Source: https://www.thecorporatecounsel.net/blog/2015/03
Timestamp: 2019-04-22 02:29:04+00:00

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The increasing substantiation rate (i.e., rate of allegations determined to have at least some merit) for retaliation reports – which more than doubled in 2014 compared to 2013 – is particularly noteworthy. As NAVEX Chief Compliance Officer, SVP Carrie Penman noted, while the statistic could be an anomaly, the SEC’s “recent focus on retaliation has caused companies to take a deep dive into these allegations.” Widely publicized, the WSJ recently reported that the SEC sent letters to a number of companies seeking copies of employment agreements and confidentiality training materials since Dodd-Frank’s 2010 effective date that might indicate attempts to stifle employee reporting to the SEC in violation of the law.
Also significant is the higher substantiation rate for repeat reporters. This is important because – at least historically – there has been concern that companies may perceive repeat reporters/complainants as less credible – a practice that SEC Chair White has cautioned against in the past.
See also this more recent WSJ article noting potential challenges to the SEC’s authority to enforce Dodd-Frank’s anti-retaliation provisions.
This recent Compliance Week article provides guidance about how to handle informal SEC communications – including informal requests for information such as the SEC’s recent whistleblower-related inquiry.
The article also provides some useful tips from SEC Deputy Chief Accountant Dan Murdock’s remarks at the December 2014 AICPA Conference and, more recently, PLI’s 2015 SEC Speaks conference, about how to most appropriately utilize Staff’s frequent speeches – which often appear to be guidance-like in nature, but are almost always qualified as reflecting the views of the speaker only, not the SEC. For example, he characterized such speeches as generally having a five-year shelf life due to, among other things, evolving staff thinking and business models.
– Are Nominating/Governance Committee Chairs Undervalued?
With board composition and renewal under increasing scrutiny, this recent EY report summarizing views of institutional investors, investor associations and advisors about board composition and board composition disclosure is instructive.
Among the key findings are that most investors don’t believe companies are doing a good job of explaining why they have the right directors in the boardroom. And the vast majority of investors believe that rigorous board evaluations – not, e.g., director term limits, retirement ages – are the most effective way to stimulate board refreshment.
1. Make disclosures company-specific and tie qualifications to strategy and risk — Be explicit about why the director brings value to the board based on the company’s specific circumstances. Companies should not assume that the connection between a director’s expertise and the company’s strategic and risk oversight needs is obvious. Also, explaining how the board, as a whole, is the right fit can be valuable, particularly given that most investors are evaluating boards holistically.
2. Provide more disclosure around the director recruitment process and how candidates are sourced and vetted — Disclosing more information around the nomination process — how directors were identified (e.g., through a search firm), what the vetting process entailed, etc. — can mitigate concerns about the recruitment process being insular and informal.
3. Discuss efforts to enhance gender, racial and ethnic diversity — Many companies — nearly 60% of S&P 500 companies — say they specifically identify gender and ethnicity as a consideration when identifying director nominees, but that is not always reflected in the gender, racial and ethnic makeup of the board. Disclosing a formal process to support board diversity, including providing clarity around what is considered an appropriate level of diversity, can highlight efforts to recruit diverse directors.
The report also identifies potential disclosure tools, which may include a strategy-based skills matrix, a lead director/chair letter discussing board succession planning/refreshment/composition, and/or shareholder engagement.
This recent guidance from the Goverance Institute of Australia provides a thoughtful approach to creating or refreshing a board skills matrix – which (regardless of geography) is an effective tool for identifying existing and desired competencies and skills on the board.
This is a good read – even for matrix veterans.
Last year, I blogged about how to file video on EDGAR – and predicted that the use of video in SEC filings would explode over the next decade as a disclosure tool. More recently, I blogged that I thought we would see more video during this proxy season. Two days ago, Prudential filed its proxy statement (here’s the interactive version) – and lo and behold, it includes this 5-minute video from the company’s lead director! As required, the video’s script was filed as additional soliciting material with the SEC.
– Highlights a $5 Starbucks card incentive to registered shareholders if they combine their registered account & brokerage account. You can get a sustainable bag, plant a tree & get a cup of coffee if you vote & consolidate!
The SEC’s proposed rules already had provided a very practical format for private issuers seeking to raise capital. The proposing release generated mixed comments, with practitioners largely supporting the SEC’s proposal, and others raising concerns about the pre-emption of state securities review.
