosure Interpretations (256.23 to 256.33), here, about Rule 506(c) exemptions under Regulation D. Recall that Rule 506(c) is a “big deal” in securities law, and probably the most significant change implemented by the JOBS Act. On the same day, the SEC released a no action letter, here, agreeing with Citizen VC, Inc. that the procedures it described in its request letter would create a substantive, pre-existing relationship that would allow it to send materials to its new best friends without violating general solicitation or advertisement rules (and thus it could make offerings under Rule 506(b) without the modest additional hoops required by Rule 506(c)).
5. In other JOBS Act related news, Montana and Massachusetts filed their initial brief, arguing that the SEC’s “Tier 2” Regulation A+ rules impermissibly preempt state law and that its rulemaking was not based on a permissible construction of the Securities Act of 1933, was not the result of reasonable decision making, and was arbitrary and capricious because it did not adequately analyze the effect on the public interest and investor protection.
6. The SEC has moved, here, to consider whether to disapprove proposed NYSE rules to exempt early-stage companies from having to obtain shareholder approval before issuing shares to related parties and their affiliates, provided the audit committee or similar independent committee approves the issuances. Per the SEC, it's not saying it will stop this, but why on earth should it allow it? Less interesting, perhaps, is the NYSE’s immediately effective rule, here, to expand the requirements for advance notice of material news announcements.
7. The Council of Institutional Investors published “Proxy Access: Best Practices,” here, and noted that nobody, but nobody, is following all of its declared best practices. A summary of the report is here. An analysis of proxy access bylaw “trends” from the recent proxy season is here.
8. The SEC issued an interpretation under Dodd-Frank whistleblower provisions, here, that whistleblowers qualify for the anti-retaliation provisions in Dodd-Frank even if they report only internally and not to the SEC. Perhaps in anticipation of other federal circuit courts’ consideration of the issue, the interpretation responds to the decision in Asadi v. GE Energy (USA), L.L.C., here, in which the Fifth Circuit held that the plaintiff was not a whistleblower under the Dodd-Frank Act because he failed to report to the SEC.
9. The summer months saw the 13th anniversary of the Sarbanes Oxley Act and the fifth anniversary of the Dodd-Frank Act, both designed to cure ills done the world by evil corporations. A few items to commemorate the occasions:
   • Rulemaking progress under Dodd-Frank is summarized by SEC Chair White here (“The Commission has taken action to address virtually all of the mandatory rulemaking provisions”) and by Davis Polk here (“Of the 390 total rulemaking requirements, 247 (63.3%) have been met with finalized rules….”).
   • Provititi’s 2015 SOX compliance report is here. Among other things, it suggests compliance costs associated with internal controls are rising. (Happy anniversary!)
   (We note that, although we were hoping for some sort of special invitation, the SEC’s gala celebration of the 75th anniversary of the Investment Company Act and the Investment Advisers Act is open to the public on a first-come basis. See here. Still, the lack of a personal invite stings, and that’s why we’re not mentioning anything in particular about the alleged historic import of those acts.)
10. 44 U.S. Senate Democrats signed a letter, here, in support of a petition to require public disclosure of campaign donations. There is no Congressional requirement for rulemaking (the petition came from the Committee on Disclosure of Public Spending), but it does add fuel, perhaps, to a hot disclosure topic.
11. We were reminded what a remarkably helpful document the SEC’s Financial Reporting Manual is when the SEC posted updates to it last month (here) to add guidance on catching up on delinquent 1934 Act filing obligations.
12. Finally, the U.S. Court of Appeals for the D.C. Circuit reminds us, here, that to be “meaningful,” cautionary language in securities filings should be, well, meaningful: avoid boilerplate, describe specific risks, don’t misstate historic facts and update statements as things change. Commentary on the ruling is here.

1. The SEC has finally proposed clawback rules, here, required by Section 954 of the Dodd-Frank Act. When adopted, the rules will require stock exchanges to propose and adopt listing standards that implement the requirements; which is to say, don’t stumble over yourself trying to adopt compliant policies now. (Although when they propose listing standards, we don’t expect the exchanges to ask their customers to do more than what is required by the SEC rules.) The proposed rules supplement Section 304 of the Sarbanes-Oxley Act, which allows the SEC to force a CEO and CFO to reimburse a public company for certain compensation and profit on stock sales if the company had a financial restatement due to misconduct. The rules also draw on experience with clawback provisions that applied to participants in the federal government’s Troubled Asset Recovery Program.

   The SEC’s proposed rules would implement the idea that if someone didn’t actually earn compensation, they shouldn’t get to keep it. Only AARP could controvert the underlying premise. As the 198-page length of the SEC’s release suggests, however, nothing is that simple. The rules would apply to Section 16 "executive officers" who received performance compensation based on financial measures in the past three completed fiscal years. The trigger for potential recovery is a restatement of financial statements due to "material errors," whatever that means, and the amount recoverable is the difference between what was paid and what should have been paid under the corrected financials. The rules prohibit indemnity, including through company-purchased insurance, to compensate an executive for recovered compensation. A company has some discretion to forgo seeking recovery if the cost exceeds the benefit, although rule limitations likely would make the exercise of that discretion itself costly and time-consuming. A company must describe its policy and any amounts clawed back, or not, following a financial restatement in its annual report or proxy statement. More detailed summaries of the proposed rules are here, here, here and here. Some additional resources about clawback policies are here (PWC review of 2014 clawback practices by 100 large public companies), here (Equilar review of 2013 clawback practices of the Fortune 100) and here (2011 presentation covering clawbacks and policy considerations).

2. Apropos of Dodd-Frank rulemaking, the SEC’s Division of Economic and Risk Analysis published additional cost/benefit analysis of its proposed pay ratio disclosure rules, here, perhaps further bolstering its ability to fend off challenges to pending rules and suggesting these rules are coming soon.
3. The SEC also published a concept release for comment covering possible revisions to audit committee disclosures. A summary is here. At the same time, the PCAOB released a supplemental request for comment on rules that require public disclosure of audit quality indicators, available here.
4. In Regulation A+ news,
   • the SEC published C&DIs on Regulation A+ rules, here;
   • the SEC posted six new or revised forms for the offerings, Form 1-A (offering statement), 1-K (annual report), 1-SA (semi-annual report), 1-U (current report), 1-Z (exit report) and 8-A (registration of securities), all available here; and
   • the SEC denied the State of Montana’s request to stay Regulation A+ rules, here.
5. As the 2015 proxy season winds down, some news on shareholder proxy proposals:
   • The Third Circuit Court of Appeals issued its opinion in Trinity v. Wal-Mart, here. Recall that the Third Circuit Court overruled a district court ruling that Wal-Mart must include a shareholder proposal in its proxy statement that would require Wal-Mart to consider and report on whether selling firearms made it look bad. In its published opinion, which trailed its order by four months, the Court clarified the test for excluding shareholder proxy proposals under the ordinary business exclusion, and emphasized that "a retailer’s approach to its product offerings is the bread and butter of its business." Some brief analysis is here.
   • A group of law firms submitted comments, here, calling for a return to the pre-Whole Foods rescinded no-action letter days, when a company could introduce a competing company proposal to delay, at least, consideration of a shareholder proposal.
   • Finally, summaries of recent "proxy access" results are here and here (the latter is particularly helpful, if we do say so ourselves).
6. For news on crowdfunding, including a suggestion that crowdfunding accounts for 20% of startup funding, see here. An updated summary of states that have adopted intrastate crowdfunding exemptions is here. And a reminder that, gasp, not everyone seeking small sums from unsophisticated investors is on the up-and-up is embodied in a recent FTC enforcement action and order here and here.
7. Delaware has now prohibited fee-shifting, or "loser pays," bylaws and expressly authorized exclusive forum bylaws. The amendments, which take effect August 1, 2015, are here.
8. And finally, same-sex couples are undoubtedly doubling up on celebrations after the SEC announced, here, that their unions are recognized for purposes of accredited investor calculations and other securities law purposes. Um, yay?

1. The SEC’s Division of Economic and Risk Analysis issued analysis, here, on the “[p]otential effect on pay ratio disclosure of exclusion of different percentages of employees at a range of thresholds.” Without even trying to follow the statistical analysis or math, we’re confident the conclusion is if you exclude people, the ratio may be off; if you exclude a lot of people, the ratio may be more off. (If we got that wrong, please don’t comment. We don’t really care that much.) Alas, your opportunity to comment to the SEC expired last week. The release of additional analysis and the short comment period might suggest that the SEC is trying to bolster the analysis to support its company-favorable statistical sampling approach to calculating the median employee’s pay and that it will soon adopt its pay ratio rules , proposed here. And presumably, rule adoption will address Senator Warren’s first and perhaps most passionately held critique of SEC Chair White, here. (Oh, Senator.)
2. As if the SEC didn’t have enough problems with intermeddlers from the Commonwealth of Massachusetts, we note that the Secretary of the Commonwealth sued the SEC, to enjoin the portion of its Regulation A+ rules that preempt state law, arguing that preemption was not intended by Congress. Lack of preemption would, of course, make this exemption much more useless. (And c’mon, Massachusetts, we get the historical context, but after 227 years “Commonwealth” just sounds vaguely elitist.) In the meantime, the SEC has updated its EDGAR filing manual to accommodate the new Regulation A+ rules, here.
3. Last month we apologized for tipping you to the fact that forms BE-10 are required for most U.S. companies with foreign operations . (Again, sorry.) The Bureau of Economic Analysis, no doubt tipped that no one knew about the requirement until reading our alert, has extended the filing deadline for new filers until June 30. See the bright red letters on its website here. You’re welcome.
4. A proxy season half-time report from Veritas Executive Compensation Consulting is here. Not surprisingly, it identifies proxy access as the highest profile shareholder proposal, identifying 84 proposals on the ballot as of the end of May. Commentary abounds, but our own summary of results to date for the 75 companies targeted by the New York City Comptroller, whose proposals follow the SEC’s preferred 3%, three-year, 25% of the board formulation, is here. Two companies, Staples and Whiting Petroleum, agreed to support a proxy access proposal at their 2016 meetings and the Comptroller withdrew its proposal. Of the remaining 73 company proposals, as of yesterday, voting results for 54 (74%) had been reported of which 33 (61%) were approved and 21 (39%) were not. Only six of the 54 companies included management counterproposals. Three of these were approved and three failed.
5. CERES and BlackRock released a report on investor strategies for incorporating ESG (that’s environmental, social and governance) considerations into corporate interactions, here.
6. The SEC proposed rules to modernize the reporting and disclosure of information by registered investment companies and investment advisers , here, including that investment companies publish new monthly reports about portfolio holdings and annual information on an updated form, and that investment advisers report information about their risk profiles. The companion release proposing updates to Form ADV is here.
7. Finally, several sources cite The Wall Street Journal’s report that the SEC’s will propose clawback rules “soon,” including the source here. That could be less about inside information and more about the WSJ guessing that, because clawbacks are the only significant governance provision in Dodd-Frank yet to be adopted, they’ve just got to be coming soon. In any case, we know what you’re thinking: Why are you telling us about pending rules we’ve known are coming without providing any actual new information? Well, because seven items just seemed like the right number to include in this month’s alert.

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May 14, 2015

1. The SEC proposed pay for performance rules, here, to implement Section 953(a) of Dodd-Frank, which requires disclosure of “information that shows the relationship between executive compensation actually paid and the financial performance of the issuer, taking into account any change in the value of the shares of stock and dividends of the issuer and any distributions.” The proposed rules would amend Item 402 of Regulation S-K to add yet another compensation table, this one showing CEO and average other NEO summary compensation and compensation actually paid (excluding unvested equity awards and adjusting for pension benefits), total shareholder returns and peer group total shareholder returns. The peer group would be either the group included in the performance graph required by Regulation S-K Item 201(e)(1)(ii), which shows cumulative shareholder return, or the group used for benchmarking under Regulation S-K Item 402(b). Summaries of the proposed rule are here and here. The comment period ends July 6, 2015. Theoretically, these rules could be finalized in time for next year’s proxy statement. Of course, that reminds us that the proposed pay equity disclosure rules mandated by Dodd-Frank Section 953(b), here, still are not effective, even though they were proposed in 2013. (These rules would apply to the next full fiscal year after adoption, which means that if adopted today, a calendar-year-end company would disclose pay equity information for 2016 in the proxy statement it files in 2017.)
2. Apropos pay for performance, we find interesting the argument made by oil billionaire Harold Hamm, founder and CEO of Continental Resources, that his wife shouldn’t get the appreciated value of most of his company in their divorce because the increase wasn’t his doing (and thus its appreciated value was exempt from the divisible estate). See here. Rarely do you see good luck cited by an executive as the reason for his success, although certainly you see bad luck, and those pesky “market forces,” often cited as an excuse for poor performance. Also interesting is the report by ISS, here, which notes that average CEO pay in the U.S. increased nearly 13% in 2015, largely through increases in retirement assets.
3. The CFA Institute released an updated model Compensation Discussion and Analysis template, here.
4. Recent SEC proposals on pay for performance and the adoption of final Regulation A+ rules (here) remind us of the host of governance and disclosure rules that linger under the JOBS Act and Dodd-Frank. These include:
   • Crowdfunding rules, here.
   • Regulation D process rules, here.
   • Hedging disclosure rules, here.
   • Compensation clawback rules, not yet proposed under Dodd-Frank Section 954, see here.
   • Possible changes, someday, on the recommendations of the Investor Advisory Committee created by Dodd-Frank Section 911, including to the definition of “accredited investors,” here.
5. Disclosure of campaign contributions is not required by SEC rules, but noise about such disclosures continues and has been the subject of SEC rulemaking requests, see here and here, and a favorite of shareholder activists (see here). The Campaign for Accountability (catchy name) filed a lawsuit claiming that the SEC has arbitrarily and capriciously failed to act on the rulemaking petition submitted by Stephen Silberstein, see here. Presumably, the lawsuit is for publicity, because it seems, on its face, stupid. Count on the decibel level increasing with the onset of the presidential campaign and a renewed call that President Obama issue an order requiring government contractors to disclose campaign contributions, here. (Recall that the Administration abandoned a similar effort in the run up to the 2012 election.)
6. Early returns on proxy access votes are discussed here. As of April 27, shareholders had rejected proxy access proposals at six of the 10 companies that had voted. (Two of the six had adopted an alternate company proxy access proposal in advance of the meeting.) An update for the week of May 3, here, shows shareholders rejected proposals at three of eight companies that recommended no votes. The tack at most companies is to simply include the shareholder proposal and recommend a “no” vote. Generally, arguments against a proxy access proposal are that it’s a solution in search of a problem, that the company’s board is good and its governance practices strong, that the proposal strips power from the independent nominating committee charged with selecting directors and that proxy access is expensive, a distraction, gives special interest groups control to the detriment of shareholders generally and encourages short-termism. In the meantime, CalPers and the NYC Comptroller have filed a host of notices of exempt solicitation under Rule 14a-2(b)(1) (solicitations that urge shareholders how to vote but do not solicit proxies, which is allowed but for which a notice must be filed that shows up on the company’s EDGAR page) in which they rail against some of these common arguments. See, e.g., here.
7. The NYC Comptroller, never one to slack, also signed onto a letter with the NY State Comptroller urging the SEC to consider enforcement action to force oil and gas companies to improve climate change disclosure, here. The letter echoes the themes of the letter recently sent by Ceres, here, although the plea in the Ceres letter is to step up comment letters to offending companies.
8. Recall that Form SD, including the second conflict minerals report for most, is due June 1, 2015. There are some observations on early 2015 conflict minerals reports. A recent report by Global Witness and Amnesty International, here, points to “alarming gaps” in U.S. corporate transparency based on last year’s reports. There are also Criticism of Global Witness’s “misleading findings” and “baffling” assessment criteria. With no meaningful SEC guidance on the adequacy of 2014 filings, no news about the SEC’s appeal of the portion of its conflict minerals rule that was struck down on First Amendment grounds (here) and a feeling of general malaise about the topic despite Global Witness’s efforts to make it interesting, expect this year’s reports to be nearly identical to 2014 reports.
9. The U.S. Department of Justice released “Best Practices for Victim Response and Reporting of Cyber Incidents,” here, generally suggesting that you (a) take steps to prevent cybersecurity breaches and have an action plan in place, (b) quickly respond to a breach by implementing your response plan, including assessing initial damage and stanching the information flow, document your process and gather data on the breach and communicate with internal personnel, law enforcement and victims of the breach so they can protect themselves and (c) after the breach, remain vigilant and remediate any identified deficiencies. The report also gives tips on what not to do, including continuing to use your breached system, retaliating and curling up into a ball and weeping. Emphasizing the import of all of this, Verizon published its 2015 Data Breach Investigations Report, available here. And just for the heck of it, recent SEC cybersecurity guidance to registered investment funds and investment advisers is here.
10. The PCAOB published “Audit Committee Dialogue,” here, in which it shares with audit committees the insights it has garnered through annual inspections of audit firms, including identifying key recurring areas of concern and new risks the PCAOB is monitoring.
11. A sneaker, perhaps, for those with foreign subsidiaries is the Bureau of Economic Analysis requirement, here, to file a report on Form BE-10 (available here), by May 29, 2015 for most. Likely, there will be no adverse consequence for failing to file, suggested by the BEA’s response to the general question “I received a ‘Notice of Failure to File’ stating that my company has not complied with the reporting requirement. What should I do?” (Answer: “file.”) But do you really want to be the company the BEA decides to fine just to send the message that it’s serious? (And if you know about the requirement and still don’t file, that’s a willful violation that could have consequences. So, um, sorry for bringing this to your attention.)
12. A survey of emerging growth company corporate governance practices adopted in connection with their IPOs is here.
13. And finally, two tidbits to add to last month’s exhaustive (exhausting?) coverage of whistleblower issues:
    • The Occupational Safety and Health Administration clarified the standard it uses for whistleblower investigations, here.
    • The SEC awarded $1 million to another internal audit type, here, and $600,000 in its first whistleblower retaliation case, here.

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April 15, 2015

You can view archived issues of this alert, as well as other alerts, here. If you have comments, email us at MissedIt@stoel.com.

1. We knew someone would do this for us if we just waited long enough. A summary of early trends in proxy access responses suggests most are including the shareholder proposal and recommending a no vote. Only a single (brave? misguided?) company has so far excluded a shareholder proposal in favor of a company proposal, a la Whole Foods. We expect the statements recommending no votes all look remarkably alike. Some additional fodder for statements in opposition might be found here.
2. In February, we reported on a troubling district court decision that Wal-Mart must include a shareholder-proposed amendment to Wal-Mart’s charter requiring it to consider, and report on, whether selling firearms made it look bad. The Third Circuit Court of Appeals reversed the district court. The decision, here, overturned a permanent injunction against Wal-Mart from excluding the shareholder proposal and was published ahead of the Court’s opinion, which will come later. Because of the scare created by the district court, expect to read about this again when the opinion is published, even though we hope it will say not much more than “duh - ordinary business exception.”
3. The SEC recently brought an enforcement action against KBR, Inc., claiming it violated whistleblower Rule 21F-17 : “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.” Part of KBR’s internal investigation process, in place before Rule 21F-17 was adopted, required that internal whistleblowers acknowledge that “I understand that in order to protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.” Even though the SEC had no evidence that the language was ever enforced or threatened to be enforced, or that it actually affected behavior, KBR settled the action by paying $130,000 and notifying those who signed the agreement that they weren’t prohibited from reporting potential violations of law to the SEC. The SEC’s cease and desist order is here and its press release is here. A cautionary editorial about yielding constitutional rights by rushing to modify your confidentiality agreements, at least in a way that allows a person to provide confidential documents to regulatory authorities, penned by Eugene Scalia (yes, relation) is here. Scalia’s editorial points out the SEC’s continuing efforts to expand its investigatory power and the ambiguity of what “communicating” with the SEC encompasses. Another piece decrying the SEC’s expansion into employment law is here. As you ponder whether and how to change your whistleblower and confidentiality agreements and policies, keep in mind that:
   • The SEC picked low-hanging fruit for its enforcement target – an implied threat of enforcement of confidentiality restrictions in the context of an actual whistleblower report – after, apparently, digging deep for a claim to bring (see here and here). The SEC may have neither the time nor the budget to go after companies with run-of-the-mill confidentiality agreements.
   • The SEC wouldn’t dare go after run-of-the-mill confidentiality agreements, as opposed to confidentiality provisions that apply specifically to settlements or internal investigations like KBR’s, and risk losing a challenge to what it hopes companies will believe is new federal policy . . . would it?
   • Presumably, nothing about the SEC’s actions prohibit the standard “Upjohn warning” to employees at the beginning of an interview that the interview is subject to attorney-client privilege and should remain confidential (as opposed to a blanket statement like KBR’s that the subject matter of the claim is confidential).
   • If Rule 21F-17 meant to say you must amend all confidentiality agreements to specifically carve out reports to federal agencies, it would have said that. But that might have been (gasp) unconstitutional. Even the SEC’s position with KBR is far from unassailable, to say nothing of downright un-American.
   • Considering the above, if you don’t have agreements that explicitly prohibit federal whistleblowing or that reinforce confidentiality obligations when a whistleblower has reported internally, doing nothing may be a reasonable strategy. (After all, in its settlement, KBR only agreed to send a corrective notice to whistleblowers who signed the confidentiality statement, not to all employees who might have confidentiality obligations generally.) You should pay particular attention to severance agreements and settlement agreements, which should not prohibit federal whistleblowing.
   • A statement in your whistleblower policy or employee handbook that “your obligations to protect and keep confidential Company information, whether under a confidentiality agreement or otherwise, do not restrict you from reporting potential violations of federal law under federal whistleblower laws” might suffice, rather than amending all existing employment agreements and in lieu of the more expansive language KBR adopted that allowed “reporting of any possible violations of federal law . . . to any governmental agency or entity.” More elaborate or nuanced statements that set the correct tone at the top to encourage internal reporting but that identify the company’s legitimate interest in preserving the confidentiality of its information, even from the federal government, might also be OK. Some additional in-house training on whistleblower compliance may be appropriate.
   • The SEC isn’t the only federal agency that has targeted confidentiality agreements in whistleblower contexts. See, e.g., the items here, here and here about the National Labor Relations Board’s efforts in this area.
   Law firm memos abound on the topic. A few are here, here, and here.
4. As a reminder about the SEC’s whistleblower program generally , which pays tipsters a bounty of 10-30% of monetary sanctions (if at least $1 million), recall:
   • Section 922 of Dodd-Frank, here, inserted a new Section 21F into the Securities Exchange Act to implement additional whistleblower protections.
   • SEC implementing rules, here, became effective August 2011.
   • The SEC Office of the Whistleblower publishes annual reports, available here. In 2012, the office received 3,001 tips and paid $50,000 to one whistleblower (this whistleblower subsequently collected $335,000 more through continued enforcement activities based on his information); in 2013, the office received 3,238 tips and paid $14,831,966; and in 2014, the office received 3,620 tips and paid $1,932,864. (Award amounts and payment amounts in a year don’t necessarily match.)
   • The SEC made awards to 14 whistleblowers under the program, one in 2012, five in 2013 and nine in 2014.
   • The SEC awarded a record $30 million to a whistleblower in September 2014, the fourth award to an individual in a foreign country.
   • The SEC awarded $300,000 in 2014 to an officer with internal audit responsibilities for reporting a matter that surfaced through the internal audit process, but was not acted on by the company for more than 120 days.
5. The SEC adopted final “Regulation A+” rules, here. The rules will be effective sometime in June. The final rules look a whole lot like the proposed rules. Expect law firms to inundate you with summaries of the rules (see, e.g., here, here and here), but a few highlights are below.

