Society Files Effective Disclosure Task Force Comment Letter with SEC

Today the Society filed a comment letter on the SEC website on its Disclosure Effectiveness project. The Society's letter strongly supports the Division of Corporation Finance's efforts to improve disclosure efficiency and effectiveness. The letter makes concrete suggestions to improve '34 Act disclosure by eliminating obsolete information which is readily available elsewhere as a result of changes in technology, eliminating duplicative or redundant disclosure, and by taking a principles based approach that would require a basic set of information but also allow companies flexibility to exercise judgment in applying disclosure requirements to communicate about their own businesses and circumstances.

More specifically, the Society letter urges the Division staff to coordinate with the FASB to eliminate requirements for the same disclosure required under both US GAAP and SEC rules. In addition, the Society believes the SEC and FASB should delineate the appropriate presentation of qualitative and quantitative disclosure as between the financial statements and the narrative Management's Disclosure and Analysis (MD&A) section in the 10K. Financial footnotes should not become "mini-MD&As" but rather should be limited to a company's historical transactions, financial position and accounting principles underlying the financial statements.

The Society also believes that technology should be used such that companies can have a profile with "tabs" or "folders" to present information by topic that covers the basic information about the business, its officer and directors, corporate governance structure and policies and descriptions of its outstanding securities. The tab functionality could also be used for links to filed exhibits, as well as for risk factors and non-GAAP reconciliations. This would allow more streamlined periodic reports that would focus more on a company's financial results for the period covered by the report.

The Society's comment letter is the work of its Effective Disclosure Task Force, led by Co-Chairs Neila Radin, Senior Vice President and Associate General Counsel, JP Morgan Chase & Co. on the '34 Act Reports and Robert Lamm, Co-Chair, Securities and Corporate Governance Practice, Gunster, Yoakley & Stewart, P.A. on the upcoming proxy statement review. The task force operates under the auspices of the Society's Securities Law Committee, led by Rick Hansen, Assistant Counsel and Supervising Counsel, Chevron Corporation. Thanks to Neila and to the more than 80 Society members who volunteered to work on the Task Force on '34 Act reports.

SEC Announces Charges Against Corporate Insiders for Violating Laws Requiring Prompt Reporting of Transactions and Holdings

In what may be the first time ever, the SEC has charged a series of corporations, investment firms, and individual officers, directors and beneficial owners, for violations of the reporting requirements of their holdings on Form 4, and Schedules 13D and 13G.

In the press release, Andrew J. Ceresney, Director of the SEC's Division of Enforcement states: 

"Using quantitative analytics, we identified individuals and companies with especially high rates of filing deficiencies, and we are bringing these actions together to send a clear message about the importance of these filing provisions." And further, "Officers, directors, major shareholders, and issuers should all take note: inadvertence is no defense to filing violations, and we will vigorously police these sorts of violations through streamlined actions."

The reference to "quantitative analytics" to identify the violations is a capability that the Commission has been building in the last couple of years.

See also Alan Dye's blog here.

Chair White Updates Senate Banking Committee on Status of Dodd-Frank Rulemaking

SEC Chair White gave testimony this week to the Senate Committee on Banking, Housing, and Urban Affairs on the ongoing implementation of Dodd-Frank. Chair White testified that since she became Chair in April of 2013, the Commission has focused on eight key areas addressed by the Dodd-Frank Act: credit rating agencies; asset-backed securities; municipal advisors; asset management, including regulation of private fund advisers; over-the-counter derivatives; clearance and settlement; proprietary activities by financial institutions; and executive compensation.

SEC Chair White noted that with respect to rules to implement the Section 951 requirement that institutional investment managers report their say-on-pay votes at least annually, proposed in 2010, would be ready for consideration "in the near term." 

With regard to the pay ratio rule, she stated that "the staff is carefully considering" the considerable number of comments received "and is preparing recommendations for the Commission for a final rule."  In response to a question from Sen. Menendez, Chair White stated that the pay ratio rule "is a priority to complete [] this year."

Regarding guidelines governing the incentive-based compensation arrangements of certain financial institutions, Chair White has "asked the Commission staff to work with their fellow regulators to develop a recommendation to finalize rules to implement this provision."

With respect to rules on "clawback" policies, disclosure on link between pay and performance, and employee and director hedging, she stated: "the staff currently is developing recommendations for the Commission concerning the implementation of these provisions of the Act, which I expect to be taken up by the Commission in the near future."

New York Senator Introduces Draft Anti-Inversion Bill

An anti-inversion bill was introduced yesterday by Senator Chuck Schumer (D-NY). The bill, S. 2786, would "amend the Internal Revenue Code of 1986 to prevent earnings stripping of domestic corporations which are members of a worldwide group of corporations which includes an inverted corporation and to require agreements with respect to certain related party transactions with those members". A draft of the bill was made public earlier this week. Davis Polk has a summary of the bill here. The bill would "tighten the existing 'earnings-stripping' rules (which generally limit the ability of a U.S. corporation to deduct interest on debt to, or guaranteed by, a related foreign party) as applied to inverted companies," and "would also require a U.S. corporation that is subject to the bill to file with the IRS an application for an annual 'approval agreement,' at the time and in the manner specified by the IRS, with respect to the positions it intends to take on its tax return." The law would "apply to any inverted U.S. company if, in the inversion transaction, the former shareholders of the inverted U.S. company owned more than 50% of the foreign parent corporation after the transaction."

