SEC Announces $300,000 Whistleblower Award to Audit and Compliance Professional

The SEC has announced the granting of a whistleblower award to an audit and compliance employee at a company who had previously reported wrongdoing internally to a supervisor. The company took no action within 120 days and the whistleblower then reported the information to the SEC who brought an action for insider trading against the Chairman and CEO of CECO Environmental Corp. and API Technologies, Corp. This is the first award to an audit and compliance professional.

See also this memo from Labaton Sucharow.

Commissioner Aguilar Concerned About Enforcement Division Cases

In a rare, dissenting statement in an action titled In the Matter of Lynn R. Blodgett and Kevin R. Kyser, CPA, Commissioner Luis A. Aguilar takes the Enforcement Division to task, calling the sanction in the case a "wrist slap at best." The case involved a company that inflated revenues in violation of GAAP, which it achieved "by inserting itself into pre-existing sales transactions between a manufacturer and a reseller for the primary purpose of booking revenues from those transactions" in order to meet its revenue growth guidance. Under these circumstances, Commissioner Aguilar believed the parties should have been charged with fraud and should have been suspended from practicing before the Commission. He also made clear that he is troubled by the potential for less-than-vigorous prosecution of future cases:

I fear that cases in the future will continue to be weak. More specifically, I fear that when the staff determines not to seek a Rule 102(e) suspension, it will also forgo bringing fraud charges. Likewise, I am concerned that Commission Orders may, at times, be purposely vague and/or incomplete, and written in a way so as to lead the public to conclude that no fraud had occurred. When this happens, the public is denied a full accounting and appreciation of the egregious nature of a defendant's misconduct. In addition, this practice muzzles my voice by not allowing any statement by me (including this dissent) to include a fulsome description of facts that support the view that the Commission should have brought fraud charges. This adversely impacts my ability as a Commissioner to provide the American public honest and transparent information-including a description of facts discovered by the staff during its investigation. In the end, these behind-the-curtain decisions can make fraudulent behavior appear to be an honest mistake (footnote omitted).

Two Dodd-Frank Final Rules Released in August Meet 12 Requirements of Law

Davis Polk earlier this week released its monthly Dodd-Frank Progress Report, covering developments from July and August. The SEC's final rules on asset-backed securities and nationally recognized statistical rating organizations met 12 requirements of Dodd-Frank. Davis Polk notes that "of the 398 total rulemaking requirements, 220 (55.3%) have been met with finalized rules and rules have been proposed that would meet 83 (20.9%) more. Rules have not yet been proposed to meet 95 (23.9%) rulemaking requirements." 280 of those 398 rulemaking requirements had dates that have since passed, and 115 (41.1%) have been missed. Of the 115, regulators have released proposals for 73 rules.

Amnesty International filed a Supplemental Brief in mid-August in National Association of Manufacturers v. SEC, providing more arguments that the commercial disclosure requirement be upheld. Amnesty had filed a petition for panel rehearing and rehearing en banc on May 29, 2014, prior to the U.S. District Court for the District of Columbia's decision in the American Meat Institute v. USDA case. Now that the American Meat case has been decided, Amnesty filed this supplement, writing "American Meat's rationale and its express overruling of a portion of the panel opinion in this case [the Conflict Minerals case] make clear that the panel erred in failing to apply the standard for First Amendment review set forth in Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626 (1985). Accordingly, panel or en banc reconsideration of the panel opinion is necessary, and under Zauderer, the commercial disclosure requirement at issue should be upheld."

Amnesty criticizes the District panel's decision not to apply Zauderer in the NAM V. SEC case. The panel made that decision because no party had suggested the SEC's rule was related to preventing consumer deception.  Amnesty also argues that "the disclosure is not unduly burdensome."

Already Looking Towards Proxy Season 2015

Though it seems the 2014 proxy season just ended, it is already time to consider preparations for the 2015 proxy season. Sidley Austin has published a memo recommending that companies consider the following:

• Devoting "resources to revise their proxy disclosures to include sophisticated visual and graphic presentations of information." This could require professional assistance from graphic design firms, but the practice has proliferated among the largest public companies.

• Companies that are seeking stockholder approval of a compensation plan should "be fastidious with regard to compliance with SEC disclosure requirements and plan descriptions." Sidley also recommends that in-house counsel give directors warning that no matter how well written a plan proposal may be, it is still likely to draw interest from plaintiffs firms.

• Removing, if they have one, a stand-alone section of their CD&A titled "Tax Considerations." This section has been a standard feature of the CD&A, but Sidley notes they have traditionally been boilerplate, and are not required as they rarely have contained material information.
  

• Asking their compensation consultants to replicate the ISS say-on-pay modelling in order to get a better sense of ISS's likely say-on-pay recommendation. 

U.S. Chamber Says ISS Survey Lacks Empirical Research that Links Policies to Increase in Shareholder Value

In a letter to ISS responding to the 2015 ISS Policy survey, the Chamber generally takes issue with the survey for investment advisors who rely exclusively on ISS voting recommendations. The Chamber states that the ISS survey does not include any empirical research, but rather is based on "philosophical preferences," which are not an appropriate basis upon which investment advisors can rely to satisfy their fiduciary obligations.