   Tier 1 offering:

   • “Bad actors” not eligible.
   • Up to $20 million in a 12-month period, including up to $6 million from affiliated shareholders.
   • Limit selling shareholders to 30% of any offering.
   • “Test the waters” communications permitted.
   • Abbreviated registration statement subject to SEC staff review, with a few additions to existing requirements. Confidential submission process available.
   • Form 1-Z filed upon completion or termination of the offering.
   • Exemption does not preempt state blue sky law.
   Tier 2 offering:
   • “Bad actors” not eligible.
   • Up to $50 million, including up to $15 million from affiliated shareholders.
   • Limit selling shareholders to 30% of any offering.
   • “Test the waters” communications permitted.
   • Same abbreviated registration statement subject to SEC staff review as Tier 1, but audited financial statements are required. Confidential submission process available.
   • Ongoing public reporting requirements, including annual report on Form 1-K, semi-annual reports on Form 1-SA and current reports on Form 1-U.
   • May file a Form 1-Z to exit reporting obligations after reporting for one full fiscal year, if fewer than 300 shareholders of record.
   • May use short form 8-A to register shares for trading on an exchange.
   • Investment limited to the greater of 10% of investor's annual income or net worth.
   • Exemption preempts state blue sky law.
   Likely, not many will make a Tier 1 offering, which requires compliance with state securities laws. Proposed Tier 2 offerings, which are really mini-IPOs, have more potential and might prove a useful fundraising alternative to Rule 506 under Regulation D. The two primary advantages of Regulation A+ over Regulation D are that the securities sold are not “restricted securities” subject to resale limitations under Rule 144 and that sales may be made to an unlimited number of non-accredited investors.

    

6. The U.S. Supreme Court clarified in Omnicare v. Laborers District Council Construction Industry Pension Fund, here, that a “belief” expressed in a registration statement does not form the basis for a material misstatement as long as the belief was honestly held and as long as the belief rested on a reasonable basis (or, phrased in a more syntactically complex way: “Thus, if a registration statement omits material facts about the issuer’s inquiry into or knowledge concerning a statement of opinion, and if those facts conflict with what a reasonable investor would take from the statement itself, then §11’s omissions clause creates liability.”). Although how “reasonable” a belief must be begs for more litigation, I believe the holding is obvious. (I base that view on no external sources whatsoever; I did go to law school, however. Which way that cuts on the reasonableness of my belief is up to you. My belief is not valid for residents of South Carolina and Pennsylvania.)
7. Finally, as if we needed more memos on cybersecurity , here is another, albeit one geared toward directors and officers that promises to be “practical.”

1. It's difficult to discern “trends” from reactions to date on proxy access proposals, but here are some data points:
   • Three companies, including two on the NY Comptroller’s 75-company target list have adopted proxy access bylaws, and presumably filed no-action requests that the NY Comptroller’s shareholder access proposals should be excluded because they are substantially implemented. See here.
   • Three companies, AES Corp, here, Cloud Peak Energy, here, and Exelon Corporation, here, filed dueling shareholder and company proposals.
   • Citigroup agreed to support a proxy access framework proposed by an activist shareholder. See here.
   • A few companies have convinced activists to withdraw their proposals in favor of company proposal. See here.
   • Prudential Financial adopted a shareholder access bylaw without even being officially asked. See here.
   • Earlier this year, Monsanto shareholders approved a non-binding proxy access proposal by a scant majority over its board’s objections. See here.
2. ISS published its proxy voting policies, here, including that it will oppose proxy access proposals by a company that are more stringent than 3-year, 3%, 25% of the board. ISS also will likely recommend withhold votes on directors that exclude a proper shareholder proposal from the proxy unless the company gets a no-action letter or judicial relief. CalSTRS published its guidance on proxy access and other voting guidance, similarly noting that it will withhold votes on directors that exclude “three-for-three” proxy access proposals or that adopt more stringent standards. These echo the views of BlackRock, see here and here (if you want to watch the whole SEC meeting at which investor views were expressed).
3. CalPERS announced it is targeting 33 energy companies for proxy access proposals. The announcement, in a joint letter with CalSTRS about the importance of corporate engagement on climate change, is here.
4. ISS posted three more equity plan scorecard FAQs (23-25) here. That pales in comparison to the 104 FAQs ISS published about compensation policies , here.
5. Warren Buffet’s annual letter to shareholders is here and an annotated version, for those who don’t speak “folksy,” is here.
6. As reported by The Corporate Counsel, and in another modest success for shareholder activists, the SEC seems to have reversed its no-action position that a shareholder proposal requiring an independent lead director “whose directorship constitutes his or her only connection” to the company may be excluded as impermissibly vague. See, e.g., the no-action letter response to Boeing here.
7. The Council of Institutional Investors sent a letter to the SEC, here, requesting action on “universal proxies ”--basically, a ballot with all director nominees on them irrespective of who nominated them. The letter follows its earlier petition for rulemaking on the topic here.
8. Fee-shifting and exclusive forum selection bylaws have been around, and controversial, for a while. Also controversial is proposed Delaware legislation to limit the ability of a Delaware company to adopt such provisions. A discussion is here.
9. Finally, Cornerstone Research’s review of 2014 public company M&A litigation is here. Projecting the results into 2015 yield this bottom line: If you do a sell-side deal, your directors will get sued; you may be less willing to settle claims; settlement likely will involve more disclosure not payments to shareholders.

1. It’s still the case that commentators have said nothing revelationary about “proxy access ,” the recent private-ordering push, and the SEC’s flip-floppery on its Whole Foods no-action letter. “Proxy access” is short hand for “when can a shareholder force a company to put its preferred director on the ballot?” Historically, the answer was “never”; for a few days the answer was “when the SEC’s rules say so”; and now the answer is “after you amend the company’s articles or bylaws to tell you when.” The proxy access saga goes back even earlier than 2003, but that’s when we started paying attention. Historical commentary on earlier proposals (search “proxy access”) is here. An abbreviated history follows.
   • 2003: SEC proposes shareholder director nomination rules, here. These are controversial. Ultimately, they die.
   • 2007: SEC proposes competing “status quo” proxy access rules (i.e., no proxy access), here, and expanded proxy access rules, here. This is weird.
   • 2007: SEC abandons expanded access and adopts “status quo” rules, here and here, rejecting the Second Circuit’s AFSCM v. AIG decision and re-establishing a company’s ability to reject a shareholder proposal that would result in a director election contest. Shareholder activists are miffed.
   • 2009: SEC proposes proxy access rules, here, and subsequently extends the public comment period, here.
   • 2010: SEC adopts 3%, 3-year, 25% of the board rules, here.
   • 2010: SEC stays the rules pending a legal challenge, here.
   • 2011: D.C. Circuit Court says “nuh uh,” here, to much of the SEC rules.
   • 2011: SEC says that although direct proxy access is dead, “private ordering” shows promise, here.
   • 2014: NY Comptroller submits shareholder access proposals to 75 public companies, here, asking for 3%, 3-year, 25% of the board proxy access.
   • 2014: SEC issues no-action letter to Whole Foods, here, saying Whole Foods may exclude a shareholder access proposal if a more restrictive company counterproposal is made. Many similar no-action requests are filed.
   • 2014: SEC says, here, “whoops, Whole Foods, we didn’t mean that . . . or, at least we’re not sure if we did.” It refuses to act on similar no-action letters. Again, weird.
   Understandably, public companies are miffed that the SEC left them with no guidance on when a counterproposal trumps a shareholder proposal. See, e.g., the U.S. Chamber of Commerce Center for Capital Markets Competitiveness letter to the SEC here. The head of the SEC’s Division of Corporation Finance recently commented on the controversy, and the difficulty of the issue, here, perhaps foreshadowing further work on the topic by the SEC.

   The Business Roundtable asked ISS and Glass Lewis not to do anything rash if a company decides to exclude a shareholder proposal in favor of its own, here. Glass Lewis, and probably ISS soon, has said it will take a case-by-case approach on proxy access proposals, see here, which presumably means it won’t automatically recommend voting against all directors if the board suggests a reasonable counterproposal.

   Options for a company that gets a valid shareholder proxy access proposal are fairly limited: include the shareholder proposal, include a counterproposal, or include both and let shareholders know that whichever gets the most votes wins. If it includes only the counterproposal, a company might preemptively seek a declaratory judgment that excluding the shareholder proposal is OK or it may let the proponent decide whether to try to force the issue in court. Our best guess on how this will shake out follows. (But don’t quote us – you’re on your own.)

   • Some will engage shareholder activists, hoping to reach a compromise with the proponent.
   • Absent compromise, a company will suggest a reasonable counterproposal in its proxy statement. (Arguably, Whole Foods’ initial counterproposal was not very reasonable.) The proxy disclosure will justify the proposal to shareholders and recite the many considerations reviewed by the board. These will borrow heavily from SEC analyses when it considered proxy access rules. Companies will review the voting policies of their big shareholders, if known, when shaping counterproposals; many will engage proxy advisory firms to help them communicate with shareholders. We imagine proposals might generally circle around 5%, 5-year, one director or 20% of the board.
   • The company will notify the SEC of the exclusion under Rule 14a-8(j), leaving it up to the shareholder activist to decide whether to seek an injunction or sue after the meeting. The more reasonable the counterproposal, the less likely a lawsuit. (And it seems unrealistic that the SEC would pursue enforcement action after saying it wouldn’t against Whole Foods and then saying it isn’t saying it wouldn’t – I mean, how big a bunch of jerks would those guys have to be?)
   • One assumes that as long as the counterproposal is reasonable, courts would be less willing to require that a company include the shareholder proposal in its proxy statement, and it’s not clear whether many court dockets would even allow action before a planned meeting.
   • Companies will argue that subsequent shareholder proposals may be omitted because they were “substantially implemented” under 14a-8(i)(10), likely with limited success.
2. More troubling than proxy access, perhaps, is the decision in Trinity Wall Street v. Wal-Mart, here. In Trinity, a shareholder activist proposed amending Wal-Mart’s corporate governance committee charter to require that it consider whether Wal-Mart was selling products that would make it look bad – specifically, large magazine firearms. The U.S. District Court in Delaware determined Wal-Mart could not exclude the proposal as a matter dealing with ordinary business operations, even though the SEC issued a no-action letter saying precisely that, because proposals “focusing on sufficiently significant social policy issues . . . transcend the day-to-day business matters.” And here, the proposal didn’t require Wal-Mart to stop selling specific products, just to determine whether to sell them and, if they decide to sell them, to report about what kind of monsters are running that place. Of course, almost proposals can be phrased in a “won’t somebody think about the children! ” kind of way, and nobody is fooling anyone: the goal is to affect ordinary business operations and prevent Wal-Mart from selling guns. The district court decision is on appeal.
3. Activist shareholders were more active in 2014 than ever before according to Activist Investing, here, and there’s no reason to assume the tide will ebb.
4. Glass Lewis proposed enhancements to its pay-for-performance and equity compensation models, here.
5. ISS released FAQs on its “equity plan scorecard,” here, and FAQs on its independent chair policy, here. A criticism of ISS’s holistic review of independent chair proposals is here.
6. Oregon joined the growing crowd of states that allow intrastate crowdfunding. Oregon’s new rules are here and its FAQs about the rules are here. The exemption allows a business based in Oregon to raise up to $250,000 from 100 Oregon investors, each of whom is limited to investing $2,500. To qualify for the exemption, a company must (a) first meet in person with a “business technical service provider” to review the company’s business plan, (b) file a notice with the State at least seven days before advertising or selling any security, (c) file advertising materials with the State, (d) obtain an affirmative declaration from the potential investor that she is an Oregonian before advertising or making an offer to her and confirm she is an Oregonian before actually selling her the securities (like by checking her driver license), and (e) disclose specified information to potential investors. After the sale, the company must report specified information to investors twice each year and file a report with the State. The offering can’t last more than 12 months, shares purchased can’t be resold for nine months, and the exemption isn’t available for development stage companies with no specific plan or for specified “bad actors.” Exempt offers and sales under these rules will not be integrated with other offers and sales made under the rules if they happen six months apart.
7. The SEC proposed rules, here, requiring disclosure in a company’s proxy statement about whether employees or directors are allowed to hedge or offset decreases in the market value of company securities. Many companies already disclose information about hedging policies as part of their CD&A and to evidence they have abided by shareholder service group preferences that such policies be in place. Policies typically apply just to directors and executives, and, if the rule is adopted, we don’t expect a rush to prohibit hedging transactions for employees generally even if the disclosure ends up being “we don’t prohibit hedging transactions for employees generally.”
8. The SEC proposed to amend its rules to follow the statutory mandates of the JOBS Act, which increase ownership thresholds that force you to go public, here.
9. The SEC granted its second bad actor waiver, here, this time in connection with settling charges against Oppenheimer & Co. for securities violations. The waiver ties “good cause” for exempting Oppenheimer to its compliance with the conditions in its waiver request letter, including improvements in its oversight processes.
10. The SEC released cybersecurity alerts that summarize its investigation of broker-dealers, here, and suggest to investors how to protect their online brokerage accounts from fraud, here.
11. Finally, Valentine’s Day approaches and, as always, young security lawyers’ thoughts turn to the timely filing of annual Schedule 13Gs, due February 14 (actually, the 16th since the 14th is a Saturday). Remember: nothing says “I own more than 5% of a public company’s stock” like a Schedule 13G.

2014

1. As the year moves to a close, expect lots of chatter about the upcoming 2015 proxy season. Including from us beginning right now. Commentary about preparing for the proxy season is here and here.
2. Almost certainly because good corporate governance practices just change so darn much, and almost certainly not because shareholder advisory groups must remain relevant from year to year, each of ISS and Glass Lewis released updated 2015 voting policies. ISS’s 15 updated policies are available here, and Glass Lewis’s six updated policies are here. Commentary about the updated policies is here, here, and here. ISS also released Quickscore 3.0, here. Companies have only until November 14 to access and verify the data used by ISS to calculate the Quickscore, which they may do here (click “Data Verification” at the bottom of the pane on the left). Commentary on Quickscore is here and here.
3. Also regarding proxy season, the NY Comptroller rolled out its first 75 shareholder access proposals (the “holy grail” of corporate governance, according to the Comptroller) as part of its “Boardroom Accountability Project,” described here. Commentary on the Comptroller’s project and proxy access proposals generally is here. The Comptroller materials cite a CFA study, here, that suggests proxy access increases a company’s value and that urges the SEC to dust off its proxy access rule rather than rely on private ordering proposals.
4. As an unscientific, modest rejoinder to the notion that good governance practices, as defined by shareholder advisory groups, and good financial results are meaningfully linked, see the article here about Oracle, the worst-governed, best-run company around. For those with an insatiable interest in the topic, see also Roberta Romano’s article about the Sarbanes-Oxley Act and “quack corporate governance,” in which she decries the triumph of recycled ideas advocated by corporate governance entrepreneurs, here.
5. To complete our bashing of commoditized corporate governance, we felt oddly gratified by the rebuttal, here, of ISS’s suggestion that board anti-takeover efforts result in lower company returns compared to alternate investments (see here). A summary of the rebuttal: “BS.” (Admittedly, many at Wachtell subsist on large billings defending companies from takeover attempts, so the rebuttal is best consumed, as always, with a grain a salt. But still, they’re clearly right.)
6. Following last month’s bevy of cybersecurity items, a few more:
   • Overviews of the increased focus on and board responsibility for managing cybersecurity risk are here, here, here, and here.
   • Information about the Department of Homeland Security’s Safety Act, which could help limit a company’s liability if it is targeted for a cyber-attack, is here and here.
   • A group of trade associations asked Congress to adopt a uniform standard for notifications to customers of data breaches, here.
7. Two separate studies, see here, found that professional investors who subscribe to a direct feed can obtain access to reports filed with the SEC seconds in advance of the general public, giving them a potential edge on the market. Of course, one assumes this advantage is relatively minor compared to the fact that the professional investors actually read the documents, know what to look for, and are more likely to correctly anticipate how the market might react. Still, timing is everything.
8. The SEC’s sanction of 10 companies for failing to timely disclose unregistered stock sales that constitute 5% or more of the outstanding shares (1% for larger companies), see here, has caused some to speculate that this is an example of the SEC’s “broken window” policy of enforcement (see, e.g., here), which many aren’t sure is a good idea (see here and here). Others take a different view, for example here (rated PG-13).
9. Fourteen states have now enacted some form of intrastate crowdfunding exemption, and several more are still thinking about it. See here. Amid this, note the SEC enforcement action, here, against a website that allowed U.S. investors to invest in foreign start-ups without adequately ensuring each investor was accredited, disqualifying the offering from the exemption under Regulation D and violating broker-dealer rules.
10. The SEC’s Investor Advisory Committee released recommended changes to the definition of “accredited investor,” here, including:
    • relying more on financial sophistication than on the ability to bear the loss;
    • a scaled approach, limiting how much an investor may invest as a percentage of income or net worth; and
    • third-party verification of accredited investor status, perhaps like the safe harbors for Rule 506(c) accredited investors.
    The Committee also recommended more study and more protection for non-accredited investors such as requiring that the purchaser representative not have a personal financial stake in the investment or receive compensation from the issuer. Recall that Dodd-Frank requires the SEC to review the definition every four years but does not mandate changes. The report from the Committee is intended to aid the SEC in its review of the definition. Commentary on the report is here, here, and here.