From today’s open meeting, and without having yet reviewed the final rules, it sounds like the SEC has taken an approach that seeks to promote capital formation, while preserving the disclosure requirements (both initial disclosure requirements and periodic reporting requirements for larger offerings) and other investor protection measures that were central to the proposing release.
The final rule establishes two tiers: Tier 1, for offerings that raise up to $20 million in proceeds in a 12-month period, including no more than $6 million of securities sold on behalf of selling securityholders, and a Tier 2, for offerings that raise up to $50 million in proceeds, including no more than $15 million of securities sold on behalf of selling securityholders. This will permit smaller and emerging companies to have an opportunity to raise substantial capital. The $50 million limit is, by statute, subject to periodic review by the SEC to determine whether the threshold is reasonable. The final rule also will include a limitation on the overall amount of securities that may be sold on behalf of selling securityholders. The exemption will not be available to certain bad actors and to other entities, such as investment companies.
The final rule, consistent with the proposed rule, modernizes the offering process by, for example, requiring that Regulation A+ offering statements be filed on EDGAR. The final rule incorporates a confidential submission process, similar to that available to EGCs relying on the JOBS Act, as well as the use of test-the-waters communications. Consistent with the proposed rule, a Tier 2 offering will be subject to rigorous disclosure standards, including a requirement to include audited financial statements, as well as to an investor limit. Issuers conducting Tier 2 offerings will also be subject to a requirement to file annual, semiannual and current event reports.
Most important to the success of Tier 2 offerings, Tier 2 offerings, given the detailed disclosure requirements and SEC review, will not be subject to state securities review. In addition, the final rule provides for a Tier 2 issuer to concurrently file a short-form Form 8-A to register a class of securities under Exchange Act Section 12(g) or 12(b)—this means that a Tier 2 issuer will, if it chooses to do so, be able to conduct a Regulation A+ offering and list on a national securities exchange.
As noted in this Cooley blog and Entrepreneur article, Etsy has filed for an IPO led by first tier underwriters as a corporation certified by B Labs. See its Form S-1.
Note there is a difference between being a public benefit corporation and being a corporation certified by B Labs. B corps or B corporations are the terms used for companies certified by B Labs. Delaware public benefit corporations are referred to as “benefit corporations” as a shorthand, but not as B Corps.
The B Labs certification is not really all that significant – as it essentially puts Etsy in the same category as other socially aware companies (eg. Ben & Jerry’s). I found it more interesting that Etsy did not become a “public benefit corporation” under Delaware law, which truly would have been remarkable (and likely posed marketing challenges with investors).
Certain pension funds have sent extensive, joint questionnaires to directors of public companies seeking detailed information as to the cybersecurity oversight systems and controls in place. Our view is that until the SEC provides further guidance, companies will generally find it in their interest to respond to such shareholder inquiries. Such disclosures, however, should be kept at a high level to demonstrate appropriate awareness and attention, while not disclosing specifics that could compromise the company’s cybersecurity strategy or raise issues under Regulation FD.
The U.S. Supreme Court ruled today that a statement of opinion in a registration statement cannot be actionable as a misstatement of fact under § 11 of the Securities Act of 1933 if the issuer actually believed the opinion expressed. However, the statement of opinion can be actionable on an omissions theory if the registration statement omits material facts about the issuer’s inquiry into, or knowledge about, the statement of opinion and if those omitted facts conflict with what a reasonable investor would have expected from a contextual reading of the statement of opinion. The decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund could lead to additional litigation about whether statements of opinion are actionable, but the Court imposed some important constraints on investors’ ability to assert § 11 claims predicated on statements of opinion.
Corporation Finance, along with other Commission staff, continues to work to implement provisions of the Dodd-Frank Act relating to executive compensation matters and payments by resource extraction issuers. In addition, the staff is currently conducting the review of the accredited investor definition as it relates to natural persons as mandated by Section 413 of the Dodd-Frank Act.
The program represented a seismic shift in approach, but in practice it is still in its early stages. After two years, the S.E.C. has generated admissions of culpability in 18 different cases involving 19 companies and 10 individuals. Given the hundreds of settlements struck by the S.E.C. over this time, it is clear that most of the time defendants are still being allowed to settle without admitting to or denying the agency’s allegations.