House Bill Introduced to Require Disclosure of Total Corporate Tax Paid in Annual Reports

Rep. Mark Pocan (D-WI) introduced H.R. 5442 yesterday that would amend the Securities Exchange Act of 1934 to require the disclosure of total corporate tax paid by a corporation in each annual report required to be filed under such Act. The bill was assigned to the House Financial Services Committee. No text is available yet.

FASB Proposes 2015 U.S. GAPP Financial Reporting Taxonomy

The FASB proposed 2015 U.S. GAPP Financial Reporting Taxonomies are available for public comment here. The public comment period will end on October 31, 2014. The FASB held a webcast on September 9, 2014 to discuss the changes in the proposed 2015 U.S. GAAP financial reporting taxonomy.

The draft 2015 updates to SEC taxonomies are available here and you can provide comments here using "Draft 2015 SEC Taxonomies" in the "General Subject Matter" section no later than October 31, 2014.

SEC Names New Secretary, First Ombudsman, and New COO of Enforcement Division

The SEC announced on September 5 that that Brent J. Fields had been appointed Secretary. Mr. Fields has 18 years with the Commission, most recently in its Division of Investment Management.

The SEC also announced on September 5 the appointment of Tracey L. McNeil as its first Ombudsman. She currently is a senior counsel in the SEC's Office of Minority and Women Inclusion (OMWI), an office created by the 2010 Dodd-Frank Act. In her role, she will "act as a liaison in resolving problems that retail investors may have with the Commission or self-regulatory organizations. The ombudsman also will establish safeguards to maintain the confidentiality of communications with investors." 

Finally, the SEC named Victor Valdez, formerly at the FDIC, as Chief Operating Officer and Managing Executive of the Enforcement Division, where he will oversee project management, information technology, human capital strategy, and risk management among other functions. 

The Commerce Department Admits Conflict Minerals Are Too Hard To Track

The Commerce Department on September 5th published a list of "all known conflict mineral processing facilities worldwide," as required by Dodd-Frank. The list of more than 400 sites "includes all known processing facilities that process the minerals tin, tantalum, tungsten, or gold, but does not indicate whether a specific facility processes minerals that are used to finance conflict in the Democratic Republic of the Congo or an adjoining country." The Commerce Department admits that "we do not have the ability to distinguish such facilities."

See also this Wall Street Journal article.

IRRC Paper to Help Non-High Frequency Investors Understand High-Frequency Trading

The Investor Responsibility Research Center in early September published a practitioner's summary of an earlier White Paper on the Impact and Future of High Frequency Trading. The practitioner's summary "is designed to help non-high frequency investors understand the current state of high frequency trading (HFT) mainly in the U.S." The authors look at "the effect of HFT on volume, price efficiency and liquidity," and "the problems and risk seen by various stakeholders." The authors find that while "HFT provides liquidity to high-volume stocks," it "may contribute to a perception of unfairness by exploiting systematic information asymmetry."

Audit Committees Continue to Provide Greater Disclosure, Finds EY Center for Board Matters

A recent report by EY Center for Board Matters finds that Fortune 100 companies are continuing to provide more disclosure related to audit committees and their auditors. EY found some notable changes in audit committee-related disclosure practices between 2012 and 2014, including, among others:

• 44% of companies disclosed that the audit committee was involved in the selection of the audit firm's lead engagement partner. In comparison, only 1% of companies did this in 2012.
• 19% of companies disclosed that the audit committee was involved in the auditor's fee negotiations, up significantly from just 1% in 2012.
• Auditor tenure was disclosed by half of reviewed companies, an increase from 26% in 2012.
• 28% of companies disclosed that the audit committee considers the impact of rotating their external auditor, up from 3% in 2012.

Supporters of Political Spending Rally at SEC Headquarters

Supporters of the 2011 petition for rulemaking on corporate political spending, led by Robert Jackson Jr. of Columbia Law School, demonstrated in front of the SEC's headquarters last Thursday to encourage the SEC to act on the petition, reports Corporate Counsel. The SEC had listed the proposal as a regulatory priority for 2013, but it was not on the agency's agenda for 2014. The event commemorated that one million comments have been submitted to the SEC on petition, the most ever seen on a proposal. See also this post on the Harvard Law School Forum on Corporate Governance and Financial Regulation from Lucian Bebchuk and Jackson, two of the petition authors.

The CFA last week also released a survey on political spending disclosure. The CFA surveyed a randomly chosen group of CFA Institute members and received 1,511 responses, 21% of whom described themselves as portfolio managers. 60% of respondents said that companies should be able to make political contributions, and also should have to disclose them, while 27% said companies should not be able to make political contributions. Of those 60% responding that disclosure should be required, two-thirds think the disclosures should be made in annual 10-Ks.