1. The SEC reminded everyone that, yes, it cares whether you timely file your Section 16 reports, by announcing enforcement actions against 28 Section 16 filers and six public companies here. Some tie the unprecedented enforcement action to SEC Chair White’s “broken window” enforcement strategy (see here), which she described a year ago here. Perhaps most ominously, the SEC’s release notes it used “quantitative analytics” to identify violators, which sounds suspiciously like it is using math to catch scofflaws. And nothing scares people more than the use of math to enforce laws they apparently didn’t think were a big deal.
2. The SEC also emphasized that broker-dealers can’t blindly rely on customer orders when selling securities in an unregistered transaction, issuing both an alert, here, and new FAQs, here.
3. Cybersecurity will continue to be a hot topic as long as large corporations suffer data breaches (see, e.g., here and here) and, obviously, as long as celebrities’ nude photos are stolen from their phones (see here . . . calm down, it’s a link to a CNBC article). In celebration of National Cyber Security Awareness month (seriously, here), a few recent resources:
   • Verizon’s 2014 Data Breach Investigations Report, which has a goal of presenting actionable information to limit your risks and which also has some punchy writing, is available here.
   • A report noting that over 50% of banks don’t disclose cybersecurity risks in their SEC filings is here.
   • The Multi-State Information Sharing and Analysis Center, which provides early cyber threat warnings and advisories, vulnerability identification, and mitigation and incident response, and, more significantly, a color-coded threat level (“blue” as of October 15) is here.
   • A message to directors, where the proverbial cyber risk oversight buck stops, that should terrify is here.
   • Transcripts from a few webcasts from The Corporate Counsel (members only) are here (Cybersecurity Role-Playing: What to Do and Who Does What, When) and here (Cybersecurity: Working the Calm Before the Storm).
   • Finally, on a micro-level, expect your next credit card to be a chip and pin card (see here), which, in addition to better security, will allow you to purchase gas in France, if you ever find yourself there and in need of gas. Say, outside of Strasbourg at 11 p.m. With your spouse, two teenage sons and a grumpy four-year old. (Because trust me, your swipe card won’t work.)
4. As we await SEC action on a myriad of JOBS Act items (Crowdfunding, Regulation A+, and additional Rule 506 process rules), note that the SEC posted a revised CDI describing how to limit internet communications to permit intrastate offerings, essentially by using in-state IP addresses to ensure out-of-state internet users are excluded. Some see renewed hope for intrastate offerings based on the revisions, see here, and others question whether the CDI provides guidance that can be implemented in a meaningful way, see here.
5. In Finnerty v. Stiefel Labs, here, the 11th Circuit Court of Appeals found a corporation had a duty to disclose preliminary sale negotiations to update prior representations that the corporation intended to stay private. Briefly: plaintiff Finnerty put shares back to Stiefel Labs a few months before Stiefel was sold. Had he held his shares, Finnerty would have made about four times as much on his stock sale. Stiefel’s rehearing request, in which it argued that the ruling requires a company to choose between disclosing preliminary sale negotiations and its fiduciary duty to maximize value for shareholders, a commonly cited reason for keeping negotiations confidential, was denied. Commentary is here. The SEC’s amicus brief, in which it argues that misrepresentations can be deceptive whether or not there is a duty to disclose and that the court can rule in plaintiff’s favor without holding that pre-merger discussions are material as a matter of law, is here. (The SEC has been pursuing securities fraud charges relating to Stiefel’s stock valuations and buy-back program since 2011, see here). Almost the inverse of the Finnerty holding, the Ninth Circuit Court of Appeals recently reminded us, here, that Section 10(b) and Rule 10b-5 do not impose a duty to disclose all material information and that “silence, absent a duty to disclose, is not misleading.” The Court continued to hold that a duty to disclose under Item 303 of Regulation S-K does not automatically mean that failing to disclose forms the basis for a 10b-5 claim, since the materiality standards for disclosure under those two rules differ.
6. Institutional Shareholder Services posted its policy survey results here. Commentary on the results is here, and commentary about proxy trends and how ISS and Glass Lewis engage with issuers and develop their policies and recommendations is here.
7. The blog-o-sphere is abuzz with chatter about the “game-changing” awards to SEC whistleblowers, in one case because of the size of the award ($30 million!) and in another because of the nature of the whistleblower (an internal compliance person at a company that didn’t fix an identified problem). The SEC’s releases on these awards are here and here. Some commentary about the awards is here, here and here. Other whistleblowing items:
   • A discussion of Wall Street whistleblowing, and reporting to the New York AG’s office as an alternative, is here.
   • A research paper suggesting whistleblower programs have no measurable impact on the outcome of enforcement actions is here.
   • A suggestion that whistleblower bounties under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) may increase above the current $1.6 million cap (chicken feed, we know) is here.
8. Plain English is not a new topic, by any means, but we were both amused and chagrined at The Wall Street Journal’s article on SEC “plain English” comments to securities filings, here. Amused because, as drafters of registration statements, we too suffer through drafting sessions where investment bankers vie for who can stuff the most adjectival superlatives into a sentence and bat nary an eye at overusing “innovative” because that is “what The Street expects.” Chagrined because now we’re worried that we come off as poorly as the SEC reviewer who snarkily questioned whether a restaurant’s claim that meals were prepared fresh daily extended to potato chips, which were on the restaurant's menu and which the reviewer also suggested could not possibly reflect “traditional Mediterranean cuisine 100 years ago.” (But which do, at least, merit their own Facebook page, here). Yikes.

1. To get us all back up to speed as fall descends, we begin this issue with a review of pending SEC rules. A host of items are on the SEC’s October rulemaking agenda, here, including the following.
   • Pay equity. Probably the SEC will actually adopt these Dodd-Frank-mandated rules, which require disclosure comparing your CEO’s pay (“a lot”) to your median employee’s pay (“much, much less”), in October. The disclosure applies to compensation in the fiscal year after the rules are effective. Assuming adoption in October, the disclosure will apply to compensation earned in 2015 and wouldn’t be disclosed until the Form 10-K covering that period or in the proxy statement filed in 2016. The proposed rules are here.
   • Crowdfunding. Although many states have stopped waiting for these rules and are forging ahead with their own (see below), it would be at least a little surprising if these are actually adopted in October. The balance between investor protection and facilitating small raises is difficult to strike. On the other hand, these rules are going to be of so little practical utility, maybe the SEC will adopt them, because who cares? The proposed rules are here.
   • Amendments to Regulation D, Form D and Rule 156. The proposed rules are here. These rules are much more controversial than the two above and also are important. Here is still the best piece we’ve seen on the Regulation D rules. It’s difficult to confidently handicap the chances of October adoption, but we’d guess “no.” That’s not to say there isn’t some activity, like adoption of CDIs regarding vetting accredited investors under Rule 506(c), here (255.48, 255.49, 260.35, 260.36, 260.37 and 260.38) and a release from the Securities Industry and Financial Markets Association that describes reasonable accredited investor verification methods for brokers and dealers, here.
   The other eagerly awaited proposed equity-raising exemption, Regulation A+, here, is not on the October calendar.
   
   A number of rules required by Dodd-Frank aren’t yet even proposed, including:
   • Compensation clawback. Lest you forget, the Sarbanes-Oxley Act included rules allowing the SEC to claw back compensation from executives who received it based on financial statements that were wrong because of (somebody’s) “misconduct.” Subsequently, the SEC’s CD&A rules noted that it may be appropriate to discuss clawback policies, and some shareholder advisory groups added “has a clawback” to their good governance checklists. Dodd-Frank §954 (here) requires the SEC to issue rules prohibiting stock exchanges from listing a company that doesn’t have a policy to recover excess incentive compensation from current or former executives that received the compensation in the last three years based on financial information that is restated. The exchanges will have time to react to SEC rules, so this requirement may be several years away. Which isn’t to say many haven’t adopted policies already. See here.
   • Pay vs. performance. Dodd-Frank §953(a) directs the SEC to adopt rules for disclosure of “information that shows the relationship between executive compensation actually paid and the financial performance of the issuer.” Some have already begun to voluntarily disclose information, most frequently showing CEO compensation relative to total shareholder return. See here.
   • Employee and director hedging. Dodd-Frank §955 mandates that the SEC require companies to disclose whether any employee or director is permitted to engage in hedging or similar transactions to protect against decreases in the value of company securities. Some companies voluntarily make disclosure, often after adopting anti-hedging/pledging policies to avoid negative ratings or recommendations by shareholder advisory types, and existing rules (Item 403 of Regulation S-K; Rule 16 under the Securities Exchange Act) already require disclosure of pledges and some types of hedging transactions.
   And, of course, this is more than four years after Dodd-Frank was enacted. A Dodd-Frank progress report is here; criticism of how much is left undone is here and here; and an overview of the first four years of Dodd-Frank (the cover photo says it all).
2. Twelve states have forged ahead with intrastate crowdfunding exemptions, compared here, and several more are thinking about it, see here. Criticism of the SEC’s view that an offer that isn’t adequately targeted to investors only within a single state is not an “intrastate offer” is here and here. Really, these amount to decrying a central premise of federal securities law, which regulates offers and not just sales. Admittedly, Congress invited this criticism when it abandoned the restriction on general solicitations, as long as sales are made to accredited investors, under the JOBS Act. But honestly, because the balance of investor protection and fundraising from the crowd is so difficult to strike, it’s hard to get too excited about anything crowdfunding related.
3. Cybersecurity continues to be a “hot” topic, or at least as hot as a topic can be after continually searing into the public consciousness for years. Stoking the topic is ISS’s recommendation to vote “against” all Target Corp. directors, who it says didn’t provide enough oversight to ensure no data breaches were possible as a sort of res ipsa loquitur theory of fiduciary duties. See here and here. (All Target directors were re-elected.)
4. The SEC fired a warning shot at shareholder service groups, reminding them that they are subject to federal proxy rules. Of course, it also noted that most shareholder adviser activity qualifies for an exemption from the rules. Staff Legal Bulletin No. 20, here, provides eight FAQs for proxy advisers and five for investment advisers. The guidance also suggests that institutional shareholders may not blindly rely on shareholder advisory groups in exercising their fiduciary duties to investors. SEC Commissioner Gallagher’s subsequent advice to public companies on how to handle proxy advisers – talk directly to institutional shareholders to correct misinformation – is discussed here.
5. Companies seem increasingly comfortable taking their time to transition to the updated COSO internal control framework to assess internal controls over financial reporting, after some initial concern that they wouldn’t be ready by the December 15, 2015 deadline. Early concerns were spurred by remarks like those here. Everybody seems to have now tumbled to the notion that the SEC requires only that internal controls be assessed based on a “suitable, recognized control framework” and that it’s difficult to imagine that between December 14 and 15, the 1992 framework will suddenly become either unsuitable or unrecognized. Our guess: companies that rely on the old framework will preemptively disclose that they are transitioning and the SEC won’t comment. (Note too the SEC’s recent charge against a CEO and former CFO, here, which includes allegations that, among other things, they didn’t understand the internal control assessment framework much less participate in it. One might argue this is exactly the kind of thing that militates against a hurried adoption of new systems.)
6. The first conflict mineral reports, due June 2, are now well behind us. The journey to the first filed reports was tumultuous right to the last, when the D.C. District Court dashed hopes that it would delay reporting with its terse May 14 ruling on an emergency stay motion: “Upon consideration of [various filings] it is ORDERED that the motion be denied.” A roundup of items regarding conflict minerals follows.
   • About 1,300 public companies filed Form SD or conflict mineral reports, well short of the SEC’s estimate of nearly 6,000.
   • Global Witness was quick to criticize conflict mineral reports, here, calling them inadequate and disappointing. Lack of specificity did seem to be the norm, with many companies unable to say much about the ultimate wellspring of conflict minerals in their long supply chains. See here.
   • The Corporate Counsel notes, here, the similarities between the “country of origin” labeling issue in American Meat Institute v. U.S. Department of Agriculture, which the en banc D.C. Appeals Court ruled did not constitute impermissible compelled speech, and the free speech arguments in National Association of Manufacturers, et al. v. Securities and Exchange Commission. Might this portend another SEC victory on appeal for its conflict minerals rules? (And will anyone care?)
   • Summaries and lessons on the filings abound, for example, here, here and here.
   • Not surprisingly, conflict minerals representations and warranties have worked their way into public buyer purchase agreements. Basically, these parrot rule language and say “we wouldn’t have to report if the conflict minerals rules applied to us.” Examples are here.
   There’s been no word from the SEC on the reports or their adequacy, which may not be surprising considering the SEC probably doesn’t have the budget, expertise or desire to delve into the adequacy of disclosures that are far afield from its core mission. In the meantime, the U.S. Commerce Department published a list of facilities that process conflict minerals, here, which isn’t hugely helpful because it doesn’t indicate whether minerals processed at those facilities come from the Congo or finance warlords.
7. Helpful suggestions on how to improve public disclosure and make it more effective continue to trickle onto the SEC’s “Disclosure Effectiveness” portal, here. The first two comment letters include an ominous albeit likely unintended message that voters are “loosing” their effect on the electoral process (please help) and a comment that those lengthy reports would surely benefit from a table of contents. Perhaps unfairly, we stopped reading the comment letters after the first two.
8. In addition to the SEC’s simplification efforts, the AICPA released two proposals as part of its “simplification initiative,” one on inventory measurement, and one on elimination of the concept of extraordinary items from the income statement presentation, here.
9. In other accounting news:
   • The SEC is apparently on the cusp of issuing new revenue recognition rules, according to Compliance Week.
   • The PCAOB is expected to soon complete rules that require disclosure of a company’s lead audit partner, see here.
   • FASB issued an Accounting Standard Update, filling the gap on GAAP determinations about an entity’s ability to continue as a going concern.

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May 14, 2014

1. The Director of the SEC’s Division of Corporation Finance foreshadowed pending SEC disclosure reforms in a speech to the ABA, here, and urged lawyers to help companies reduce repetition, focus disclosure and eliminate outdated information. Ironically, advocates for more disclosure about environmental, social and governance (ESG) issues are coming out of the woodwork on the periphery of the SEC’s consideration of reforms, no doubt fueled by vague statements that the reforms will be about better, more concise disclosure, not necessarily less disclosure. The SEC has dipped its toe in ESG waters on all sorts of things that it has argued – sometimes more and sometimes less convincingly – are part of its core mission to protect investors (their pocketbooks, not their souls), maintain market integrity and facilitate capital formation; e.g., extensive executive compensation disclosure and interpretive guidance on climate change disclosure. Congress has occasionally forced the SEC to plunge its whole leg into ESG waters, requiring it to demand disclosure that serves a social purpose one can barely connect to the SEC’s mission; e.g., pay equity and conflict minerals disclosure. An overview of whether ESG groups will influence disclosure reforms is here and a criticism of mandated disclosure generally is here.
2. The SEC formally stayed the part of its conflict minerals rule that required public statements that products are “DRC conflict free,” “have not been found to be ‘DRC conflict free’” or are “DRC conflict undeterminable” (see here). The SEC action implements the earlier interpretive guidance from its Division of Corporation Finance, here, which followed the U.S. District Court’s ruling last month that this disclosure requirement violated free speech rights. The industry groups that filed the original suit seeking to overturn the conflict minerals rule have now filed an emergency motion, available here, to stay implementation of the entire rule by May 26, which is at least a few days before the June 2 filing deadline. Briefs in opposition to the motion were due May 9, and the appellants’ response was due yesterday. At least two of the SEC’s five Commissioners would love to see a full stay, and better yet a declaration that the entire rule is invalid. See the Joint Statement of Commissioners Gallagher and Piwowar, here. So too would most public companies. According to a PWC survey of public companies, here, as of February 2014, 90% had not drafted their report or had an initial draft with significant additional work required, and 26% were in the early stages of due diligence. (The survey also includes data on how companies are handling rule compliance.) At least two companies couldn’t wait to file, and have already done so, here and here (see commentary on the latest filing here). Each of these early filings has flaws and is not an ideal disclosure model. Any additional early filings can be viewed by going here and entering “SD” in the “Form Type” box.
3. The comment period for the Regulation A+ Rules, one of the two provisions of the JOBS Act we believe might prove at least somewhat useful to encourage capital formation, expired March 28, 2014. A summary of comments on the rule is available here, including the strong views of state regulators that Regulation A+ offerings should not be exempt from state blue sky laws, which would make those offerings more burdensome and less useful for issuers. No word on when the SEC will act on the proposed rules.
4. The SEC issued a revised statement on well-known seasoned issuer waivers that includes its framework for assessing waiver applications, here. SEC Commissioner Gallagher issued his own Statement on WKSI Waivers, here, to make the point that “refusing to grant a waiver is not a step that we should take lightly” and to react to Commissioner Stein’s dissenting statement, here, which she filed to voice disapproval of the waiver granted to The Royal Bank of Scotland, the first waiver for criminal misconduct, and to express concern that the SEC “may have enshrined a new policy – that some firms are just too big to bar.” There’s nothing like this type of intrigue to make an esoteric, wonkish topic moderately more interesting.
5. The SEC issued Compliance and Disclosure Interpretations (Questions 110.01, 110.02, 164.02, 232.15 and 232.16, available here) about using social media in proxy contests and securities offerings. In particular, the rule allows links to satisfy legend requirements, finally opening the door to completing your IPO in 140 characters or less on Twitter (“We make things and sell them. We make money, usually, and hope to make more. But don’t come crying to us if you lose your investment. See our disclaimer here.”). Commentary on the CDIs is here and here.
6. Finally, in the world of corporate litigation, a few items of note:
   • The Delaware Supreme Court upheld in ATP Tour, Inc. v. Deutscher Tennis Bund, here, a fee-shifting bylaw that requires shareholder plaintiffs to pay for intra-corporate litigation if they are not successful on the merits or do not achieve “in substance and amount, the full remedy sought.” Commentary is here and here.
   • The Delaware Chancery Court upheld the validity of a poison pill, here, noting that a disproportionate influence over major corporate decisions (“negative control”) could be a threat that justifies adoption of, in this case, a two-tiered pill triggered at a threshold of 10% for activist investors (Schedule 13D filers) and 20% for passive investors (Schedule 13G filers). Commentary on the case is here, and much more colorful commentary is here, including an admonition to directors to stop sending damning, discoverable emails about an activist shareholder and his views.
   • Cornerstone’s review of 2013 M&A shareholder litigation, suggests that almost all public company M&A results in sell-side litigation (94% in 2013), typically with charges that the board ran a flawed process. Per the chart on page 2, almost none of them (2% in 2013) lead to monetary recovery for shareholders, and the majority resulted in more disclosure (75% in 2013) and, presumably, payment of attorney fees. (Yes, we mentioned this last month, but be honest, did you notice?)

April 9, 2014

You can view archived issues of this alert, as well as other alerts, here. If you have comments, email us at MissedIt@stoel.com.

1. The Director of the SEC’s Division of Corporation Finance, Keith Higgins, recently gave the keynote address, here, at the 2014 Angel Capital Association Summit. He focused on the following three items on the SEC rulemaking agenda important to angel investors. (He didn’t mention Regulation Crowdfunding, which might suggest that he thinks, as we do, that crowdfunding won’t be useful).
   • Rule 506(c). Higgins noted only $10 billion has been raised in 900 offerings relying on the 506(c) exemption in contrast to $233 billion in 9,200 506(b) offerings in the same period. He shared thoughts on the most cited reasons for the slow 506(c) start.
     • Fear about disclosure of sensitive financial information under the enhanced accredited investor verification standards. Higgins waved this off, and we agree this doesn’t make much sense. The SEC provided non-exclusive safe harbors, like confirmation of your status by your accountant, and a principles-based rule that allows you to protect financial information with modest effort.
     • Fear about the meaning of “general solicitation.” Higgins noted the furor over what “general solicitation” means may be curbing reliance on 506(c), which is ironic since general solicitation is allowed under 506(c), so it doesn’t matter if you know what it means. He reminded everyone the SEC’s view has not changed: demo days and venture fairs are as permissible as they always have been (which has always depended on the facts and circumstances). He did suggest SEC no-action letter guidance on the issue might be due for an update, given that general solicitation is allowed in one type of Rule 506 exemption but not in another.
     • Fear about pending process rules. Higgins acknowledged the proposed process rules are controversial. While he didn’t suggest what might happen here, or when, he did say that no one should fear retroactive application and that he expects reasonable transition rules will be adopted.
     Not cited by Higgins is perhaps a more fundamental reason for 506(c)’s slow start: just because you can tell the world you’re raising money doesn’t mean you’ll get any money, and some may not want to publicly fail to get financing. There likely always will be a place for brokers and finders paid to connect with specific investors able and willing to invest money in risky startups, and if you’re going to use them anyway, why not rely on the tried-and-true 506(b) exemption?
   • Accredited investor definition. Higgins didn’t say much new here, reiterating that Dodd-Frank requires a review of the definition, which, aside from excluding the value of a primary home from the net asset test, hasn’t changed since 1982. He did say that the SEC would consider whether it should apply criteria beyond the income and net worth tests, including professional licenses (e.g., CFA or CPA), existing ownership of a specific amount of investment securities, and reliance on intermediaries that enhance a person’s ability to make good investment decisions.
   • Regulation A+. Here Higgins simply summarized the SEC’s proposed rules.
2. A useful primer on Rule 506 and commentary on new ways to raise money after the JOBS Act, in a format we haven’t seen others use, are available here. They are, in a word, killer.
3. To balance the lengthy discussion about private offerings, reviews of IPO activity in the two years since the JOBS Act are here and here and statistics about 2013 “venture-backed” IPOs are here.
4. And speaking of IPOs, or at least public offerings, a highlight of trends in securities litigation settlements last year (“up”) and highlights and commentary identifying a trend in securities litigation filings after securities offerings and regulatory investigations of public companies (also “up”) are here.
5. That’s not to say M&A as an exit strategy is any great shakes either, at least from a “subjecting yourself to litigation” perspective. A report noting that most (public) M&A activity results in litigation is available.
6. Information about the SEC’s cybersecurity roundtable, where you may also find a transcript when completed, is available here. The meeting and focus, on the heels of the release of NIST’s Framework for Improving Critical Infrastructure (here), highlight the continued importance of the issue.
7. The SEC posted
   • Nine more FAQs on conflicts mineral reporting.
   • A revised statement on how well known seasoned issuers may obtain a waiver of “ineligible issuer” status here.
8. Finally, two reports that caught our eye:
   • A(nother) study about whether the Sarbanes-Oxley Act was worth it (no, but what are you going to do?) is here and commentary about the study is here.
   • ISS’s 2014 preseason report on Environmental and Social Issues is here.