ISS' policy is premised on an underlying rationale devoid of empirical research, rendering the policy devoid of any nexus between the voting decision and enhancement of shareholder values.
 

The Survey, therefore, does not (indeed, cannot) provide ISS with any basis for arguing that its proxy voting policies reasonably facilitate the ability of SEC-registered investment advisers to fulfill their critical fiduciary obligations or comply with applicable regulatory standards. (footnotes omitted)

The Chamber also questions whether an investment advisor can properly rely on proxy advisory firm opinions that are not linked to increasing shareholder value: "But, investment advisers cannot fulfill their fiduciary obligations to clients by basing voting decisions on proxy advisory firm opinions that make no reference to, much less that do not even deign to establish, a causal connection between the proxy advisory firm's recommendation and the enhancement or furtherance of shareholder values."

Abercrombie & Fitch Negotiates Settlement with Shareholder Over CEO Pay 

Abercrombie & Fitch Co. reached a negotiated settlement on Friday with a shareholder who filed a complaint over the pay of CEO Michael Jeffries. The settlement is notable because, according to this Reuters Business Insider article, it is atypical that plaintiffs' firm would settle "less than an hour after the underlying lawsuit was filed in the U.S. District Court in Columbus, Ohio." Under the settlement, "Abercrombie agreed to appoint a chief ethics and compliance officer, tie executive pay more closely to performance, bolster anti-corruption compliance training, and limit access to nonpublic data to Jeffries' partner and other third parties, among other provisions." Abercrombie did not admit wrongdoing. Shareholders will not receive monetary awards, while "the plaintiff's lawyers could receive up to $2.78 million in fees and expenses if the settlement were approved." Notably, Mark Lebovitch, a partner at Bernstein, Litowitz, Berger & Grossmann representing the plaintiff, said "the plaintiff chose an 'atypical strategy' of negotiating changes quietly, rather than risk a long court battle with Abercrombie's 'famously aggressive counsel' at Skadden, Arps, Slate, Meagher & Flom," according to the article. 

The Texas Supreme Court on Friday upheld an ExxonMobil incentive compensation that included a provision that allowed the company to strip a top executive of millions in nonvested restricted stock when he joined a rival energy firm. In Exxon Mobil Corp. v. Drennan, No. 12-0621 (Tex. Aug. 29, 2014), Drennan sued Exxon after he left the firm to join Hess Corporation and his shares still under restriction were canceled. Exxon had informed Drennan that he would be losing his current position, but that the company was trying to find him another, but was so far unsuccessful. Exxon considered Drennan's move to a competitor as a detrimental activity. Drennan initially lost the case, but the Houston Fourteenth Court of Appeals reversed the decision and ordered ExxonMobil to return the stock. Exxon then appealed to the Texas Supreme Court.

At issue in the case was whether the incentive plan's New York choice-of-law provisions (the plan calls for application of New York law) and provisions for forfeiture of awards in the case of detrimental activity are enforceable under Texas Law. The Texas Supreme Court found both were enforceable. The detrimental activity provision was found not to be a non-compete agreement, and so enforcing the New York law was found not to "contravene any fundamental public policy of Texas." 

While there is no reported opinion yet, the complaint is interesting, and mentions a few Society members in connection with facts about vote counting, namely Keith Paul Bishop of Allen Matkins Leck Gamble Mallory & Natsis LLP, and Ron Mueller of Gibson Dunn.

New Academic Papers Available for Post Beach Reading

We have become aware of these relatively recent academic papers related to governance:

• From Institutional Theories to Private Pensions, by Martin Gelter of the Fordham University School of Law and European Corporate Governance Institute, shows that "the focus of modern corporate law theory on the concerns of shareholders is historically and geographically contingent" by tracing "shareholder-stakeholder debates through the 20th century."

• Securities Litigation in the Roberts Court: An Early Assessment, by John C. Coates, IV, of Harvard Law School, looks at the Roberts Courts securities law decisions. Securities law cases represent an increased share of the Supreme Court's docket versus those of prior Courts (though the overall docket has shrunk,) and have averaged one to two cases per year. "The analysis is applied to predict outcomes for cases to be argued in the October 2014 term, and is used to sketch the types of cases likely to attract the attention of the Court in the future."

This week's highlighted question from the Huddle is:

Our Investor Relations Department received a message from an individual via our website. It contains a resume and requests that the individual be considered for a board position. Do others have a process for handling such unsolicited requests from apparently unqualified individuals? If so, what process do you follow? 

This question generated a lot of activity and many excellent answers (too many to note here) including:

Many companies (typically NYSE listed) have a stated policy regarding whether (and how) they will consider suggested candidates from stockholders.  Is the person a stockholder?  If so, you would need to follow that process.

Otherwise, I would probably send to the chair of your nominating and corporate governance committee (with an appropriate cover note explaining that it was unsolicited but that you feel compelled to send to him since Board positions are within domain of directors not management).

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