CalSTRS Cites Strong Response to Campaign to Add Women to Boards

CalSTRS reported at the end of August that it had received a very strong response in response to a letter writing campaign encouraging greater board diversity. CalSTRS and CalPERS sent the 131 California companies in their combined portfolios without women on their boards a letter offering their combined expertise to help them "diversify their boards." CalSTRS notes that in "just four months, 35 companies have responded to the letter and 15 companies have added at least one woman . . . "

Relatedly, a new post on the Columbia Law School Blue Sky Blog summarizes the ongoing ethnographic research on corporate board diversity by Lissa L. Broome, of the University of North Carolina School of Law, John M. Conley, of the University of North Carolina School of Law, and Kimberly Krawiec, of Duke University Law School. Based on research consisting of 57 interviews with corporate directors and a few others such as institutional investors, executive search professionals, and proxy advisors, the authors conclude that "while everyone we have spoken to endorses diversity in the abstract, very few have been able to tell us why it matters. In fact, pushing the topic has yielded difficult and sometimes uncomfortable conversations."

Boards Should Give Investors More Details on Self-Evaluation Process, says CII

CII has published a report highlighting a selection of "exemplary disclosures about the board evaluation process." Writing that "shareholders value detailed disclosure of the board evaluation process when making voting decisions about directors," CII highlights disclosures that investors find "meaningful." CII acknowledges that while detailed disclosure of the board evaluation process "is not a common practice" in the US, it is more common elsewhere in the world. CII considers the following best practices for disclosing information about board self-evaluation: 1) an explanation of the mechanics of the evaluation process, and 2) a discussion of the most recent evaluation. CII makes it clear that shareholders do not expect details of actual individual director evaluations, but rather the process the board uses to "approach[] the task of continually improving itself."

CII welcomes Society members' feedback on this report.

Delaware Court of Chancery Upholds Forum Selection Bylaw

The Delaware Court of Chancery on Monday ruled that First Citizens BancShares Inc.'s bylaws requiring nearly all shareholder disputes be litigated in North Carolina is valid. Citizens BancShares, Inc., a bank holding company incorporated in Delaware and based in Raleigh, North Carolina, had adopted a forum selection bylaw the same day that it also announced it was acquiring another bank. The plaintiff, City of Providence, sued over the validity of the bylaw, and asserted claims against the board concerning the merger.

Delaware Chancellor Andre G. Bouchard found that the bylaw "is virtually identical to the ones that then-Chancellor, now Chief Justice, Strine found to be facially valid in Boilermakers Local 154 Retirement Fund v. Chevron Corporation ("Chevron") except in one respect: it selects as the forum the United States District Court for the Eastern District of North Carolina, or, if that court lacks jurisdiction, any North Carolina state court with jurisdiction, instead of the state or federal courts of Delaware." Chancellor Bouchard concludes that under Delaware law and the bank's "governing documents, the Board was entitled to designate those courts for this purpose," and cites the "logic and reasoning of the Chevron decision." Chancellor Bouchard also granted the motion to dismiss the claims related to the merger.

See also this post from the Corporate & Commercial Litigation Blog and this from The D&O Diary.

The D&O Diary Surveys Directors' and Officers' Liability and D&O Insurance

The D&O Diary has published its yearly survey of the "most important" current trends and developments in the world of Directors' and Officers' liability and D&O insurance. The survey looks ahead to the securities cases on the Supreme Court's docket, the state of litigation reform bylaws, the cybersecurity landscape, the impact of the JOBS Act, and more.

Paper Finds CEOs Time News Releases to Coincide with Equity Vesting

A new paper by Alex Edmans, of the London Business School and others, Luis Goncalves-Pinto of the National University of Singapore, Yanbo Wang of INSEAD and Moqi Xu of the London School of Economics & Political Science (LSE) finds that "CEOs strategically time corporate news releases to coincide with months in which their equity vests." The authors study news releases and equity vests data for S&P 500 firms from 1994 to 2005, and for Russell 3000 firms from 2006 to 2011. The paper states that CEOs "release 5% more discretionary news in vesting months than prior months," and that they are "23% (14%) more likely to sell shares in months in which their stock (options) vest, compared to non-vesting months."

This week's highlighted question from the Huddle is:

Currently our Corporate Governance Guidelines provide that our Nominating and Corporate Governance Committee assists the Board in CEO and Executive Officer succession planning. It has recently come to our attention that some companies have their Comp Committee handle this process. I would be interested in hearing from other companies about whether their Nominating and Governance Committee or Comp Committee (or another committee) assists with succession planning and why they chose that path.

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

At [my company], our Corporate Governance and Nominating Committee has the responsibility for CEO succession planning. Our Compensation and Leadership Development Committee has the responsibility for leadership development below the CEO level. Since our Compensation Committee Chair also sits on the Governance Committee, and vice versa, there is good coordination between the two committees on leadership development generally. 

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