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March 12, 2014

1. The U.S. Supreme Court recently ruled in Lawson v. FMR LLC that the whistleblower provisions of the Sarbanes-Oxley Act protect employees who work for contractors and subcontractors of public companies and not just employees of the public company itself. At issue was the meaning of the phrase: “No [public] company . . . or any . . . contractor [or] subcontractor . . . of such company, may [retaliate] . . against an employee . . . because of [whistleblowing activity].” In its holding, the Court rejected the argument that the language was simply to prevent a public company from hiring a hatchet man, like George Clooney’s character in “Up in the Air,” to implement the retaliation. See here. Your cynical view that we, perhaps like the Court, have superfluously included a reference to George Clooney to increase our internet readership is noted.
2. The U.S. Supreme Court also recently decided Chadbourne & Parke LLP v. Troice, in which it held that the Securities Litigation Uniform Standards Act of 1998 (SLUSA) does not bar a state-law claim that the defendants misrepresented that uncovered securities were backed by covered securities. See here. (SLUSA generally precludes state class actions alleging misrepresentations in connection with the purchase or sale of a covered security.) 
3. To complete the hat trick, because we so rarely get to write about U.S. Supreme Court cases involving securities law, we note the Supreme Court also heard oral arguments in Halliburton Co. v. Erica P. John Fund and will soon decide the fate of the fraud on the market presumption of reliance in federal securities class actions. That presumption allows plaintiffs to seek to certify a class without showing that each shareholder relied on alleged misrepresentations. An exhaustive review of the issues, in three parts, is available here. Additional commentary and a summary of the theory is here.
4. And, for the four bagger, we note that the U.S. Supreme Court has also granted certiorari to hear Indiana State District Council of Laborers v. Omnicare, a case that should reconcile appellate court splits on whether lawsuits under Section 11 of the 1933 Act require allegations that an issuer knew its statements were false in addition to allegations that the statements were actually false. (In other words, is lying required?) Commentary is here.
5. Because this month’s alert is almost entirely about judicial action, we feel compelled to provide a link to a description of 2013 Delaware corporate law decisions and how they might guide corporate action in 2014, here.
6. Only three non-judicial items caught our eye this month:
   • A somewhat depressing article, at least for those who work on IPOs, about the death of small IPOs is here. The study attributes the decline to diminished investor demand, a reasonable reaction to the imbalance of risks and rewards associated with microcap investing. The study reveals that only 55% of microcap companies (initial market cap of less than $75 million) remain listed five years after an initial IPO compared to 61.3% for mid-cap and 67.1% for large-cap companies. Microcap companies most frequently exit public markets through voluntary or involuntary delisting, compared to more exits through acquisition for larger companies, and the microcaps that remain public fail to grow significantly. From this perspective, making an IPO easier, or even alternatives like the pending Regulation A+ process, might not be helpful because the primary culprit is simply microcap company lack of success.
   • Deloitte’s Audit Committee Brief on the 2013 COSO Framework is here and on the new era in audit committee reporting is here.
   • Warren Buffet’s letter to shareholders, which some describe as “folksy,” or at least as folksy as one can be when discussing how the intrinsic value of a share is much higher than its $134,973 book value, is available here. For sure, the letter is at least plain spoken. On the other hand, Buffet does give valuable folksy tips, including suggesting flying to Kansas City and driving to Omaha for the annual shareholder meeting to save money, an itinerary that includes competing against him in a newspaper-throwing contest, an exhortation to buy ketchup bottles with his picture rather than the (obviously heavily discounted) bottles with Charlie Munger’s picture, an invitation to take advantage of “Crazy Warren” discounts while he clerks at Borsheims, and an in-your-face challenge to get the giant root beer float at Piccolo’s because only sissies get the small one. And it works for him.

February 12, 2014

1. As proxy season begins, a few items of note:
   • ISS published guidance, here, explains how it will calculate a company’s “Governance Quickscore,” which is supposed to help investors identify governance risk. Commentary is here.
   • A decent reminder of “key” proxy items is here.
   • Some SEC issued guidance, here, covers “unbundling” under Rule 14A-4(a)(3), which generally requires that shareholders be allowed to cast separate votes on each material matter and that matters not be conditioned on each other, except when the SEC says it’s cool. Commentary is here.
2. The SEC also added two new Compliance and Disclosure Interpretations (CDIs), here, to the Rule 506(c) CDIs it published in the last few months. The new CDIs address transitions between traditional 506(b) offerings and general solicitation 506(c) offers for offerings that began before 506(c) was adopted. Still no word on the status of proposed 506(c) process rules (here) or, for that matter, proposed crowdfunding rules (here).
3. There has been no news about conflict minerals and the chance that SEC rules would be overturned on appeal (see last month’s ICYMI here). So don’t count on it. Note that the SEC posted Form SD, the form to make your conflict minerals report, here.
4. It’s occasionally useful to remind ourselves that the SEC’s Division of Corporation Finance posts its financial reporting manual – its internal guidance for those reviewing your reports. The manual, which includes an update about accounting estimates for share-based compensation in IPOs (so pay attention, IPO filers), is here.
5. The NYSE updated its annual listing standard affirmation to include compensation committee independence requirements, here.
6. Last month, we noted proposed “Regulation A+” rules, which, along with the adoption of Rule 506(c), are the most potentially useful of the JOBS Act changes. (Sure, sure, everyone loves “confidential” IPO pre-filing, but did it really change much? Probably not – see here.) Comments on the proposal are due March 24, 2014. To tide you over, a few secondary sources on this proposed mini-IPO rule are here, here, and here.
7. FINRA approved the registration of Nasdaq Private Market as a broker dealer, the first step in its registration with the SEC as an alternative trading system to match buyers and sellers in primary and secondary offerings of private company securities. See here and here. The introduction of the private trading market was announced last year, see here. Yet more evidence that IPOs will be increasingly rare?
8. The PCAOB has apparently given up on requiring auditor rotation among U.S. public companies. This is in contrast to the European Union, which has taken steps to require audit firm rotation every 10 years “subject to technical finalisation and formal approval by the co-legislators” (see here).
9. The National Institute of Standards and Technology released its Framework for Improving Critical Infrastructure Cybersecurity, here, which is intended to help manage cybersecurity-related risks. Particularly after what happened at Target a couple months ago (see here and here), and given the SEC’s continued focus on cybersecurity (see here and here), you can expect NIST’s publication to be widely read.
10. Finally, Valentine’s Day approaches and, as always, young security lawyers’ thoughts turn to the timely filing of annual Schedule 13Gs, due February 14. Remember: nothing says “I own more than 5% of a public company’s stock” like a Schedule 13G.

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1. The SEC last month proposed Regulation A+ rules, here, which provide for capital raises of up to $50 million without a full-blown registration statement. Summaries of the proposed rules abound (e.g., here), but a few high points of the two "tier" exemptions follow.

   Tier 1 offering:

   • "Bad actors" not eligible.
   • Up to $5 million, including up to $1.5 million from selling shareholders.
   • Abbreviated registration statement subject to SEC staff review, with a few additions to existing requirements. Confidential submission process available.
   • Form 1-Z filed upon completion or termination of the offering.

   Tier 2 offering:

   • "Bad actors" not eligible.
   • Up to $50 million, including up to $15 million from selling shareholders.
   • Same abbreviated registration statement subject to SEC staff review as Tier 1, but audited financial statements are required. Confidential submission process available.
   • Ongoing public reporting requirements, including annual report on Form 1-K, semi-annual reports on Form 1-SA, current reports on Form 1-U.
   • May file a Form 1-Z to exit reporting obligations after reporting for one full fiscal year, if fewer than 300 shareholders of record.
   • Investment limited to the greater of 10% of investor's annual income or net worth.
   • Exemption preempts state blue sky law.
   Probably, not many will make a Tier 1 offering, which, like the existing Regulation A exemption, requires compliance with state securities laws. It also doesn't let you raise much. Proposed Tier 2 offerings, which are really mini-IPOs, have more potential and might prove a useful fundraising alternative to Rule 506 under Regulation D. The two primary advantages of Regulation A+ over Regulation D are that the securities sold are not "restricted securities" subject to resale limitations under Rule 144 and that sales may be made to an unlimited number of non-accredited investors. Comments on the rules are due 60 days after publication in the Federal Register, which one assumes will happen soon.
2. And speaking of Regulation D, it is noteworthy that no movement is evident on proposed "process" rules for 506(c) offerings, although comments continue to be posted even though no official action extended the November 4, 2013 deadline for comments. It's probably just me, but has anyone else picked up a shift in tone in comment letters by legitimate commentators? It seems to have moved from "here's some suggestions to make this slightly less awful" to "why not make this not awful at all," including the ABA Business Law Section's plea for the SEC to take a wait-and-see approach instead of moving to curb speculative abuses with onerous rules (see here). Counterbalancing the ABA are letters from U.S. Senators Levin and Heinrich (here and here) urging the SEC to make the rules at least as awful as proposed, if not more. (Incidentally, the Levin staffer who wrote "the soon-to-be 'Wild West' that now exists" should be smacked. For syntax reasons, if nothing else.)
3. That's not, however, to say the SEC has been idle on Regulation D. It published nine Compliance and Disclosure Interpretations (CDIs) on Rule 506(c) offerings (Questions 260.05-13) and 19 CDIs on "Bad Actor" disqualifications under Rule 506(d) (Questions 260.14-32) here. It also issued its first waiver of the bad actor rules, to RBS Securities, here.
4. As the May 31 filing date for conflict mineral disclosures on Form SD approaches, a last gasp for voiding the disclosure rules seems to have legs, at least according to two accounts of the appellate hearing on the U.S. District Court's ruling that the disclosure requirements were valid. See here and here. Business groups' free speech arguments resonated with the panel, according to press coverage, and at least some time was spent suggesting that the rules are not within the SEC's core mandate of protecting investors (which is undisputed but probably irrelevant). Appellate judges are paid to be skeptical and ask probing questions of counsel, so don't count on a successful appeal based on coverage of the hearing. No timeline was set for a decision by the court.
5. In what skeptics might see as continued struggles to stay relevant and cynics as an effort to have issuers continue to pay to receive its analysis, ISS revised the method it uses to calculate an issuer's governance QuickScore. See here. Also, it released its 2014 proxy voting updates. See here and here.
6. A few other items of note:
   • Commentary on the Twitter IPO, including Twitter's responses to SEC questions, is here. The final prospectus, including a description of Twitter's "virtuous cycle of value creation" (. . .um. . . what?), is here.
   • The JOBS Act-required report on Regulation S-K, including a glimpse, at the end of the report, into where changes on this integrated disclosure rule might go, is here.
   • The SEC's Office of the Whistleblower's Second Annual Report, showing no significant change in tips between 2012 and 2013, is here.
   • The SEC's rulemaking agenda for the next 12 months is here, notable to 79 U.S. House and Senate Democrats, at least, for its omission of rules to require disclosure of political spending (see here and here). ("Because it protects investors" . . . right.)
   • Nasdaq's amended compensation committee independence rules, which align with the NYSE rules, were adopted last month (see here); the revised Compensation Committee Certification, here, can be completed online here.

2013

November 13, 2013

1. The SEC proposed "Regulation Crowdfunding," here, on October 23. "Crowdfunding" generically refers to raising money in small amounts from many people over the Internet. Crowdfunding has taken the form of product pre-orders, where production occurs only after enough money has been gathered to make production economical, or simply donations of money in exchange for tokens like a film credit or a coffee mug. Neither involves an offer or sale of "a security" because no one paying expects to get a profit. Regulation Crowdfunding applies crowdfunding principles, and the notion that "the crowd" will gravitate toward the best ideas and the most promising projects, to sales of securities. But it also tries to protect investors, which occasionally is an issue (see, e.g., here, here, here and, of course, here). The SEC's struggle to include adequate investor protections without making the regulation completely unworkable is reflected in the regulation's 585-page length. Yes, 585. The public comment period on the rule ends February 3, 2014, which also is the last day you may comment on FINRA's proposed Funding Portal Rules and Related Forms (see here).

   It's tempting to think of Regulation Crowdfunding as a poor man's IPO, rather than an exemption from public registration, since it allows publicity, allows anyone to purchase, and requires that information be provided to the crowd during and after the offering. Key aspects of the regulation:

   No matter what its final form, Regulation Crowdfunding isn't going to be very useful for most. It's expensive, time-consuming money and buys you a large, unsophisticated shareholder base that probably should scare away deeper pockets. And assuming the SEC adopts reasonable final Rule 506(c) "process" rules, who needs it? (That was rhetorical; the answer is "very few.") Here's a scorecard:
   • Information. It focuses on keeping the crowd informed, including allowing information only to flow through a single funding portal, and imposes a sliding scale of disclosure depending on how much money is sought. It requires a post-offering annual report and that funding portals provide specified information to potential investors.
   • Keep risk and fraud small. Only $1 million may be raised through crowdfunding in a single 12-month period, individual investments are capped based on net worth or salary, and resales are prohibited for one year. (The SEC clarified that the $1 million cap doesn't preclude additional money raises through other exemptions, and reconciled some sloppy statutory language regarding caps on investment amounts. It also proposed to permanently exempt shares originally sold to the crowd from the record holder count under Section 12(g) of the Securities Exchange Act of 1934.)
   • New regulated industry. It creates a new regulated industry of "funding portals" charged, in meaningful ways, with watch-dogging the new system.?

   	Regulation Crowdfunding	Rule 506(c)
   Offering size limit	Yes, $1 million in 12-month period	No
   Investment amount limit	Yes, the rich capped at $100,000 and the poor at as little as $2,000	No
   Mandatory disclosure	Yes, by both issuer and intermediary	No

    

   	Regulation Crowdfunding	Rule 506(c)
   Offering size limit	Yes, $1 million in 12-month period	No
   Investment amount limit	Yes, the rich capped at $100,000 and the poor at as little as $2,000	No
   Mandatory disclosure	Yes, by both issuer and intermediary	No
   Continuing federal reporting obligation	Yes, annual report posted on website and filed with SEC, but holders of shares bought may not count for §12(g)	No
   Investor type	Anyone with Internet access	Offers to anyone; sales only to accredited investors
   Investor verification; due diligence	Intermediary obligations	Reasonable verification by issuer of accredited investor status; FINRA Rule 2310 requires some diligence by any broker
   Resale limitations	No resales for 12 months, with some exceptions	No resales for 12 months (Rule 144), but "4 1/2" exemption
   Marketing/communication	Only through intermediary	Unlimited by issuer; specified intermediaries not deemed brokers under §4(b)(1) of the '33 Act Pending rules may require advanced Form D filing, supplemental disclosure, temporary provision of materials to SEC
   Required intermediaries	Yes	No; specified intermediaries not deemed brokers under §4(b)(1)
   Eligible issuers	Private U.S.-based companies, excluding investment companies	Anyone but "bad actors"
   Cost	Probably high for $1 million	Probably low
   Can I use it now?	No, the SEC hasn't yet adopted rules	Yes, but pending process rules may alter the landscape
   Preempts state law?	Yes	Yes

   
    
2. The comment period for proposed Rule 506(c) process rules ended November 4. The link to the SEC's online comment form, here, was active as of today, however, which suggests you can still comment. No word yet on when rules will be adopted, or what they'll look like. In the meantime, however, at least a few issuers have taken advantage of general solicitation for offerings, see here and here.
3. The Director of the SEC's Division of Corporation Finance updated Congress on JOBS Act implementation, here. Among other things, he notes the SEC staff is "finalizing rule recommendations under Title IV." This is the "Regulation A+" provision that would allow offerings up to $50 million in a 12-month period. The North American Securities Administrators Association, Inc. proposed a coordinated state review program for such offerings, which preempt state Blue Sky laws only when securities offered are listed on a national exchange or sold to qualified investors, here.
4. SEC Chair White talked about information overload in SEC filings and the SEC's forthcoming JOBS Act report on whether changes should be made to Regulation S-K, the SEC's integrated disclosure rules. The speech is here and commentary on the speech is here and here.
5. And speaking, once again, of disclosure overload, the SEC filed a brief defending its conflict mineral rules ("our hands were tied") here. The conflict mineral bill sponsors in Congress filed an amicus brief, here. Brief commentary on the filings is here.
6. The PCAOB issued staff audit practice alert No. 11, Considerations for Audits of Internal Control Over Financial Reporting, here. Gripping bedtime reading, we assume.

October 9, 2013

1. The SEC extended the comment period for Regulation D "process rules" to November 4, 2013, perhaps after recognizing that in many ways, the proposed rules make Regulation D worse for issuers. See here. In the meantime, the SEC published a host of items to help people out, including:
   • An investor alert, here, that told investors to brace themselves for September 23, the effective date of the SEC rule allowing general solicitations under new Rule 506(c);
   • Another investor alert, here, that explains what "accredited investor" means; and
   • A summary of the "bad actor" disqualifications rules effective September 23, here, purportedly as a small entity compliance guide (but it serves as an "any" entity compliance guide).
2. The SEC proposed the "pay ratio" disclosure rules, here, that were required by Dodd-Frank over three years ago. The comment period ends December 2. Although the SEC received over 22,860 prepublication comment letters about pay ratio disclosure, additional comments should be plentiful because these almost certainly are the dumbest of the Dodd-Frank mandated rules. To its credit, the SEC did at least try to make the disclosure less costly, if not less dumb. Generally, the proposed rules require that a company disclose its CEO's annual compensation, median annual total compensation for employees except the CEO (that's "median," not "average"), and the ratio. (Mathematically: X, Y and X/Y, where X = a lot and Y = much less.) The proposed rules allow statistical sampling and estimates to identify a "median employee" (based on, say, W-2 income) whose total compensation would then be calculated, and require that a company briefly disclose its methodology and identify estimates. Summaries of the proposed rules are here, here and here. The disclosure would be made in a company's annual report or proxy statement, and the disclosure may first be required in proxy statements filed in 2016, covering 2015 compensation, which should give everyone time to figure out what to do once final rules are published. (Spoiler alert: Whatever the form of the final rules, the gist of disclosures will read as follows, only with modestly expensive and time-consuming analysis surrounding it: "Our CEO makes a lot of money. It is a lot more money than the rest of our employees make. Some of them don't make very much at all. It is probably more money than you make too, and his annual salary might even be more money than you will ever make in your lifetime. But on an hourly basis our CEO still makes far less than Alex Rodriguez or Angelina Jolie, and it is just as silly to compare his salary to theirs as it is to compare his salary to the workers in our mail room. But we wanted to make sure you knew that not all of our workers make as much as our CEO.")
3. The SEC will pay a whistleblower upwards of $14 million, according to a final order, here, late last month. That data point will almost certainly make companies and possible whistleblowers perk up and take more notice of the SEC's still relatively nascent Office of the Whistleblower, which previously disclosed a $50,000 award to a whistleblower in 2012 and another 2013 award that is expected to total about $125,000. Some characterize the award and the measures the SEC took to preserve the anonymity of the soon to be wealthy whistleblower as a "game changer," see, e.g., here and here. Information about the award is available here.
4. Capital markets are all atwitter about the latest social networking IPO, see here. There really isn't much interesting to say about the IPO of a company that has consistently lost money but that promises huge returns if it can monetize its user base by sending spam ads without alienating them and selling user data. (Honestly, if this were the late '90s, the company's name would be "TwitTer.Com, Inc.") But Twitter's valuation is high, and comparisons to Facebook's IPO are obvious. Twitter's registration statement is available here, and commentary about the Twitter IPO is here and here.
5. Finally, as the Federal Government shutdown persists, note that it's apparently business as usual at the SEC, at least for a few more weeks, see here. The SEC's plan of operations if Congress doesn't renew appropriations is here. Ominously, the SEC's plan was silent about what will happen if Twitter wants to complete its IPO while the SEC was out. But darned if the SEC didn't subsequently address that possibility here. For those who aren't Twitter, a summary of how the shutdown may already be affecting us is here.

__________________________

September 11, 2013

1. As we run up the September 23 effective date of rules eliminating the prohibition on general solicitations under Regulation D and wait for final SEC "process" rules, a few additional resources are here (summary of comments on the proposed rules) and here ("practical implications" of the new and proposed rules).
2. The GAO published its second Dodd-Frank required report about the effectiveness of conflict mineral rules, here. Given the delay in implementing the rules, the GAO second report still doesn't really have anything to say. But the report is 47 pages. Its conclusion: it's not clear smelter certification programs will be reliable because the DRC is a mess and nothing is secure or easy to track; the rules may impact even companies that aren't public; and the DRC is a horrible, horrible place. On another note, the National Association of Manufacturers filed its notice of intent to appeal the court ruling upholding the conflict mineral rules, see here: still likely too late to affect a public company's need to file its first report. In contrast, the SEC has apparently decided not to appeal the court decision that struck down its resource extraction disclosure rules and, instead, to re-write them. See here. And, finally, even while many wring their hands wondering why going public seems so unappealing these days, some suggest (see, e.g., here) that social legislation through burdensome disclosure is just getting started. (Um . . . connection?)
3. The SEC approved NYSE rules that allow a one-year grace period for IPO-companies to develop an internal audit function (or outsource the function), here. Note that Nasdaq and other exchanges do not have the same requirement; Nasdaq withdrew its prior proposal requiring an internal audit function after some expressed concerns about its cost but plans to resubmit the proposal (see here).
4. And, finally, some partial good news. According to Audit Analytics recent report, audit fees dropped in 2012 as a percentage of revenue for accelerated filers (see here), although non-audit fees have increased slightly.