S.E.C. officials say this age-old practice saves it from having to bring — and possibly lose — a case in court, allows the agency to return money to victims more quickly and conserves resources for other investigations. Nevertheless, S.E.C. enforcement officials say they believe the policy change has sent a crucial message. “Requiring admissions adds a powerful tool in appropriate cases, and it has been extremely successful and positive,” Mr. Ceresney said in a recent interview. “In cases where we have obtained admissions, it adds accountability, and that has been very important.” In determining what kinds of cases are likely to be subject to such treatment, the S.E.C. has given itself wide latitude.
In November 2014, and further amended in February 2015, FINRA announced a comprehensive revision of the equity research rule currently numbered as NASD Rule 2711 and proposed a debt research rule modeled on the equity research rule. The equity research rule would be numbered FINRA Rule 2241 and the debt research rule would be numbered FINRA Rule 2242. The amended rule proposals can be found here: SR-FINRA-2014-047 (equity) and SR-FINRA-2014-048 (debt). The structures of the two rules are very similar but there are important differences. To guide your analysis of the two rules, here is a link to a line-by-line comparison of the two rules.
This proposed legislation – known as the “Delaware Rapid Arbitration Act” – is working its way through the Delaware General Assembly and would enable Delaware entities to engage in a rapid and efficient form of arbitration. It’s expected that the legislation will become law next month (with an effective date 30 days later). Here’s a set of FAQs on the bill – and a blog about it from the Delaware Division of Corporations.
– Five Day Tender Offers: What Can Market Participants Expect?
As noted in this Reuters article, Bank of America filed this Form 8-K to note that it has adopted a proxy access bylaw with a formula of 3%/3-year formula – along with a group cap of 20 shareholders & nomination cap of 20% of board seats. As noted in this piece, BofA conferred with the NY Comptroller’s office and other pension funds before making this move – even though the proponent at BofA was retail holder John Harrington.
Then there is Big Lots and Whiting Petroleum, which have reached agreements with the NY Comptroller’s office to adopt bylaws with the thresholds 3%, 3 yrs, cap of 25%, no group limit. These companies have not yet filed bylaw amendments.
Also note that Citigroup has filed its definitive proxy statement, in which the board supports the shareholder proponent’s proxy access proposal as earlier announced.
Tune in tomorrow for the webcast – “Proxy Access: The Halftime Show” – during which Morrow’s Tom Ball, Davis Polk’s Ning Chiu, Covington & Burling’s Keir Gumbs, Gibson Dunn’s Beth Ising, TIAA-CREF’s Bess Joffe and Sullivan & Cromwell’s Glen Schleyer will analyze how companies decided to handle the new wave of proxy access shareholder proposals – and how investors might react to that.
If a management proposal is made in response to a shareholder proposal on the same subject matter, does that end the inquiry — and the company may exclude the shareholder proposal because it ‘directly conflicts’ with management’s proposal? What if the proposals have the same subject matter, but the terms differ? What if management’s proposal could be viewed as a proposal that, if adopted, may purport to provide shareholders with the ability to do something, such as call a special meeting or include a nominee for director in a company’s proxy materials, but that, in fact, no shareholder would be able to meet the criteria to do so? If a company excludes a shareholder proposal because it conflicts with the company’s own proposal on the same subject matter, should the company have to disclose to its shareholders the existence of the shareholder proposal? What if the company’s competing proposal was offered only in response to the shareholder’s proposal — should the company have to disclose its motivations for its own proposal? …. In impartially administering the rule, we must always consider whether our response would produce an unintended or unfair result. Gamesmanship has no place in the process.
A few months ago, I blogged about a split between the 9th Circuit and 2nd Circuit on whether an alleged failure to make a disclosure required by Item 303 of Regulation S-K is an actionable omission under Section 10(b) and Rule 10b-5. Now, Kevin LaCroix blogs about a recent decision in Tile Shop Holding Securities Litigation, in which District of Minnesota Judge Ann Montgomery followed the Second Circuit’s ruling on the question and held that an alleged failure to make a disclosure under Item 303 can serve as the basis of a Section 10(b) securities claim. The ruling is interesting in a number of other respects as well.