__________________________

August 14, 2013

1. As forecast, there is no shortage of law firm memos describing Regulation D changes, including the final rules eliminating the general solicitation ban (here) and prohibiting "bad actor" participation (here) and the proposed changes to the Regulation D offering process (here). On the theory that later published summaries have pilfered all the good material from earlier summaries, some recent materials are here, here, here and here. Our own presentation outline on the pending changes, along with a spiffy version of Regulation D that shows how it will and may change, is here. The final rules are effective September 23, 2013, which is the same day the comment period expires for the proposed rules. It's not clear whether the SEC will adopt the proposed rules on September 23 and whether they will be immediately effective, but that must at least have been its goal. A letter from SEC Chair White that suggests transition guidance may be forthcoming is here. Cautious issuers will wait for the offering process rules to be adopted before plunging ahead with general solicitations.

   The proposed SEC process rules are controversial, and some have gone from twerking¹ at the prospect of unfettered money-raising through general advertising to fretting that restrictions on the offering process make general solicitations less appealing and worrying that mistakes will ruin the ability to use Rule 506 for one year, which is a very long time in the life of many start-up companies. Members of Congress have lobbed opposing comments to the SEC to shape the rules. For example, some pled for the advance Form D filing before the rules were proposed (here), and others suggest that advanced filing and other requirements are illegal (here).

   Other items and thoughts related to the new rules:

   • The SEC rules suggest lawyers could help a company certify an investor's accredited investor status, a fact-based inquiry that centers on how much money a person has or makes. A proposed form is here. It's not clear why the SEC calls out lawyers to make factual inquiries, aside from a generalized notion that lawyers are ubiquitous and smart, and that ethics rules and concerns about legal opinions may lead them to conduct an adequate investigation.
   • The SEC updated its report on the use of Regulation D in capital markets, here.
   • Nothing in the SEC rules or proposed rules suggests that failing to timely file a Form D affects the exemption with respect to which the Form D should have been filed. In other words, the hammer in the new rules is barring future reliance on Rule 506, not tagging you with a violation of the Securities Act for your current use of the exemption. See the SEC's CDI 257.07, here.
   • Failing to timely file means you can't rely on Rule 506 for one year, even in an offering for which you do not make a general solicitation (a Rule 506(b) offering). Because Regulation D is an interpretive rule and the Form D has always been considered a notice filing – one that many don't make – it's not clear how this ban will actually affect Rule 506(b) offerings. Probably many more Forms D will be filed, but there could be more reliance on Section 4(a)(2) (before the JOBS Act, "4(2)") of the Securities Act if a filing is missed, leading to fewer late-filed Forms D.
   • The enhanced accredited investor investigation only applies to general solicitation offerings under Rule 506(c). It makes sense you would need to more closely vet investors responding to a general solicitation. Although the circumstances of a Rule 506(b) offering are fundamentally different, issuers may nonetheless begin to more rigorously scrutinize investor status in Rule 506(b) offerings to shore up their "reasonable belief" that an investor is accredited, the standard under Rule 501.
   • We predict "D&O Questionnaire" type documents will become a regular component of Regulation D offerings to document that no bad actors are involved.
2. Those hoping the SEC's conflict minerals rules would go the way of its resource extraction disclosure rules (see the June 12, 2013 ICYMI, here) were disappointed last month when a U.S. District Court granted the SEC's summary judgment motion to dismiss the suit challenging these rules, here. In concluding that the SEC did not act arbitrarily or capriciously, the court favorably noted the SEC statement that it isn't responsible for second-guessing Congress's determination that the rules would promote peace in the Congo. The court also held that the SEC sufficiently discharged its duty to consider the rules' impact on efficiency ("disclosure will help investors in pricing the securities … subject to the [rules]," "could improve informational efficiency," and could "divest capital away from other productive opportunities"), competition (public companies "could be put at a competitive disadvantage with respect to private companies that do not have such a [reporting] obligation," and the rules "may provide significant advantage to foreign companies that are not reporting in the United States") and capital formation (the SEC "[did] not expect that the rule would negatively impact prospects of the affected industries to the extent that would result in withdrawal of capital from these industries"). In other words, the rules may be bad for U.S. public companies, and we've considered that, but that's what Congress said to do. The court also did away with the plaintiff's free speech argument, which frankly sounded like a stretch to begin with. All of this means, of course, that those hoping this would all go away should be in a bit of a panic to ensure they are able to make the required conflict mineral disclosures. Any reversal on appeal likely won't be made before the May 31, 2014 disclosure deadline. PWC issued a report on "How companies are preparing" for new disclosures, or failing to do so, here.
3. Speaking of regulations that many wish would go away, note reports that the SEC may act "in the next month or two" to propose the pay disparity disclosure rules required by Section 953 of the Dodd-Frank Act, here. Depending on what you read, these have been delayed either because "corporations" continue to keep down the little guy or because they are silly and the SEC has had better things to do. Our view – it's because they are silly: calculating average pay is expensive and burdensome, and its disclosure has no readily apparent benefit. Guess what? Average public company employees already know what they make compared to the CEO. And (this is just a guess) it will take more than this additional disclosure to embarrass a CEO into taking less.
4. The mention of Dodd-Frank rules caused us to look up, just for fun, this progress report (here) on Dodd-Frank, now three years after it was enacted. 39% complete! Yahtzee!
5. Your opportunity to complete ISS's policy survey, and to help shape its voting policies, has arrived! It is here. (And only a cynic would view ISS's annually shifting view on what constitutes good corporate governance as merely an attempt to stay relevant and in business. For shame.)
6. And finally, the PCAOB proposed new auditing standards to "enhance the auditor's reporting model." Its press release is here, a fact sheet is here, and the proposal is here. FEI's summary of the proposal is here.
   ---------------
   ¹A lewd dance. Your objections to the use of this term in this publication are noted in advance.
    

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July 10, 2013

1. Brace yourself for an onslaught of law firm alerts following the SEC's elimination of the ban on general solicitations under Rule 506 and Rule 144A, here. In connection with the new rule, the SEC adopted a final rule, here, disqualifying "bad actors" from making Rule 506 offerings and proposed rules, here, intended to enhance the SEC's ability to evaluate market practices and to address concerns with general solicitations, including proposals to require pre-solicitation Form D filing and a closing amendment, submission to the SEC of solicitation materials, and disqualification of an issuer from relying on Rule 506 for a year if it misses a Form D filing. The SEC's news release, which includes links to "fact sheets" about the new and proposed rules, is here. Recall that the SEC was instructed by the JOBS Act to adopt rules removing the ban within 90 days. Enactment today means the SEC was off only by 371 days. Some, apparently including the SEC, speculate that the SEC lost the ability to enforce the general solicitation ban on July 5, 2012, the 91st day after the JOBS Act was signed. See here. Despite that, the new rules become effective 60 days after publication in the Federal Register, which also is the comment period for the proposed rules. Among other things, eliminating the general solicitation ban makes still pending crowdfunding rules under the JOBS Act even less useful and interesting. (News Flash: They were never going to be very useful.)
2. The SEC's resource extraction disclosure rules, enacted under Dodd-Frank and which required disclosure of payments to foreign governments, were tossed out by the U.S. District Court for the District of Columbia a few days ago. See here. In determining that the rules were arbitrary and capricious, the presiding judge noted that the SEC's view that the law required public disclosure and that it couldn't consider exemptions for reports about countries, like China, where such reports are illegal, was based on shaky reasoning. Some speculate that this outcome should make the SEC worry about the fate of its conflict mineral disclosure rules, also challenged in the U.S. District Court in the District of Columbia, since "some of the arguments against the rule are similar to those in the resource extraction case" (see here). Hardly an insightful analysis, and certainly not enough for anyone to abandon efforts to comply with conflict mineral reporting requirements, but chalking up another loss for SEC rulemaking is at least encouraging for those challenging the conflict minerals rules.
3. SEC Chair Mary Jo White announced a shift to a harder SEC enforcement stance, no longer necessarily defaulting to settlements that allow "neither admitting or denying" liability. See here. Commentary on the change is here, here and here.
4. Perhaps our favorite corporate-law judge, Delaware Chancellor Leo Strine, opined that exclusive forum bylaws that require litigation relating to a corporation's internal affairs (derivative action, breach of fiduciary duty, claims under the Delaware General Corporation Law or claims under the internal affairs doctrine) are presumptively valid under Delaware law even if only approved by directors and not by shareholders. See here. A summary and commentary on the decision are here and here. Although likely to be appealed, count on resurgence in interest in this topic and a number of new bylaw amendments now that a successful defense of the provision, at least in one state, is on the books.

__________________________

June 12, 2013

1. Although we would love to believe the pending lawsuit on conflict mineral disclosure rules will prevail (to be pending perhaps for awhile, a source suggests here), we note the SEC posted 12 FAQs, addressing interpretive issues under the rules. A host of law firms have slightly condensed the already skimpy FAQs, but we note three items we were heartened to see: (1) the packaging protecting or keeping fresh your products doesn't count; (2) if you are a cruise line, your product is services, not boats; and (3) a missed or bad Form SD does not ruin your eligibility to use Form S-3. To balance things, two items we were disheartened to see: (1) "generic" components included in a product are covered under the rule if they are essential even though you presumably have no influence over what's in those components; and (2) you must include an audit report on your conclusion that minerals are "DRC conflict free" if you source them from the DRC but not if you source them from outside the DRC. (Did we say we wanted to make it harder for violent warlords in the DRC to profit from mineral sales? We meant "everyone.")
2. While the conflict mineral rules and FAQs make clear that mining ore, and related activities like smelting and shipping it, isn't "manufacturing" a "product" that subjects one to conflict mineral reporting, resource extractors have their own disclosure cross to bear in that they must disclose payments to governmental entities for the purpose of the commercial development of oil, natural gas or minerals. The SEC also published (a mere nine) FAQs about those rules.
3. Recent SEC Compliance and Disclosure Interpretations, on a hodge-podge of topics, are summarized here.
4. NASDAQ paid $10 million to the SEC to settle charges that it violated several Exchange Act rules when it mishandled trading during Facebook's IPO, including failing to comply with some of its own rules and to maintain sufficient net capital reserves. It also violated short sale rules, and pocketed a tidy $10.8 million profit, when it assumed a short position of more than 3,000,000 shares in an "error account" and subsequently covered while Facebook's early investors continued to wildly click the "I don't like" button. The SEC's blow-by-blow is here.
5. NASDAQ also withdrew its proposal to require listed companies to have an internal audit function, here, to give itself time to adequately assess comments.
6. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) released its much anticipated updated internal control-integrated framework, the framework for assessing internal controls over financial reporting. The release is announced here, an executive summary is here, FAQs are here, and a summary from Financial Executives International is here.
7. And speaking of internal controls, note the SEC's apparent effort to apply algorithmic analysis to MD&A disclosure to help identify financial fraud, see here and here. It is not without irony that our editorial staff found the linguistics studies cited in the FEI blog extremely difficult to read (as did the writer of the blog, apparently: colons are good, Christopher), but here is what we gleaned: verbose disclosure with little content is a bad sign.
8. Recall that July 1, 2013 is the date after which compensation committee adviser standards apply through NYSE (here) and NASDAQ (here) listing standards. An "adviser" includes not just a compensation consultant but also outside legal counsel and others. A compensation committee of a listed company can hire or accept advice from whomever it likes, but it must first consider the person's independence from management, including the six considerations specified in the listing standards ((1) other services the adviser provides to the company; (2) percentage of the adviser's revenue the company provides; (3) the adviser's conflict of interest policies; (4) whether the adviser has a business or personal relationship with a committee member; (5) stock ownership in the company; and (6) whether an adviser has a business or personal relationship with an executive officer). This is somewhat silly in the context of the company's general outside legal counsel, which interacts primarily with company management but which may also participate in compensation committee meetings and provide general advice to committee members about, for example, tax, corporate, accounting and disclosure obligations associated with compensation matters. But it is what it is, as they say. Practice among companies may develop as follows:
   • Annually, the compensation committee will consider the six factors, and perhaps request that its advisers, including the company's outside counsel, provide summary information that responds to the factors.
   • The committee will document in meeting minutes that it considered the factors before engaging advisers or receiving advice, and will document specifically its determination that its compensation consultant is independent.
   • The company will voluntarily disclose in its proxy statement that the compensation consultant is independent but not disclose information about others. (If the work of a compensation consultant raises a conflict of interest, proxy rules require disclosure of the nature of the conflict and how it is being addressed. In light of scrutiny of compensation consultants, negative assurance seems easy and beneficial.)
   Note too that companies should also review their compensation committee charters before July 1 to ensure they include the committee's authority to engage advisers only after considering the independence factors.

1. The SEC filed an initial brief, available here, in the lawsuit challenging its conflict mineral rules. Recall that the rules are effective now; the first conflict minerals report covering 2013 will be filed in 2014. The lawsuit claims, among other things, that the SEC failed to adequately assess the costs and benefits of the rule. In its brief, the SEC claims (and we're paraphrasing here) that, because Congress required it to adopt a rule with unquantifiable and uncertain social benefits, its hands were tied and it did the best it could. Oral arguments are scheduled for May.
2. The Stop Trading on Congressional Knowledge (STOCK) Act required a GAO report on the role of political intelligence in financial markets, which was recently published here. "Political intelligence" is information from a political source and not a reference to the intelligence of the political class. Which certainly makes this report less slapstick. A summary of the GAO's conclusion: "Beats me."
3. And speaking of cutesy acronymic laws, the Jumpstart Our Business Startups (JOBS) Act turned one year old on April 5. A few retrospectives, largely confirming that the law has been disappointing, are here, here, here and here. Although many lament that crowdfunding rules remain in limbo, we continue to believe crowdfunding won't be meaningful and that the only interesting result of the JOBS Act may be the rules allowing general solicitations for Regulation D and 144A offerings and proposed "Regulation A+"—each still pending with no firm word on timing.
4. Related to startups, but unrelated to the JOBS Act, the SEC issued a no-action letter to the FundersClub Inc., here, saying the FundersClub need not register as a broker-dealer if it sets up a website where its members, all accredited investors, can participate in Rule 506 offerings. FundersClub would make money by negotiating the terms of investments in a startup if enough members are interested. Brief commentary about the development is here.
5. The SEC announced, here, that it will not seek an enforcement action against the CEO of Netflix for violating Regulation FD by posting on his personal Facebook account that Netflix streamed 1 billion hours of content in June 2012. The SEC's press release about its decision not to act is here, and commentary on the development is here. Some revel in the stodgy SEC's recognition that disclosure through social media can be Regulation FD compliant, at least if you tell investors that's what you're doing, and eagerly await the day the SEC allows them to draft an IPO prospectus in 140 characters or less ("We sell things and make money. Usually. Investing is risky. Don't cry if you lose your shirt.") . Others lament that recognition of tweets and Facebook posts as adequate public communication is a sure sign our society is doomed. Whatever your view, note that the SEC report suggested the Netflix CEO almost certainly violated Regulation FD. So before you tweet or post, consider whether your insatiable need for attention should trump thoughtful communications about your company.
6. The law firm with, we're told, more say-on-pay plaintiff lawsuits under its belt than any other, posted a piece on "emerging trends on Say-on-Pay disclosure" and a defense of its suits (attacked "with a complete lack of context," according to the firm), here. Meanwhile, the U.S. District Court in Delaware affirmed that negative say-on-pay votes are not sufficient to attack a board's executive compensation decisions, here, and the U.S. District Court in Northern Illinois dismissed a say-on-pay suit condemned as "painting a derivative claim with a disclosure coating," here. These decisions suggest to some, see here, that these suits are almost dead.
7. Finally, in accounting news:
   • The PCAOB proposed reorganization of audit standards is here.
   • FASB issued its fifth XBRL implementation guide, each of which addresses a specific financial metric, here.

1. The normally neutral Swiss, historically unperturbed by fascists and neighboring warmongers, recently decided that who they really hate are rich executives, so they adopted a referendum requiring binding shareholder votes on executive pay. News about the referendum, which may take some time to work its way into Swiss law, is here, here, here and here. Although we haven't gone quite so far in the U.S., ICYMI noted last month the increased litigation risk associated with (inadequate) say-on-pay disclosure. Additional commentary on this topic is here.
2. Nasdaq proposed, here, a new requirement that listed companies maintain an internal audit function. This should sound familiar because the requirement mirrors NYSE standard 303A.07(c), here, which has been around for close to a decade.
3. Warren Buffet's eagerly awaited annual letter to shareholders, which many read for his insights into the world generally and some just because it's folksy, is here.
4. The joint 2013 Director Compensation and Board Practices study by the Conference Board, Nasdaq OMX, and NYSE Euronext is available here.
5. The PCAOB recently published a report that notes "trends" toward better auditing but continuing problems among smaller auditors, here, and smacked PricewaterhouseCoopers, here, for failing to remediate quality issues flagged by the PCAOB back in 2008/2009. The PCAOB published a portion of the "Part II" comments from its original reports on PWC here and here.
6. ISS may be looking at your proxy statement this year to check on whether or not you have an anti-pledging/hedging policy that applies to company insiders. A few companies have adopted or publicized policies to ward off a "no" or "withhold" recommendation on the directors ISS considers responsible for failing to adopt a policy, which might mean Governance Committee members or all directors. A few resource materials as you grapple with this:
   • ISS Updates here.
   • ISS FAQs here.
   • Law firm commentary here, here and here.
   • Sample proxy statement disclosures about an assortment of policies are in public filings here (Qualcomm Inc.), here (Hill-Rom Holdings, Inc.), here (Concur Technologies, Inc.) and here (Rockwell Collins, Inc.).
7. It is occasionally useful to be reminded (pay attention) of how good the SEC and others are at uncovering insider trading (see, e.g., here), but knowing what is actually illegal can be somewhat nuanced, as evidenced by the long-running SEC suit against professional jerk, amateur dancer, and publicity hound Mark Cuban (see here and here). Of course, it's also worth remembering that it's perfectly fine to use even obscure public information to make money and ruin iffy companies. See, e.g., here.
8. Finally, we would be remiss for failing to note the U.S. Supreme Court action in two (count 'em, two) securities law cases:
   • Amgen, Inc. v. Connecticut Retirement Plan and Trust Funds, here, resolved a Circuit Court split and lowers the bar for plaintiff classes, at least in some Circuits, by holding that allegations, rather than proof, of materiality are sufficient for class certification. Dicta in concurring and dissenting opinions by four Justices, however, leads some to speculate that the "fraud-on-the-market" theory established in Basic v. Levinson is ripe for change, which would be a basic change indeed. ("Basic". . . Really? Nothing?) Commentary on the case is here, here, here, and here.
   • Gabelli v. SEC, here, says the five-year statute of limitations on SEC enforcement actions runs from the time of the violation, not from when the SEC discovers or reasonably should have discovered the violation.

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February 13, 2013

1. A bit like the interpretive memo about "prohibited loans" under the Sarbanes-Oxley Act, joint interpretations of provisions of the Iran Threat Reduction and Syria Human Rights Act were issued by eight law firms, here, to fill the gap left by the SEC's seven new CD&Is on the rules, here. The new disclosure requirements, including a separate IRANNOTICE Edgar filing requirement, became effective last week.
2. Speaking of efforts to burden public companies and public investors with the cost of implementing U.S. foreign policy, note that U.S. Chamber of Commerce filed briefs in the lawsuit to void conflict mineral rules claiming, among other things, that the SEC did not adequately assess the costs of the rule or whether it will achieve its intended goal of curbing violence in the Congo. An overview of the lawsuit is here, and a suggestion that the rules are already having the opposite of the desired effect is here. The SEC has responded: "We believe our legal interpretation and economic analysis are sound, and we look forward to defending the rule that Congress directed us to write." (Granted, our own views may well be warping our perception here, but does anyone else sense an element of "our hands are tied, we didn't ask to write this stupid rule" to that statement?)
3. The SEC approved NYSE listing standards, here, and Nasdaq listing standards, here, that implement compensation committee rules required by the Dodd-Frank Act. A summary of the listing standards.
4. As public companies prepare proxy statements, they might heed the warning from a Wall Street Journal blog, here, that it may be worth sweating the details a bit more this year to avoid the latest strategy on say-on-pay lawsuits. Recommendations on how to prevent and defend such suits are here.
5. Time is dwindling for a public company to verify data used in ISS's new "QuickScore" rating system, which replaces its "Governance Rating Indicators." ISS posted information about the new rating system here and an overview of the new system is available here. A critique of ISS's return to a blunt instrument rating system more similar to its original governance quotient is here.
6. A few other proxy items:
   • A summary of ISS and Glass Lewis 2013 voting policy updates is here.
   • Equilar's compensation and governance summary report, in which it assesses results from last year's proxy season and previews the 2013 season, is here.
   • Georgeson's rehash of 2012 proxy proposals and voting on governance issues is available.
   • The NYSE's annual reminder to listed companies about NYSE notice and filing obligations is here.

1. Institutional Shareholder Services' 2013 proxy voting policy materials are collected here. Among other things, ISS recently posted 2013 FAQs about its peer group methodology here, executive compensation policies here and everything else here. Commentary on ISS's 2013 voting policies.
2. Nasdaq proposed to amend, here, its rules relating to compensation independence and compensation consultants to fix timing issues. A summary of commentary on the NYSE and Nasdaq rules is here. None of these is particularly interesting, but it does give us the opportunity to remind you that these rules are coming soon (see here and here). Also, remember the new proxy disclosure about conflicts of interest with compensation consultants and how they were resolved (see Regulation S-K, Item 407(e)(3)(iv), adopting release here). And, just so you have it handy and to round out proxy news, here is SEC guidance on shareholder proposals from a few months ago.
3. Speaking of proxy disclosure, a warning about the possible new plaintiff firm say-on-pay strategy, suits to enjoin shareholder meetings claiming inadequate disclosure, is here.
4. The Auditor of auditors was unhappy with results of its audit of auditor internal control audits. (Now say it five times fast.) More simply put, the PCAOB says here that accounting firms stink at assessing their clients' internal controls. More politely put: "The Board is concerned about the number and significance of deficiencies identified in firm's audits of internal control during the 2010 inspections." Note too that the SEC approved PCAOB's Auditing Standard No. 16, Communications with Audit Committees, here.
5. The SEC published its annual report about its whistleblower program for FY 2012 here. Whistleblowers from all 50 states and 49 foreign countries delivered 3,001 tips in 2012; the SEC made a single whistleblower payment of about $50,000. Some interesting items we choose to believe are true based on only casually looking at the bar charts at the back of the report and avoiding contradictory information: (1) about one-fourth of complaints fit in the "Other" category instead of a category the SEC has jurisdiction over, suggesting those whistleblowers are nuts, and (2) people in California really like to blow whistles.
6. Implementation of the JOBS Act (remember that?) limps along. "Crowdfunding" rules (which President Obama naively called "a game changer") appear likely to sit on the shelf a while longer, see here. Meanwhile, one of the few JOBS Act provisions that could significantly change things, removal of the ban on general solicitation under Rule 506 (see here), may be slowed. Reuters reports here that two Commissioners are really unhappy about it and here that, perhaps, neither was departing SEC Chairman Schapiro.
7. ICYMI's own home state of Oregon, apparently on the cutting edge of state securities law, adopted the "fraud on the market" presumption of reliance. See here. The theory is beloved by the SEC and oft-used in federal courts. Note too that the U.S. Supreme Court may have additional color to add to the theory, see here.
8. The new year always brings an immediate, nostalgic look back, and 2013 is no exception. The D&O Diary notes the top 10 D&O stories of 2012 and collects a slew of other blogger retrospectives here. Perhaps the greatest lesson from 2012: people watched a lot of stupid stuff on YouTube.
9. Commentary on the SEC's conflict mineral rules continues to trickle out, albeit more slowly than we anticipated, as people struggle with what the rules mean and how to comply. To add to your stack of resources, a recent law firm Q&A piece is here.  

2012

October 10, 2012

1. ISS released the results of its 2012 global corporate governance policy survey, which we imagine it will somehow use to formulate voting recommendation policies, here. According to ISS, executive compensation remains the top focus of investors and issuers, with risk oversight second for issuers and director qualifications third for issuers (second for investors). Also, Shearman & Sterling published its annual summary of big-company governance trends here and compensation trends here, and PWC published its annual director survey here.
2. The compensation committee listing standards published to implement SEC Rule 10C-1 are here (NYSE) and here (Nasdaq). The 58 and 97 pages the exchanges have devoted to the new standards suggests there is something interesting going on. There isn't. Most public companies already have a separate compensation committee with independent directors; hiring independent compensation consultants should be easy, and one wonders why anyone thought it was OK to rely on consultants hired by executives. The new rules won't "fix" executive compensation, whatever that means, but may provide a veneer that legitimizes ever upward creeping salaries. A recent study that suggests peer group comparison, presumably even comparisons conducted by independent consultants, is a cause for executive compensation gone amok is available here. (And honestly, stop suggesting your policy to set compensation "near the 50th percentile" is thoughtful, unique or good governance—it is the opposite of those.)
3. Litigation based on failed say-on-pay votes, essentially alleging that the shareholders saying "no" means directors aren't acting in good faith, continues to lose in court. A few recent examples are described here.
4. In JOBS Act news,
   • The SEC posted updated FAQs (nos. 42-54), here.
   • The comment period for proposed rules eliminating the general solicitation ban for Rule 506 and Rule 144A offerings expired October 5. Among the comments, the North American Securities Administrator Association, Inc.'s disappointment with the lack of clear accredited investor verification standards is here.
   • The SEC posted a how-to guide for submitting a draft registration statement here, and posted a sample letter to issuers, explaining how to transition existing draft registration statements to the new system.
5. If you're planning on an offering soon, take note of the new SEC wire instructions and fees effective October 1, 2012, posted here.
6. In auditing news, COSO published its exposure draft to update its internal controls assessment framework here. Significant, of course, because this is the framework most use.
7. Issuers continue to ponder the SEC's conflict mineral rules that, on closer reading, we are willing to characterize as "vague" and "extremely unhelpful." Among other things, the SEC refused to define "product," "manufacture" or "contract to manufacture," which are kind of important. Recent law firm summaries of the rules are here, here, here and here. The Corporate Counsel recently sponsored a conflict minerals webinar, leaving one with the impression that those who have spent lots of time on the question are really hoping the SEC is going to provide some additional guidance, because no one knows where much of this will shake out. A few notes on some fundamental questions:
   • What is a "product"? An iPhone is a product, that's easy. But what product is an airline selling? Transportation services or the seat on a plane which contains conflict minerals? Are conflict minerals "necessary" to the product of transportation services? Sure, but intuitively, an airline shouldn't have to worry about conflict minerals. But Boeing certainly does, and are airlines caught if they contract to manufacture planes needed for their fleet? How about a DVD? Arguably, the content, not the physical DVD, is the product. But you can buy streaming movies, so where does that leave you? Does it matter that the cost of the DVD is passed through to the consumer? What about a cell phone service provider? Does it contract to manufacture phones? (This one is covered in the SEC release—it depends on how much influence the company exerts over the manufacture, and if the only specification is that the phone be compatible with the company's network, you should be fine. Super helpful.) What about utility companies that sell power but also sell meters that contain conflict minerals? What if they lease the meters?
   • Is the product being "manufactured"? It's evident and generally understood what "manufacturing" means, says the SEC in its release, but then proceeds to reject specific definitions, like the North American Industry Classification System's, which would exclude "assemblers" that piece together products from components not in raw form, which the SEC believes are supposed to be captured. Does the computer system integrator who sets up your network "manufacture" the system from off-the-shelf components? Almost certainly not. But how about a company that assembles computers from purchased components? Maybe yes, but the SEC confuses this analysis by saying that the contract-manufacture of components that go into a company's product should be captured if the company exercises "enough" influence over the manufacturing process, moving you into a different mode of analysis. (But if there's a reasonable substitute for the mineral, can you claim it's not "necessary" to the function of the product to escape the rule's reach? Seems too clever.)
   • What level of influence on the manufacturing process traps you? You're not in the clear merely because you don't specify the use of conflict minerals, the SEC clearly says, but how detailed do specification need to be before you are subject to the rule? If you only specify functionality requirements and avoid delving into production detail, is that enough? (If you know the functionality is going to require a specific conflict mineral, that almost certainly doesn't help you.)
   • What about packaging? If the package is important for marketing, are you selling the packaging or just what comes in it? Packaging probably isn't captured except, maybe, when it becomes part of what you're selling (like the hard tin holding cookies that is suitable for re-gifting) or is necessary to the product, like if it keeps "fresh cookies" fresh.
   • What are people doing now to get ready to report?
     • Some are starting to budget for this, or at least to get budget requests in. Also, most are begrudgingly moving to understand the rules and risks—like the private right of action under Section 18 (filing a report that contains a false or misleading statement)—and getting buy-in at the executive and board levels to set the proper compliance tone at the top.
     • Some are engaging suppliers, and some suppliers are engaging customers, on the diligence process.
     • The smart ones are not throwing lawyers at this in a "check the compliance box" kind of way, but are preparing to ease the pain of dealing with the rules by building an internal team that knows the products and supply chain, and can deal with customers, suppliers and contract manufacturers in something less than a ham-fisted way.
     • Some external parties are working on certification processes; some issuers may be hopeful this will do some of the work for issuers.
   • Finally, is a lawsuit going to save us from this mess? Commentators aren't willing to handicap the chances here. The SEC's release specifically addressed some of the questions raised by commentators, like the U.S. Chamber of Commerce, and punted a bit on the cost-benefit analysis, which depends on how you value the social benefits. Also, because these rules are mandated by Congress, in contrast to proxy access rules, the SEC's hands are somewhat tied.

1. The SEC adopted conflict minerals disclosure rules last month on a 3-2 vote. The final rules, all 356 pages of them, are here. Conflict mineral reports on new Form SD ("Specialized Disclosure") must be "filed" by May 31 of each year beginning in 2014. The report covers calendar years, irrespective of an issuer's fiscal year, and the first report covers the reporting period beginning January 1, 2013—just three and a half months from now. Really. A few useful resources:
   • The SEC press release, here, includes a fact sheet that outlines the rule requirements.
   • A useful disclosure flowchart is here (and on page 33 of the release).
   • A Conflict Minerals Resource Center is here.
   • A sampling of the many memos summarizing the rule requirements is here and here.
   • Expect auditors in particular to start serving up systems for rule compliance. See, e.g., here and here.
   You may now start scrambling to react to the rule requirements, which likely will entail at least: (1) figuring out which of your products use tungsten, tantalum, tin or gold, whether those materials are "necessary to the functionality or production" of the product, and, if not, whether they can be replaced so you don't need to file a report; (2) if you use conflict minerals, developing a process under OECD or other appropriate guidelines (see here) to trace their sources that can be replicated and taught to responsible employees, and consulting an independent auditor to ensure your process is up to snuff.

   A few interesting changes in the final rule:

   • The report must be made as an exhibit to the new Form SD rather than as an exhibit to Form 10-K, perhaps an explicit acknowledgement by the SEC that the disclosure is weird. A draft taxonomy for the form is here. The report also must be available on the issuer's website.
   • The rules recognize the burden of compliance for users of recycled or scrap conflict minerals, who still must file a Form SD but whose minerals derived from those sources are deemed "conflict free."
   • For a two-year transition period (four years for smaller reporting companies), products may be designated "DRC conflict undeterminable" if a company can't determine whether the minerals in its products originated in a covered country or financed or benefited armed groups in a covered country.
   • The rule includes an "audit objective" to opine on whether the design of the diligence measures conforms to the OECD framework or other appropriate framework and whether the measures were followed.
   The rules continue to be controversial, and the 3-2 adoption vote reflects the dissatisfaction by some Commissioners that appropriate executive muscle wasn't flexed to, for example, exempt de minimis mineral amounts or smaller issuers, or to make rule compliance cheaper. Some question whether, despite good intentions, the rules will help or hurt people in the DRC (see Commissioner Paredes' statement, here), and, more philosophically, when the SEC's mandate to protect investors extended to saving their souls. See, e.g., here.

   As noted last month, the rules may still be subject to challenge in the D.C. Circuit Court (see here), particularly given the disparity among estimates of the rule's costs. Anticipating this, the SEC included a savings clause in the release ("such invalidity shall not affect other provisions . . . that can be given effect without the invalid provision").

2. The SEC also adopted rules regarding the disclosure of payments by resource extraction issuers, here, also on Form SD. In contrast to conflict mineral rules, these are anticipated to apply "merely" to 1,101 oil, natural gas and mining companies, and compliance costs are estimated to be "lots" less. Summaries of the rules are here and here.
3. The SEC proposed rules, here, to eliminate the general solicitation prohibition for Rule 506 offerings. General solicitation in Rule 506 offerings will be OK provided that:
   • The issuer takes unspecified "reasonable steps" to verify that purchasers are accredited investors;
   • All purchasers are reasonably believed to be accredited investors; and
   • The general conditions of Rule 506 are met, including integration principles and resale limitations.
   Although unspecified, the SEC suggests the level of necessary investigation of accredited investor status depends on (1) the nature of the purchaser and the type of accredited investor the purchaser claims to be; (2) the information the issuer has about the purchaser; (3) the nature of the offering, such as whether general solicitation was used; and (4) the terms of the offering, such as the minimum investment amount.

   The proposed rules would add a check box to Form D to indicate whether issuers used a general solicitation or general advertising in a Rule 506 offering, which presumably will help the SEC monitor how the new rules are working.

   The SEC also proposes to provide that securities may be offered pursuant to Rule 144A through a general solicitation or general advertising as long as they are ultimately sold only to persons the seller reasonably believes are qualified institutional buyers.

   The comment period for the rules expires October 5, which apparently is not fast enough for some who thought the rule should have been adopted as an immediately effective interim rule (see here).

4. Rounding out the whirlwind of Dodd-Frank-related SEC activity in the last month, the SEC published its required report on retail investor literacy here. A summary: "poor."
5. The SEC posted FAQs about JOBS Act provisions affecting research analysts and underwriters here.
6. For those who still want to hear more about the Facebook IPO, here is SEC Chairman Schapiro's response to Congressman Issa's 34 IPO-related questions, driven, no doubt, by continued bafflement that a really cool company valued well beyond its financial prospects could trade down after its hyped IPO. Glaringly absent questions include: Would disclosure that no Facebook products contain conflict minerals have rallied the stock price? Does it matter that that's because Facebook doesn't produce anything?
7. The PCAOB adopted Auditing Standard No. 16, here, to improve communications between auditors and the audit committee. A summary is here. Assuming the SEC approves the new rules, they will be effective for fiscal years beginning on or after December 15, 2012. You might dust off your audit committee charter to see if updates are required.

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August 15, 2012

1. Next week, the SEC will consider, among other things, the adoption of Conflict Minerals disclosure rules, which have been in the works for two years. For those who can't wait, a sneak peek at differences between the proposed rules and the draft final rules, from The Wall Street Journal, is here (subscription required). Of course, "final" doesn't necessarily mean final, since the rule-making process will almost certainly be challenged, à la proxy access, by business groups. See the U.S. Chamber of Commerce's threatening letter to that effect here. While we wait for the drama to unfold, note the useful resource center on Conflict Minerals here.
2. Conflict Minerals requirements reflect the occasional penchant of Congress to inefficiently push public policy by requiring embarrassing disclosure by public companies and making self reporting a must, as it has done with adoption of the Iran Threat Reduction and Syrian Human Rights Act, here. The Iran THRESHR Act, as we hope it will come to be known, requires a public company to determine whether it or any affiliate has knowingly engaged in impermissible activities and, if so, to describe what it did in detail in its periodic reports and in a separate report the SEC will post on its website and forward to the President and Congress.
3. Insider trading is what we in the securities profession like to call "bad." Fortunately, it also is sometimes amusing. Here, for example, is an SEC enforcement action that describes a Bristol-Myers Squibb executive's Internet research for tips to avoid getting caught before engaging in insider trading. That probably didn't help his defense. Nor, presumably, did recovery of Amazon recommendations based on his purchasing history--"You might also enjoy Insider Trading for Dummies, The ABC's of Avoiding Prosecution by the SEC, and The Count of Monte Cristo." (Yes, we made up that last part. But honestly, how is that less ridiculous than an Internet search?)
4. The SEC posted a video explaining to potential whistleblowers how the SEC processes tips, here. Nowhere in its explanation does it suggest that an employer's Internet search of "how to punish whistleblowers without getting caught" is a fact it will consider in its process, so thank goodness we've already educated you with the entry above.
5. The polls are now open for ISS's latest governance survey, here: your chance to influence ISS policies and voting recommendations. In other proxy news, Broadridge published its 2012 proxy review here.
6. Finally, an M&A update on private equity purchases of public targets, here, notes lackluster activity in the first half of 2012, but according to PwC signs point to an uptick in the second half of 2012 (see here).

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July 12, 2012

1. The SEC adopted final rules late last month, here, that:
   • Direct securities exchanges to prohibit the listing of a company with no compensation committee comprised of at least three independent directors. In determining independence, the exchanges must "consider" the source of the compensation paid to the member and whether the member is affiliated with the issuer. Also, the exchanges must require that compensation committee charters reserve the authority to hire independent compensation consultants, legal counsel and other independent advisers. Exchanges may adopt rules in time for the 2013 proxy season.
   • Require disclosure of the compensation committee's assessment of compensation consultant conflicts and how any conflicts were resolved. This will result in more clutter in 2013 proxy statements.
2. The SEC also announced plans to:
   • Consider at an open meeting on August 22 (see here) adoption of conflict mineral rules, resource extraction payment disclosure rules, and the elimination of the Rule 506 prohibition on general solicitation. Public companies likely are dreading adoption of the first two; private issuers are likely salivating over the last one and maybe worrying a little about possibly enhanced requirements to confirm a funding source's "accredited investor" status.
   • Soon allow (see here) confidential registration statement filings through EDGAR for emerging growth companies and foreign private issuers.
3. In contrast to its six-week advanced notice of rules to be considered in August, no doubt issued as a "get off my back" to Congress and maybe as a reaction to private lawsuits demanding rule-making action, the SEC changed its Dodd-Frank timeline to lump all pending rules under "pending action" rather than under estimated adoption windows, here, presumably to de-emphasize all the missed deadlines.
4. When it does move on new rules, expect the SEC to amp up its economic analysis section, even of Congressionally-mandated rules, as outlined here, to avoid proxy access-like challenges à la Business Roundtable and Chamber of Commerce v. SEC, here.
5. In accounting news:
   • FASB abandoned its controversial efforts to update accounting for loss contingencies. The agenda for the meeting where this was decided.
   • There are materials from the PCAOB's second meeting on auditor independence and audit firm rotation.
6. We maintain there are really only two things in the JOBS Act with the potential to significantly change capital raising: the Regulation D changes the SEC will consider in August and the pending "Regulation A+" exemption. While you wait for the SEC to propose rules on the latter, consider reviewing the JOBS Act-mandated study on factors that may affect trends in Regulation A Offerings, which led to a whopping one Regulation A offering in 2011, here. Spoiler alert: it's because $5 million isn't much, the costs of qualifying the offering with the SEC and state regulators are high, and Regulation D is better. Regulation A+ rules will raise the amount to $50 million and remove state regulators from the equation, which is helpful. Whether it will prove to be a useful exemption remains to be seen.
7. FINRA published a notice, here, requesting comment on proposed regulation of crowdfunding activity.
8. Last month, we noted a few summaries of proxy season results and trends. A few more are here, here and here.
9. Proxy result watchers continue to devote much ink to advisory shareholder votes on executive pay. For an international perspective on say-on-pay, with a focus on the U.K.'s pending requirements for binding shareholder votes on director compensation.
10. Finally, July 2 marked the 10-year anniversary of the Sarbanes-Oxley Act. A few retrospectives are here and here. A tune that remains catchy after all these years is here.