As the Securities and Exchange Commission follows through with its promise – or threat, depending on how you look at these things – to bring more of its enforcement actions as administrative proceedings before judges employed by the commission, at least a half-dozen defendants have brought constitutional challenges to the SEC’s right to pursue charges outside of federal district court. They’ve asserted two different theories: First, administrative proceedings violate their Seventh Amendment and due process rights because there’s no jury and the evidentiary rules favor the SEC; and second, the entire administrative law judge system violates separation-of-powers doctrine under the U.S. Supreme Court’s 2010 decision in Free Enterprise Fund v. Public Company Accounting Oversight Board.
The good news this week for SEC defendants facing administrative proceedings is that U.S. District Judge Rudolph Randa of Milwaukee believes both constitutional arguments to be “compelling and meritorious.” But the bad news in Randa’s ruling in Bebo v. SEC is bad indeed. The judge dismissed Laurie Bebo’s suit seeking a preliminary injunction to block the SEC from moving ahead with its administrative proceeding against the former CEO of Assisted Living Concepts, concluding that he does not have jurisdiction to resolve the constitutional questions.
The SEC announced a whistleblower award of nearly half a million dollars to a former company officer whose report of misconduct resulted in an SEC enforcement action. In order for a whistleblower submission to be considered original information, it must be derived from a claimant’s independent knowledge or analysis, which is generally not applicable if the whistleblower obtained the information as an officer, director, trustee or partner.
The whistleblower in this case was an officer of the company. However, the Claims Review Staff decided that the information provided by the individual was not disqualified from being treated as original information since the officer reported the information internally at least 120 days prior to reporting it to the Commission, and the matter failed to be addressed at the company. We explain the exception in our memo on the rules.
This is the first whistleblower award to an officer. As is their usual practice, the SEC provided no details about the background of the misconduct or the report made by the whistleblower. The SEC has awarded 15 whistleblowers in the last three years, for an eye-popping total of nearly $50 million, which is financed from the sanctions.
Now the Commission is wading deeper and deeper into the employment law business. We’ve known for some time that the SEC was looking for cases in which to enforce the Dodd-Frank anti-retaliation provisions of the whistleblower rules. It brought such a case against Paradigm Capital Management just last June. Also last year, SEC whistleblower chief Sean McKessy warned against companies writing severance agreements to buy their former employees’ silence with post-employment benefits. “And if we find that kind of language, not only are we going to go to the companies, we are going to go after the lawyers who drafted it,” he said.
But thanks to the Wall Street Journal’s Rachel Louise Ensign, that’s not all. Oh, no; that’s not all. In an article from last week, she reports that the Commission is actively looking for that kind of language. It has sent a request letter asking a number of companies “to turn over every nondisclosure agreement, confidentiality agreement, severance agreement and settlement agreement they entered into with employees since Dodd-Frank went into effect, as well as documents related to corporate training on confidentiality.” The letter also asks for “all documents that refer or relate to whistleblowing” and lists of terminated employees.
A few weeks ago, the SEC filed this amicus brief with the Second Circuit in Berman v. Neo@Ogilvy LLC, to defend its position that Dodd-Frank’s whistleblower protections include whistleblowers who internally report their concerns.
In our “Q&A Forum,” someone asked for a list of the companies listed in Friday’s blog that have adopted the “Prudential” style of renomination ineligibility provision. The list was posted in response (#8370).
We spent a very busy and productive two days last week in Washington. One meeting was with the SEC Staff responsible for the conflict minerals disclosure requirements. They were, as usual, generally tight-lipped in responding to our questions, but we did get three interesting bits of information.
– Readers may recall recent comments from CorpFin Director Keith Higgins about his view that many RCOI descriptions were inadequate. The comments did not make clear if he was referring to those who filed a Form SD only, or the RCOI descriptions included in Conflict Minerals Reports (CMRs). The Staff clarified that the comments were aimed at Form SD filers only, which makes sense. Moreover, we suggest that those filing only the Form SD for CY2014 be prepared for additional scrutiny that is likely to come from other stakeholders as well.
– Staff gave no insight into when additional FAQs/Interpretive Guidance will be published. But they did state that the next round consists of approximately 10 questions. This puts to rest the rumor that the Staff was working on a very large number of questions, which is one reason for the lengthy delay.
– A number of issuers have expressed concern about the validity of the Keller and Heckman letter on the Staff’s position that nonmetallic forms of 3TG are not a covered derivative. The Staff stated that the letter does fully represent their formal position on the matter and that issuers should not be wary of relying on it. Further, we note that the letter covers 3TG, not just tin or 3T, so gold salts/plating chemicals are not considered covered derivatives.

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