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June 13, 2012

1. At the mid-way point of the 2012 proxy season:
   • Much has been written about the 2012 "shareholder spring" revolt against executive pay, and each nay on pay vote is noted by compensation wonks (about 46 so far this year), although as this mid-season summary notes, the rejection rate is only 2% for large accelerated filers, about the same as last year.
   • A useful analysis of "pay for performance" trends, with a discussion of proxy disclosures, ISS and Glass Lewis voting policies and analytics, and recommendations for public companies, is here.
   • An analysis of how groups like ISS affect mutual fund voting is here .
   • Although the SEC has no articulated plans to revive its proxy access rules, which were invalidated in July 2011 by the D.C. Circuit Court, ISS highlights action on the private ordering front here.
2. After the initial furor, JOBS Act-related news has died down in the last month. Only two items:
   • The SEC established a secure email system for emerging growth companies and for foreign private issuers to submit confidential registration statements for review. Instructions for the system, and an update for foreign private issuers, are available here.
   • We've heard that the SEC has insisted in the IPO comment process that emerging growth companies disclose the risks to investors of scaled JOBS Act disclosures – or as we like to say, the risks of complying with the law. 
3. Last month, we suggested JOBS Act rulemaking would likely distract the SEC from its remaining Dodd-Frank rulemaking. Non-profit Oxfam America filed a lawsuit in Massachusetts U.S. District Court requesting that the Court order the SEC to issue final mineral extraction disclosure rules. The court filing is here and commentary is here. Mostly, though, we just find this amusing. Hard to believe it will go anywhere.
4. In SRO news,
   • FINRA proposed, here, an immediately effective pricing change that increases fees from 0.01% to 0.015% of the proposed maximum offering price and that makes automatic shelf registrations by well known seasoned issuers subject to a maximum fee of $225,000 rather than $75,000. New fees apply July 2, 2012. (So make those shelf registrations now, WKSIs!)
   • Nasdaq proposed changes to director independence rules, here.
   • The NYSE proposed listing standard adjustments, here, to accommodate emerging growth companies that take advantage of the requirement to present only two years of audited financial statements.
5. A curse, or blessing perhaps, of monthly client alerts is that for some topics anything that can be said has been said already by the media or by bands of white-shoe lawyers shackled to their desks until they produce a topical alert for clients. So it is with Facebook's IPO, not only one of the largest, but almost certainly the most-discussed, IPO in U.S. history. If you're already bored, stop reading. For those blissfully oblivious: Facebook, the world's preeminent social networking site, went public at $38 a share and a $104 billion valuation, traded up initially, then fell about 18% to close on day two at $31 (see here). Pundits lament the failure of the IPO and cast blame on Facebook executives (for being greedy and pricing shares too high), lead underwriter Morgan Stanley (initially for being greedy and pricing shares too high, subsequently for selectively communicating changed forecasts during the roadshow), and Nasdaq (for a sloppy initial trading process). At least one purported class action suit has followed, as have threatened suits and investigations from state regulators and from the SEC, which obliquely noted it will examine "issues" related to the offering. There have been so many stories about Facebook's IPO, it's hardly worth providing links, but here is a D&O Diary summary with additional links. And here are some general thoughts:
   • Who cares. (Or in Facebook speak, .) The rare investors given first crack at Facebook shares didn't make a killing in the first three days of trading. Boo hoo. Why not laud Facebook and its CFO, who allegedly had a firm hand on the IPO helm, for making loads of money for pre-IPO investors and for building an enviable cash war chest for company growth?
   • Facebook makes lots of money, mostly on ads and increasingly by taking a (big) cut of online purchases made through Facebook, but not $100 billion valuation worth of money. The value was based on the potential to make money off the brand and the hundreds of millions of Facebook users. A modest downgrade in projected second quarter earnings during the road show goes out in the wash of the fundamental valuation methodology the investors bought into—made up numbers based on assumptions about Facebook's ability to monetize its huge user base.
   • Facebook didn't hide that making money for investors isn't its top priority. Nor did it hide that Mark Zuckerberg maintains control. Zuckerberg, surely to the chagrin of Morgan Stanley, went so far as to include a letter to investors in the prospectus stating, "Facebook was not originally created to be a company. It was built to accomplish a social mission—to make the world more open and connected. We think it's important that everyone who invests in Facebook understands what this mission means to us, how we make decisions and why we do the things we do." Or phrased differently: "Listen, dude, I'm in charge and I don't care about investor returns."
   • The reputational harm Facebook may suffer from the failed IPO isn't likely to come from users. If you are interested in finding out how fat your high school flame is, or in letting 2,000 of your closest friends know what kind of muffin you just ate, you're likely unconcerned with Facebook's disappointing public trading price. But reputational harm could matter to advertisers, as could the additional publicity about how Facebook hasn't perfected advertising to mobile device users.
   • Facebook's IPO may give institutional investors more leverage in lowering offering prices in IPOs in the near term, perhaps even for "old economy" companies that actually make and sell things and whose future performance is tied more rationally to financial metrics. A win for the privileged few with a seat at the road show presentation, but a loss for issuers and pre-IPO investors. An IPO off-ramp event, as it were. (As if we needed that – see here.)
   • Mark Zuckerberg is almost certainly insufferable. He created Facebook in his Harvard dorm room eight years ago and built it into a dominant global company, likely being told the entire time how awesome he is. Let me be clear: I hate anyone younger and richer than I am just as much as the next guy, and yes, appearing in a hoody at investor presentations and occasionally not at all shows a lack of maturity and manners. So? (Did you not read his letter to investors?)
6. Finally, because so much has been written about Morgan Stanley's "selective disclosure"to its customers, and how unfair it is that only some knew about the downgrade of Facebook's Q2 earnings forecast, a few notes on analyst reporting rules, and some handicapping of plaintiff's chances against Facebook and its underwriters:
   • Morgan Stanley's insistence that its IPO process adhered to standard practice is true. It just is.
   • "Selective disclosure" rules under Regulation FD (Fair Disclosure) don't apply during the IPO process but at the IPO when a company becomes an issuer.
   • Morgan Stanley's oral communications to large customers were intended to avoid publishing a "research report," which is a no-no under FINRA Rule 2711, here, and to make sure it wasn't issuing a "free-writing prospectus" that could be required to be publicly filed. (Note that the JOBS Act largely eliminated research report bans for emerging growth companies, which Facebook isn't. Note too that because most investment banks have signed the Global Research Settlement, see here, they are contractually bound to similar provisions about not publishing research reports.)
   • Analysts and investment bankers are largely segregated through the offering process, mostly to ensure that geeky analysts aren't influenced by charismatic investment banker types.
   In lawsuits, plaintiffs will hang their hats on the prospectus's failure to disclose material information, including the failure to disclose "known trends" likely to materially affect revenues or income under Item 303 of Regulation S-K (which was the subject of a recent court decision here). Is a "known trend" a modest downgrade in one quarter's earnings that wasn't in any rational way connected to the IPO price? Please.

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May 9, 2012

You can view archived issues of this alert, as well as other alerts, here. If you have comments, email us at MissedIt@stoel.com.

1. The SEC scrambled last month to react to the immediately effective portions of the JOBS Act, including hastily assembling some FAQs, here, to guide emerging growth companies in registration. Some "IPO on-ramp" provisions of the JOBS Act that are the subject of the SEC's FAQs may be useful, but it's difficult to imagine they will lead to much of a bump in IPO activity generally. (Pending "Regulation A+" rules, which the JOBS Act requires the SEC to implement "sometime," will exempt offerings of up to $50 million and may be a legitimate alternative for small companies who need some significant cash and are willing to subject themselves to some SEC regulation but not ready to become full-blown public companies.)
2. Crowdfunding still seems to get people in a tizzy, which undoubtedly led the SEC to warn, here, that the new crowdfunding exemption requires rule-making. So, if you're crowdfunding right now, you're breaking the law. Stop it. A litany of reasons we suspect crowdfunding won't be useful to most:
   • all fundraising is limited to $1 million per year, including crowd-sourced funds (what happens if you run out of money?!?);
   • unlike every other exempt offering, employees may not conduct the offering—it must go through a broker or crowdfunding portal, which also will be regulated and will charge yet unknown fees;
   • no advertising except for references to the funding portal;
   • some public disclosure is required, including audited financials for offerings over $500,000 and annual reports to the SEC with yet-to-be-determined content;
   • administrative expense of tracking many shareholders;
   • higher risk that unsophisticated shareholders will be more upset when they lose all their money and more likely that they will sue directors or others;
   • may be tougher to get follow-on financing from venture capitalists, who may not want the headache of finding room in your "crowded" capital structure;
   • for those with new product ideas, like, say, smart phone apps, contingent advanced sales may offer an alternative to crowdfunding (see, e.g., here); and
   • lingering fear that companies that can't get accredited investors interested may not be worth investing in, or are scams (see, e.g., here).
3. Another reason crowdfunding may not be worth the time and effort is pending rules that eliminate the general solicitation prohibition under Rule 506 of Regulation D if sales are made only to accredited investors. Presumably, that means all kinds of people, including company executives, will be able to say all kinds of stuff about your company, its products and the offering on a website and accept money directly after determining the investor is accredited under whatever verification requirements the SEC adopts. Offerings exempt under Regulation D are already the dominant method for raising money in the U.S., according to a recent study by the SEC's Division of Risk, Strategy and Financial Innovation published, here. Under Regulation D, Rule 506, which allows sales to an unlimited number of accredited investors, was used over 90% of the time. With the elimination of the general solicitation requirement, that number may edge up, despite the reduction of accredited investor ranks when Dodd-Frank excluded the value of one's primary residence from the net worth test a few years ago (see conforming changes to SEC regulations here).
4. A report on recent say-on-pay results for the Russell 3000 is here. Heartening to public company executives is that nearly all issuers get approval of pay practices. But at least some of the outliers tend to be interesting, as evidenced by the amount of internet space devoted to CitiBank's failed say-on-pay vote last month, which prompted it to release a statement, here. The possible reasons for Citi's unexpected no vote are described here.
5. Also of note, Glass Lewis (the other institutional shareholder service) announced a portal through which issuers may engage with GL on governance topics, here.
6. With all the hullabaloo about the JOBS Act, recall that the SEC is still behind in Dodd-Frank rule-making, in some cases (conflict minerals) blessedly so. A progress report on rule implementation is here.

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April 12, 2012

1. It seems like the only thing anyone was writing about in the last month was the Jumpstart Our Business Startups, or JOBS, Act. President Obama signed the fast-tracked Act on April 5. The internet teems with information. Some is collected below.
   • The trim 22-page law is here.
   • Commentary on how the sausage got made is here and here, and a refresher on how this all works is here.
   • A brief summary of its seven titles:
     • Reopening capital markets to emerging growth companies. Those with annual revenues less that $1 billion are "emerging growth companies" and remain so for five years after an IPO. For recent IPOs, that rounds to "everyone but Facebook." Intended to provide an IPO on-ramp, these provisions reduce executive compensation disclosure, defer shareholder advisory votes on executive pay, defer internal control audit attestations, allow (initially) confidential submission of IPO registration statements, require only two years of audited financial statements, ease "gun-jumping" communication rules with sophisticated buyers to test the waters for an IPO, and remove the ban on research reports and allow analysts to communicate with the company. These provisions were effective when the Act was signed.
     • Access to capital for job creators. General solicitation will be OK for private placements, as long as you don't sell to anyone but accredited investors or qualified institutional buyers. There is no mandated timeline for SEC action. 
     • Crowdfunding. It's OK to raise up to $1 million over the internet from complete strangers who aren't accredited investors and don't give you more than $2,000 (or more depending on the investor's income level), and as long as you do it through a registered broker or funding portal. The rules shift compliance with disclosure obligations to brokers and funding portals, possibly bringing risk that will be reflected in fees and may make raising $1 million pretty expensive. Among other requirements, participating investors will have to acknowledge in writing they are likely to lose all their money. The SEC is to adopt implementing rules within 270 days. (Yeah, right.)
     • Small company capital formation. This "Regulation A+" provision requires the SEC to expand Regulation A, or adopt a new regulation, to exempt public offerings of $50 million from registration under the '33 Act and generally to make it easier to complete a small IPO. There is no mandated timeline for SEC action.
     • Private company flexibility and growth. A company may have up to $10 million in assets and up to 2,000 shareholders or 500 non-accredited shareholders before it is forced to become "public" and begin periodic reporting under the '34 Act. These provisions were effective when the Act was signed.
     • Capital Expansion. Banks also can have 2,000 shareholders before being forced to become public.  These provisions were effective when the Act was signed.
     • Outreach on changes to the law. The SEC must inform select groups about the changes to the law.
   • The SEC has let emerging growth companies know they may submit confidential registration statements to the SEC as required by the Act, here, and published FAQs on the submission process, here. A registration statement and amendments must be made public 21 days before the IPO roadshow.
   • The SEC also released FAQs on changes to the requirement for '34 Act registration and deregistration, here.
   • Also, the SEC opened a portal for public comment on the Act, here, even though it hasn't yet proposed implementing rules, and likely will post all JOBS Act-related materials here.
   • A group of 14 law firms published a collective view of the general solicitation exemption, here, noting that everyone needs to calm down and wait 90 days for the SEC rules that implement the Act's exemptions on general solicitations.
   • Some useful references:
     • General law firm summaries are here and here.
     • Goldman Sachs' side-by-side summary of prior and changed law is here.
     • Implementation schedules by provision are here and here.
     • The implications of the Act for compensation disclosure and practices are summarized here.
   • Detractors and proponents of the Act are many, and none are shy about publishing views, with the debate generally as follows:
     • Point: Relief for start-ups will encourage capital formation and lead to more jobs. (See here.)
     • Counterpoint: No it won't. (See here and here.) It will just make fraud easier. (See here, here, here, here, and here.)
     • Supporting arguments for your view of the Act, whatever it may be, are encapsulated in a top five pros and cons list here.
2. Expect a crowd to start offering crowdfunding services and proposing governance structures for the nascent fundraising process. A new crowdfunding association has commenced, here, and momentum builds for a crowdfunding SRO, like the stock exchanges, that would interact with the SEC in establishing rules of the game, see here and here. Given the $1 million fundraising limit and the regulatory burden likely to be imposed on brokers and funding portals, it remains to be seen whether the risk/reward pencils out for intermediaries and whether the cost of raising $1 million through crowdfunding will be worth it for start-ups, which might prefer to solicit investors broadly under revised Regulation D but limit sales to accredited investors.
3. Lost in the shuffle of the JOBs Act, the STOCK Act, here, was also recently signed into law. The law prohibits trading by members and employees of Congress on the basis of material, nonpublic information received because of their position, and requires disclosure of stock trades and other information, including, bizarrely, personal mortgage information, by members of Congress. An online reporting system open to the public is to come. Information about the Act is here and here. (Is anyone else weary of the cutesy bill titles that have seemingly become the norm? Jumpstart Our Business Startups (JOBS) Act? Stock Trading on Congressional Knowledge (STOCK) Act? Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure (CROWDFUND) Act? Ugh. Enough.)
4. Related to insider trading, the U.S. Supreme Court rejected indefinite tolling of Section 16(b) claims based on failing to make Section 16(a) filings, here. Commentary on the decision is here.
5. The PCAOB has begun posting materials from its roundtable discussions about auditor independence and mandatory auditor rotation, here.
6. Two more courts have ruled against plaintiffs in "say-on-pay" spawned fiduciary duty breach actions, Weinberg v. Gold in Maryland, here, and Witmer v. Martin in California, see here). (Recall that we reported on the first dismissal of such a case back in February, but in case you forgot, see here.)
7. ISS established a feedback review board, see here, to facilitate communication with the ISS and for you to tell it what it screwed up in your governance rating or voting recommendation.

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March 14, 2012

1. It has been a quiet month at the SEC. The only action on Dodd-Frank implementation was its joint release with the CFTC of identity theft red flags rules, here, which, between you and me, doesn't look very interesting. (Note that as the second anniversary of Dodd-Frank nears, regulators have met only 99 of 400 rulemaking requirements. See the progress update on Dodd-Frank implementation here.)
2. A few other modest SEC items to note:
   • A letter to the SEC from several U.S. Senators criticizing elements of "draft final" conflict minerals rules spurred at least one commentator, here, to suggest the long-anticipated (dreaded?) adoption of those controversial rules is imminent. Note that the draft rules require a conflict minerals report in a company's second annual report after rule adoption, giving companies at least some time to absorb the rules and implement a system for gathering supply chain information for the report.
   • A few summaries of the SEC Staff's reactions to no-action requests about excluding shareholder proxy access proposals from a company proxy statement are here and here. It does not appear likely, at least in the short term, that the SEC will re-engage on proxy access rules, despite efforts by some to get this back to the fore (see, e.g., here).
   • Momentum appears to be gaining for mandatory public company disclosure of campaign contributions. See, for example, here, here, here, and here.
3. PCAOB proposed a new auditing standard, here, relating to disclosure of related party transactions that Towers Watson speculates, here, could involve auditors in executive compensation decisions.
4. There's lots of talk in the air about "public benefit corporations," a new-fangled form of entity, sort of, that requires directors to consider broader societal goods beyond narrow shareholder value. A useful discussion of benefit corporations from a D&O liability perspective, with links-o-plenty to other information, is here. Another overview is here. Seven states have adopted some variation of the Model Benefit Corporation Legislation, here, and several more are considering adoption, bolstered by an increase in ESG-driven investing (that's "environmental, social and governance"). An entity run by directors not strictly beholden to shareholders or, presumably, to state attorney general offices as are non-profits? What could possibly go wrong?
5. Finally, Weil Gotshal, which apparently has a lot of time on its hands, has put together a comparison of Corporate Governance Principles and Guidelines from a variety of groups, here, including the American Law Institute, the Business Roundtable, the NACD, the OECD, CalPERS, the Council of Institutional Investors and others.

1. A smattering of bylaw amendments purporting to make Delaware the exclusive venue for shareholder derivative suits and claims of fiduciary duty breaches followed Vice Chancellor Laster's suggestion in a 2010 case that such provisions would be enforceable. A coordinated smattering of lawsuits challenging the provisions on due process grounds has followed. A summary with links to a smattering of additional information is here.
2. As noted in a New York Times article, here, insurance regulators in California, New York and Washington have adopted rules requiring insurance companies to disclose how they assess and respond to climate change risk. Among others that pushed for the requirement were Ceres and the California State Teachers' Retirement System, also proponents of the SEC's release of climate change guidance in 2010. (Remember that? Here?) Ceres' description of the shocking inadequacy of climate change responses by insurers is here. Captain Renault's shocked discovery that gambling was occurring at Rick's Café Américain is here.
3. In contemplation of the upcoming proxy season, note:
   • ISS updated its FAQs about how it assesses executive compensation policies, here.
   • The NYSE notified brokers, here, of corporate governance items it considers "non-routine" that brokers cannot vote on without instruction from beneficial owners. That means it may be harder for public companies to garner approval for "proposals to de-stagger the board of directors, majority voting in the election of directors, eliminating supermajority voting requirements, providing for the use of consents, providing rights to call a special meeting, and certain types of anti-takeover provision overrides."
   • A summary of new compensation disclosures for 2012 is here.
   • The SEC posted a new CDI about appropriate descriptions of say-on-pay proposals in proxy materials, here; notably "[t]o hold an advisory vote on executive compensation" doesn't work.
   • ISS posts a tally of 2012 proxy access proposals here. (Unless you've assiduously avoided reading these alerts, you know these represent the first "private ordering" of proxy access practices following negation of SEC proxy access rules by the D.C. District Court. And did you notice we provided this same link last month? Honestly, pay attention. We're not putting these out there for our health.) Some speculation about whether companies will move to adopt proxy access proposals to fend off more onerous shareholder-proposed versions is here.
4. The first (of many, we expect) dismissal of a "say-on-pay" lawsuit is here. A summary of the case and commentary are here.
5. KPMG's discussion of the increased complexity and volume of public disclosure and a handful of suggestions to decrease disclosure overload are here. Speaking of which, note that Forms 10-K (Part I, Item 4) and 10-Q (Part II, Item 4) should now include headings for "Mine Safety Disclosure" (formerly, "Removed and Reserved"). The SEC estimated only 100 companies will have anything to disclose under the mine safety disclosure rules, not to be confused with pending conflict mineral disclosure rules. Also, a summary of financial disclosure challenges in 2012 is here.
6. Finally, a few litigation items.
   • A useful collection of links to information about M&A litigation activity, which increased in 2011, is here. Perhaps particularly relevant given speculation that 2012 is poised for an uptick in M&A activity (see here).
   • A review of 2011 insider trading litigation is here.
   • A synopsis of noteworthy 2011 Delaware court decisions is here.

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January 11, 2012

1. The SEC adopted two 2011 rules just under the wire: mine safety disclosure rules, here, and the revised accredited investor definition, here. Each of these was made effective by Dodd-Frank itself, so consider the final SEC rules simply housekeeping and fine-tuning. The SEC also updated its Dodd-Frank rulemaking schedule, here, which now estimates activity within six-month spans rather than more specific periods. It, and other regulators, has missed most of the congressionally mandated implementation deadlines, see here. Here's the slate of SEC corporate governance action in the first half of 2012, by Dodd-Frank section:
   • §952: Adopt exchange listing standards about compensation committee independence and factors affecting compensation adviser independence; adopt disclosure rules regarding compensation consultant conflicts.
   • §§953 and 955: Propose rules for disclosure of pay for performance, pay ratios, and hedging by employees and directors.
   • §954: Propose rules about recovery of executive compensation.
   • §1502: Adopt rules for disclosure related to "conflict minerals."
   • §1504: Adopt rules for disclosure by resource extraction issuers.
   Chairman Schapiro also outlined some corporate governance areas of SEC focus in 2012, here, including proxy plumbing and beneficial ownership reporting changes.
2. Schapiro's speech did not suggest the SEC will be going back, yet again, to the drawing board on proxy access; she emphasized that private ordering has the potential, over time, to improve shareholder access. ISS is keeping a tally of proxy access proposals for 2012 here.
3. ISS released a white paper about how it will evaluate company pay-for-performance practices, here, and thus when it will ding board compensation committee members for fostering a "pay for performance disconnect."
4. ISS also released an update to its Governance Risk Indicators (GRId), a scorecard to identify risky governance practices, here. Public companies may review their scorecards and make corrections between February 20 and 23.
5. In the latest in the fierce battle for listings, the SEC approved Nasdaq's ability to give away free investor relations services, here. The order follows a previous order allowing the NYSE to do the same thing, here.
6. As warned last month, here's an additional smattering of 2012 "looks ahead":
   • 12 director issues for 2012, from Deloitte, here.
   • Considerations for public company directors in the 2012 proxy season, here.
   • What's new for the 2012 proxy season, here.
   • What to expect in 2012 (just, you know, generally), here.
   • The corporate governance opportunity for 2012, here.
   • Risk management and the board of directors – an update for 2012, here.
   • Financial Executive International's Top Challenges for Financial Executives for 2012, here.
   • M&A trends for 2012, here.
7. A survey of executive M&A outlook in 2012 is posted here. Depressingly, confidence seems depressed compared to 2010 and 2011.

2011

1. The first annual report to Congress by the SEC's nascent "Office of the Whistleblower" is here. Because the report covers only seven weeks of experience with the new SEC whistleblower reporting and bounty program, it's fair to say that there are no discernable trends, and certainly nothing that should cause you to run out and change your whistleblower policy. That hasn't stopped law firms from discerning trends, however—see, e.g., here and here. Commentators seem split on whether the 334 complaints fielded in the first seven weeks of operation are a lot, but, again, other than the raw number there is little else in the report. No bounties have been paid. Some SEC staff have indicated that, contrary to fears, the quantity of complaints has not rocketed but that the quality is higher, maybe because anonymous reporting means senior employees with better knowledge risk less when they make complaints and because lawyers, some of whom likely are working on contingency, are helping to draft reports.
2. Also in SEC news:
   • The SEC curbed the ability of foreign private issuers to use a non-public review process in initial public offerings, here.
   • The SEC announced, here, that to enhance the transparency of the filing review process, it will publish comment letters and responses "no earlier than 20 business days" after completing the review, down from "no earlier than 45 days." Presumably, despite the shift from days to business days, and even though "no earlier" means the SEC is living up to its policy no matter how late correspondence is released, we glean from the title of the announcement that postings will be made more quickly.
   • The SEC approved tougher stock exchange listing standards for reverse merger shell companies, see here.
3. ISS published its 2012 proxy policy updates, available here, for the U.S., Canada, Europe and "other." A few key items:
   • ISS promises better analysis of pay for performance rankings.
   • Its recommendations on proxy access proposals will continue to be made case-by-case, but it announced additional factors it will examine.
   • It will generally recommend voting for proposals to require political spending disclosure, a shift from its case-by-case approach in 2011.
   Glass Lewis also presented a preview of the 2012 proxy season and a recap of 2011 trends, see here.
4. The first few shareholder proxy access proposals in the wake of the SEC's forced return to the drawing board on mandatory proxy access have been filed for the 2012 proxy season. An update is here. One group's model provision for a proxy access proposal is here.
5. Proxy Monitor released its analysis of corporate governance and shareholder activism in 2011, here, in which it identifies the small subset of shareholders active in proposing governance changes and suggests that the push for shareholder democracy may be, in practice, a vehicle for special interest influence on corporate action rather than a focus on shareholder returns.
6. A useful retrospective that slipped our notice in last month's ICYMI, on trends in executive compensation, is here.
7. As year-end approaches, expect an onslaught of "what to expect in 2012" pieces. A bevy of predictions on what will be important to boards of directors in 2012 is here, here, and here.
8. In audit news:
   • The PCAOB issued an alert, see here, to flag issues that, in these difficult economic times, might lead to material misstatements and therefore require more attention.
   • The PCAOB issued its annual report cards on auditors, noting that PWC and KPMG fared poorly compared to last year. See here.
   • The European Commission issued its proposed reforms for public company auditors and audits, here, including a proposal for mandatory audit firm rotation, a measure being considered by the PCAOB (see here). The EC proposal contains other reforms, e.g., a ban on non-audit services, already adopted in the U.S. through the Sarbanes-Oxley Act.
9. Finally, on the private equity M&A front, note:
   • A report on the apparent resurgence of private equity transaction and "management" fees, here.
   • A private equity buyer/public company target M&A deal term study, here.

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November 9, 2011

1. The SEC's Division of Corporation Finance recently released:
   • Guidance, here, on disclosures about cybersecurity incidents and risks. The release follows, but isn't necessarily related to, revelations that hackers of Nasdaq's website may have accessed more confidential information than originally thought (see here). As with the SEC's climate change disclosure guidance (remember that? here?), the guidance serves as a reminder that rules exist and that, perhaps, they require disclosures about cybersecurity. Brace yourselves for public companies to largely plagiarize the last two paragraphs of the SEC's introduction to create what could become a standard risk factor. (Honestly, if the SEC is going to use phrases like "[risks] may include, but are not limited to," it's just begging to be plagiarized.)
   • Staff legal bulletin 14F about shareholder proposals under proxy rule 14a-8, here.
   • Staff legal bulletin 19 on legality and tax opinions in registered offerings, here, including an overview of opinion requirements and the staff's views regarding required opinion elements and its practice in reviewing them.
2. The SEC recently held a roundtable discussion on conflict mineral disclosure rules. The archived webcast is here, a transcript of the meeting is here and the proposed rules from last December are here. The meeting covered the rule's scope and steps for compliance, including supply chain tracking, and the form, content and audit of the required conflict minerals report. Some commentary on the proposed rules and the roundtable meeting is here, here  and here. For detail on the OECD's parallel due diligence guidance, see here and here. Not to be cut out of the action, the nation-state of California recently banned state agencies from contracting with anyone subject to an SEC enforcement action for failing to comply with the federal rules, whatever they may turn out to be (see here). Finally, a summary suggesting SEC cost estimates associated with rule compliance are off by "a lot" is here. (As a possible reference point, recall the SEC's 2003 rules implementing internal control disclosure requirements, here, in which it estimated compliance costs "around $1.24 billion (or $91,000 per company)." That's right, $91,000. Whoops.)
3. Another SEC roundtable discussion, on disclosing measurement uncertainty in financial reporting, was held yesterday. The briefing paper is here, and we expect a transcript and archived webcast will be posted in the next few days here.
4. The SEC approved tougher NYSE, NYSE AmEx and Nasdaq listing standards for companies that go public through reverse mergers, here. (Recall the SEC guidance on shell company mergers from September, here, and its public alert from June, here).
5. ISS released its 2011 U.S. post proxy season report, here. Among the findings, summarized here:
   • Most shareholders said "yes" on executive compensation (92.1% support on average), but companies engaged on the issue and, in some cases, modified pay.
   • An annual say-on-pay is preferred by shareholders (80.1% support on average).
   • "Withhold" votes on directors fell, likely because say-on-pay votes offered an alternative to voting against compensation committee members.
   • Support of board declassification proposals was up (73.5% support on average).
   • Support for environmental and social issues rose to 20.6% on average, and a record five proposals were adopted.
6. OSHA published "interim final rules" implementing Dodd-Frank revisions to SOX whistleblower protections. Links to the rules and to the portal where you may comment on the rules are here. Note that OSHA compiles a host of whistleblower resources, including links to the 21 whistleblower statutes it administers, here.
7. Finally, as we approach the end of the year, a few 2011 corporate governance surveys:
   • Davis Polk's review of IPO company governance is here (with controlled IPO companies here).
   • WSGR's survey of venture-backed IPO company governance is here.
   • At the other end of the public company spectrum, Shearman & Sterling summarizes the practices of the 100 largest U.S. public companies in governance, here, and director and executive compensation, here.
   • PWC's annual corporate director survey is here.
   • Stanford Graduate School of Business's survey of whether CEOs make the best board members is here.
   • ISS's annual survey of governance issues is here.

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October 12, 2011

1. The FDIC, Federal Reserve, Treasury and SEC published proposed regulations to implement the "Volcker Rule" requirements of Section 619 of the Dodd-Frank Act, which generally would prohibit banks from short-term proprietary trading for their own accounts and from specified relationships with hedge funds or private equity funds. The Federal Reserve's press release, and a link to the proposed regulation, is here. The rule has been characterized by some, pithily but perhaps incorrectly, as one of the "sharpest tools" to prevent future financial collapse due to unchecked speculation by banks.
2. In news from the Securities and Exchange Commission,
   • The SEC published an updated Financial Reporting Manual, the playbook for the accounting staff in the Division of Corporate Finance and a handy resource for those preparing financial disclosures, here. The update includes a summary of the revisions and "Last Updated" tags in particular sections to help you keep track.
   • The Division of Corporation Finance published "CF Disclosure Guidance" based on its reviews of Forms 8-K reporting transactions, typically reverse mergers, in which shell companies cease to be shells. See here.
   • The SEC decreased securities registration fees by 1.2%, to $114.60 per million of aggregate maximum offering price of securities. See here. Let the capital raising begin!
   • The SEC published proposed rules prohibiting conflicts of interest in asset-backed securitizations, here, and proposed rules regarding registration of security-based swap dealers and participants, here.
   • The SEC will hold a public roundtable discussion on October 18, see announcement here, to solicit views in advance of publishing proposed conflict minerals disclosure rules.
   • Corporation Finance Director Cross testified before Congress in September on SEC initiatives to foster capital formation without endangering investor protection, which sounds like a splendid idea. Of particular interest are the references to potential activity on the internal controls/SOX 404 front for smaller issuers, summarized here. It's good to see the internal controls debate is still alive and kicking nearly a decade after SOX was enacted.
3. ISS published, here, its 2011-2012 policy survey, a listing of what investors and issuers think are the hot corporate governance topics. Among its key findings: executive compensation is again a focus for many; more engagement between investors and issuers in 2011; environmental, social and governance issues are viewed by both investors and issuers to have "a significant impact on shareholder value."
4. Some were taken aback to learn that at least one say-on-pay lawsuit has survived the summary judgment phase, see here, because "the business judgment rule imposes a burden of proof, not a burden of pleading." In its order denying the motion to dismiss, the Court allowed the trial to continue because the plaintiff's claim—that the board's approval of increased 2010 executive compensation despite poor company performance constituted a breach of the duty of loyalty—was "plausible on its face." Note that the claim relates to 2010 pay that 66% of the shareholders voted against at the 2011 shareholder meeting. The plaintiff cited the "overwhelming rejection" as evidence, apparently, that the duty of loyalty was breached. It's hard to imagine plaintiffs ultimately winning these types of cases, assuming directors do not document their intent to "stick it to shareholders" by wasting corporate assets on extravagant executive compensation, but the settlement and nuisance value of suits in the wake of a negative say-on-pay may have just gone up.
5. The U.S. Department of Labor broadened, in Mendendez v. Halliburton, Inc., ARB No. 09-002 (Sept. 12, 20001), here, the kind of company "adverse action" that could form the basis for a whistleblower retaliation claim under Section 806 of the Sarbanes-Oxley Act, holding that identifying a whistleblower by name to his superiors and co-workers, in contravention of the anonymous reporting system required by SOX (which the Board said is a term and condition of employment), may be enough to support a claim even if a plaintiff can't show "tangible consequences" of retaliation. Recall that, in addition to requiring the much-discussed SEC bounty program (see here), Dodd-Frank added a new cause of action under the Securities Exchange Act of 1934 for whistleblowers who suffer employment retaliation after sharing information about potential securities law violations with the SEC, which allows suit directly in federal court before exhausting administrative remedies; expanded the statute of limitations to up to 10 years; and provided that prevailing whistleblowers can win reinstatement, attorney's fees and double back pay with interest.
6. To cap off our foray into the world of litigation, a summary outline of the U.S. Supreme Court's "active year in federal securities cases" (apparently, we shouldn't expect any more this year) is here.
7. FINRA published, here, a reminder that NASD Rule 2711 prohibits firms from exchanging favorable ratings to investment banking clients, and warns that scrutiny is heightened when "an issuer has communicated an expectation of favorable research as a condition of participating in an offering." In the release, FINRA specifies its concern: AIG CEO Robert Benmosche's complaints to senior I-bank executives about unfavorable ratings and his statement that "[F]or the next offering, I want to make sure there is a clear understanding of who AIG is and our trajectory, and why AIG is a stock that investors should own . . .. If I'm confident they can articulate that well, they will have a chance [at being selected as an offering participant]".
8. Finally, an editorial comment on the "Occupy [insert metropolitan area of your choice]" movement, summarized by a siting in Portland, OR, of two signs held by side by side protesters: "End the FED" and "End Hunger." To us, an accurate statement of the divergent, though not necessarily inconsistent, interests represented at the protest.

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September 14, 2011

1. The biggest news in the last month may have been the announcement of what isn't going to happen. SEC Chair Schapiro stated, here, that the SEC will not seek a rehearing or Supreme Court review of the D.C. Court of Appeals decision to vacate SEC proxy access rules but that she remains "committed to finding a way to make it easier for shareholders to nominate candidates to corporate boards." As noted in last month's ICYMI, the SEC's changes to Rule 14a-8 were not affected by the Court ruling. This means shareholders may require a company to include proxy access proposals in its proxy statement, paving the way for company-by-company proxy access standards. It's not clear whether proxy access proposals will have the same type of broad appeal to shareholders as, say, majority voting, and one imagines it may be more difficult for, say, a labor union, to garner support for a self-interested proxy access proposal. Prepare yourself, though, for the onslaught of templates and discussions of purported "best practices" on the subject (coming soon to a law blog near you).
2. A recent study suggests that public company directors need not be so fearful of ISS voting recommendations and analyzes factors that influence shareholder votes and director "withhold" votes.
3. A post on the Harvard Law School Forum on Corporate Governance and Financial Regulation cautions brokers, dealers, accountants and lawyers, here, not to take too much comfort from the recent U.S. Supreme Court decision in Janus Capital Group v. First Derivative Traders, the latest in a series of cases affirming there is no aider and abettor liability in federal securities law. The post notes that Dodd-Frank additions to the '34 Act, effective July 16, 2011, make it unlawful "to make . . . for the purpose of inducing the purchase or sale of such security, . . . any statement which was at the time and in the light of the circumstances under which it was made, false or misleading with respect to any material fact, and which that person knew or had reasonable ground to believe was so false or misleading." Although the holding in Janus suggests only an issuer "makes" a statement in a typical offering document, Dodd-Frank also amended the '34 Act to make liable any person who "willfully participates in any act or transaction in violation of" that provision. It may be that "willfully," which is not defined, requires knowledge that a statement was false, but count on allegations that a participant knew or should have known about the statement to carry plaintiffs past the summary judgment phase of a lawsuit.
4. The PCAOB published a concept release, here, soliciting comments on "ways that auditor independence, objectivity and professional skepticism could be enhanced," including possible mandatory audit firm rotation.
5. An article in CFO.com, here, notes the rise in compensation clawback policies in recent years. Recall that Dodd-Frank will ultimately require that stock exchanges require clawback policies as part of their listing standards (see here and here). Although the SEC hasn't yet proposed rules, it did recently flex its SOX 304 muscle (see here) to claw back bonus compensation and stock sale profits from an executive, even though the executive was not directly charged with committing accounting fraud.
6. A hodgepodge of other items:
   • The SEC adopted changes to Form ID, the form one completes to obtain the EDGAR codes that are a prerequisite to making filings with the SEC, here.
   • The SEC requested comments, here, on how it should go about its required retrospective review of SEC regulations. On a related note, we couldn't agree more with the view of The Corporate Counsel's Broc "my name sounds like a superhero's" Romanek, here, on the "disturbing trend" of addressing social issues through public company disclosure requirements. Alas, don't expect the SEC's regulatory review to do anything about some of the more ridiculous requirements mandated by Congress, like conflict minerals disclosure, but who knows what the legislative future might bring (see, e.g., here).
   • Perhaps not surprisingly, last month saw the largest number of IPO withdrawals since 2008 and was the slowest IPO month since July 2009. See here. Also, the WSJ notes, here, that most 2011 IPO companies are trading below their IPO prices.

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August 10, 2011

1. The D.C. Circuit Court of Appeals held, here, that the SEC's proxy access rules are invalid because the SEC failed to adequately consider the rules' effect on efficiency, competition, and capital formation as required by the Administrative Procedures Act. This is the latest setback in the SEC's long, bumpy road to proxy access reform, which in modern memory (meaning "since I started paying attention") began back in 2003 (see here) and at one point included dueling rule proposals (see here and here). It could be back to the drawing board, yet again, for the SEC to ramp up its economic analysis, although since the SEC is behind on Dodd-Frank implementation and has further delayed some rulemaking, see here, and may have its 2012 budget hopes dashed by Congress, see here, one wonders whether it will take another decade to get rules in place. In its expression of disappointment about the D.C. Circuit's ruling, here, the SEC noted that the rule allowing shareholders to submit proposals for proxy access, which was stayed by the SEC pending resolution of the challenge to its rules, was not affected by the court's decision. Can you say "private ordering"?
2. As we warned last month, Dodd-Frank's July 21 birthday occasioned more retrospectives than you can shake a stick at. For a useful summary of implementation in year one, see here, and, for a more positive spin, see here. The editor at ICYMI received The Daily Show retrospective, here, from about 1,000 people. (Warning: Although aired on regular cable and readily accessible on the Internet, we consider The Daily Show segment inappropriate for small children, some securities lawyers, and anyone who will write to us complaining that we included a link to it.)
3. ISS published its preliminary 2011 proxy season report, here. Included in its "key takeaways":
   • company compensation practices garnered 91.2% approval on average;
   • shareholders at 1.6% of companies said nay on pay;
   • annual say on pay is clearly favored by investors;
   • board declassification proposals got more support;
   • support for environmental and social shareholder proposals rose (to 20.6% on average); and
   • opposition to director nominees decreased, which was attributed to more engagement due to "say on pay" implementation.
4. The SEC adopted, here, Dodd-Frank mandated rules to decrease reliance on credit agency ratings, replacing rating criteria for registering non-convertible debt securities on short forms S-3 and F-3 with a new four-part test. Some might consider Congress's implied views of ratings agencies in Dodd-Frank presciently self-serving, given the astounding recent downgrade of U.S. Treasury debt by S&P, see here. The SEC also re-proposed a rule regarding shelf eligibility conditions for asset-backed issuers, here.
5. The FDIC adopted final rules, here, for the clawback of compensation from former and current executives and directors "substantially responsible" for the failed condition of covered institutions. And, speaking of clawbacks, note the SEC Commissioners' rejection of its enforcement staff's proposed settlement of its first ever effort to claw back compensation under Section 304 of the Sarbanes-Oxley Act from an executive not accused of complicity in accounting fraud. See here.
6. Expect whistleblower bounty rules from the Commodity Futures Trading Commission this week, see here. The CFTC rules, which haven't gotten nearly the play of the SEC's whistleblower bounty rules, could be a double whammy for firms subject to regulation by both agencies. On the topic of the SEC's whistleblower rules, an admonition to take a breath, calm down, and do the best you can with your whistleblower system is here.

July 13, 2011

1. The Dodd-Frank Act turns one year old on July 21! Deftly maneuvering ahead of the slew of retrospectives we anticipate on July 22, a review of what the SEC has accomplished under the Act so far is here. The biggies, at least in the governance world, are:
   • Final say-on-pay rules, here. As noted in last month's ICYMI (see also here), say-on-pay litigation quickly followed, including an action filed last month in New York against BNY Mellon in which the plaintiffs did not let shareholder approval of pay practices stand in the way of their fiduciary breach claims.
   • Final whistleblower bounty rules, here. The Internet teems with secondary resources about whistleblower systems and the SEC's bounty program. A recent suggestion of "what corporate managers should know about the SEC whistleblower rules" is here.
   Proposed rules covering a slew of other governance and disclosure items under Dodd-Frank, now slated for adoption in the second half of 2011, include:
   • compensation committee and adviser independence rules;
   • conflict minerals, mine safety and resource extraction disclosures;
   • pay for performance disclosure;
   • pay disparity disclosure (but see a possible correction of this one, here);
   • compensation clawbacks; and
   • director and employee hedging disclosure.
   Don't be surprised if adoption of some of the proposed rules slips further, as has been the trend under the ambitious rule-making agenda imposed by Dodd-Frank. See page 11 of the progress report here.
2. Keep in mind that the D.C. Court of Appeals may, any day now, issue a ruling on shareholder access to a public company's proxy statement, either clearing the decks for implementation or sending the SEC back to the drawing board yet again. For the last we heard on the issue, and a suggestion that business groups may have the upper hand in the case, see here, here and here.
3. The SEC updated its Financial Reporting Manual, its playbook for accounting review of public filings, here. The SEC added a helpful "summary of changes" section to the manual.
4. The SEC adopted and changed a few Compliance and Disclosure Interpretations, including some about compensation-related items. A description of the changes is here.
5. The SEC staff also recently published observations, here, on common problems with XBRL implementation.
6. The IRS proposed "clarifying" §162(m) regulations, here, that emphasize that (a) an incentive plan must specify maximum individual awards and (b) the transitional relief for private companies that go public does not apply to restricted stock units, phantom stock or other equity-based compensation except "stock options, stock appreciation rights, and restricted property." Recall, generally, that regulations under §162(m) allow exclusion of "performance-based compensation" from the $1 million cap on compensation tax deductibility for publicly traded companies and that transition rules provide that §162(m) does not apply to compensation paid pursuant to a plan or agreement that existed while the company was private.
7. The PCAOB released a concept release on the possible revisions to standards for reports on audited financial statements, here, and announced a public roundtable on the topic to occur sometime later in 2011.
8. The FTC and DOJ jointly published changes to the Hart-Scott-Rodino premerger notification form, generally expanding the information required to be provided. The final rule is here and the new notification form is here.
9. ISS posted its 2011-2012 policy survey, here. This is your chance to influence ISS voting guidelines, at least until access to the survey ends on August 3.
10. Finally, the NYSE released an Information Memo earlier this month, here, the subject of which is proper conduct at the NYSE, including on the trading floor. The list of prohibited activities makes the NYSE trading floor seem like a super fun place, at least before distribution of the memo, which prohibits "roughhousing", "use of air horns", "practical jokes", "smoking", "running," "consumption of alcoholic beverages" and "possession of firearms, illegal weapons and fireworks." It is encouraging to note NYSE policies also strictly prohibit gambling, including "organized for-profit betting activity relating . . . to outside events." Uh, wait . . . .