Senate Democrats Urge SEC Chair White to Finalize Pay Ratio Rule

Earlier this week,15 Senate Democrats sent this letter to SEC Chair White requesting that the SEC move forward with a final CEO pay ratio rule by March 31, 2015. The letter expresses their view that the proposed rule the SEC issued in September 2013 reflects a balanced approach - providing flexibility for companies, while also omitting exemptions that could thwart legislative intent. The letter also reiterates that this rulemaking is mandatory under Dodd-Frank.

Spending Bill Increases SEC's Budget, Reverses Dodd-Frank Swaps Provision

President Obama signed the Omnibus Spending Bill approved by Congress last weekend. According to this article, the bill increases the SEC's budget by $150 million - $100 million more than House Republicans originally approved, but about $200 million less than the Obama administration requested.  

The spending bill also eliminates a Dodd-Frank provision that would have restricted most financial derivatives trading in entities holding deposits guaranteed by the FDIC and eligible to borrow at the Federal Reserve's discount window. The net effect of the changes, according to this Forbes article, would be "to expand permissible swaps activities within a bank and to only exclude swaps based on asset-backed securities that are unregulated and not of a credit quality."

Reuters reports that lobbyists anticipate attempts to effect additional changes to Dodd-Frank with the incoming Republican-controlled Congress - but don't expect any major overhauls.

NYSE Proposes to Extend "Late Filer Rule" to 10-Qs & Defective Filings

The NYSE has filed with the SEC a proposed rule change that would extend its "late filer rule"-which is currently applicable only to Form 10-Ks- to Form 10-Qs and materially deficient filings. The proposed rule would: (i) impose a maximum period within which a company must file a late Form 10-Q in order to maintain its listing, and (ii) clarify the treatment of companies whose annual or quarterly reports are defective at the time of filing or become defective at a later date. As is the case now with 10-Ks, the rule would generally provide for an initial 6-month grace period - and an additional 6-month period at the NYSE's discretion - to permit a company's securities to continue trading before delisting procedures commence.

PCAOB Chair Promotes Robust Audits for Economic Growth

In a speech at a U.S. Chamber Center for Capital Markets Effectiveness event earlier this month titled "The Future of Financial Reporting," PCAOB Chair James Doty addressed the role of independent audits in expanding capital formation. Noting the trend toward short-term investing - a problem he deems exacerbated by the financial crisis, Doty argued that more relevant and reliable audits are critical to "coaxing" long-term investors back into the capital markets.

Doty cited the current "generic" auditor's reporting model, which he sees as an impediment to auditors' ability to compete on the basis of quality, as counter to robust audits. His remarks about the model are noteworthy in view of the Society's comment letter on the PCAOB's initial proposal to change the model and the forthcoming reproposal, which reportedly will address some of the concerns raised by commenters about critical audit matters.

Last week, several SEC staff members criticized the PCAOB for focusing on auditor disclosure initiatives (e.g., auditor's reporting model) rather than prioritizing rulemaking relating to auditor performance.

SEC Staff & Others Address Form 10-K Focal Points for 2015, COSO Frameworks

This Wall Street Journal article discusses several Form 10-K disclosure topics highlighted by SEC staff at last week's AICPA conference - including international tax disclosures, segment reporting, goodwill and fair-value estimates. SEC Deputy Chief Accountant Nili Shah reportedly stated that the SEC apparently "'won't object'" if companies use the old (1992) COSO internal controls framework for 2014; however, "'both investors and we will question continued use of the '92 framework going forward.'" However, a Compliance Week article provides this additional color on the implications of using the old framework:

The SEC and other audit and internal control experts speaking at the conference cautioned companies not to rest easy if they choose not to adopt the new COSO framework for their 2014 year-end reporting. Chuck Landes, a member of the COSO board representing the AICPA, said auditors should look carefully at the reasons why companies might choose not to use the framework this year. 'Anecdotally, we're hearing some say they're not sure they can pass under the new framework,' Landes said. 'If you can't pass under the '13 framework, I'm not sure how you can pass under the old framework.' He cautioned auditors to look for sound business reasons why companies do not adopt and consider whether the company has a problem with tone at the top if it can't show good reasons for not adopting.

In 2013, COSO issued a new internal controls framework that it deemed to supersede the 1992 framework as of December 15, 2014.

ISS Opens Equity Plan Data Verification 

ISS has opened an Equity Plan Data Verification process so that companies planning to submit an equity plan to a shareholder vote can ensure that ISS's proxy analysis will reflect the most recent and accurate data about their plan. Companies that register will be notified when their data is available, and will have two business days thereafter to verify the data and/or request modifications. The process is not available for companies filing within 30 days of their meeting date due to the narrow window. See these FAQs for additional information.

Audit Firm Rotation in Europe Triggers Audit Quality & Other Concerns

Contrary to regulators' intended objectives, audit firm rotations in Europe reportedly have led to concerns about reduced audit quality, increasing concentration/market share, and labor problems. Specifically, rotations occurring in advance of 2016's mandatory retendering requirement (approved by the European Parliament in April) show:

• 20% - 40% declines in audit fees (except in the UK) - triggering concerns about audit quality
• Labor problems associated with licensed audit firm personnel concentration in particular locations
• Increasing concentration resulting from rotated business going to firms with lead market share - contrary to intended increased competition

PCAOB board member Lewis Ferguson, who supported the PCAOB's 2011 concept release on auditor rotation, expressed concerns: "[T]hese are some of the issues we are seeing. It makes me very skeptical about whether auditor rotation is a good thing or if it's going to lead to what the Europeans thought it would lead to." The PCAOB has repeatedly indicated that it is monitoring regulatory reforms on auditor rotation abroad as it considers next steps for the U.S.  

Communications Challenges for Tax Inversion Deals

In this new paper, Finsbury's Chuck Nathan and Kal Goldberg address some of the key communications considerations for both pending and new inversion deals in the context of a contentious political environment. Strategic communications considerations include: (i) managing the conflicting interests/concerns of investors, politicians and customers; (ii) understanding investors' "tipping point" at which an otherwise favorably perceived deal structure may be perceived as unfavorable; (iii) thoughtfully explaining the inversion story from the outset (even if the deal won't use that structure); and (iv) communication issues relating to the foreign targets.

See also our previous report on the new Treasury Department rules designed to curtail tax inversion deal structures.

Current & Former SEC Commissioners Challenge Harvard's SRP De-Classification Proposals

SEC Commissioner Dan Gallagher and former Commissioner Joseph Grundfest just published a paper challenging the accuracy, propriety and legality of Harvard's Shareholder Rights Project's efforts to de-stagger boards under Rule 14a-8. According to Gallagher and Grundfest, the SRP's reliance on particular research to support their claim that staggered boards are adverse to shareholder interests is materially false and misleading - as it fails to take into account substantial opposing research that (i) evidences the likely benefits of classified boards for certain companies, and (ii) challenges the analytical techniques of the research relied upon by the SRP.

Gallagher and Grundfest assert that - among other things - companies should be able to exclude SRP's declassification proposals under Rule 14a-8 either by seeking no-action relief or motions for declaratory judgment. Rule 14a-8 permits companies to exclude shareholder proposals that violate Rule 14a-9, which prohibits solicitation via a proxy containing any materially false or misleading statement or omission. According to the paper, the authors also posit: (i) the SEC could bring enforcement proceedings against Harvard alleging violations of Rule 14a-9 under the principle of respondeat superior; (ii) private party plaintiffs should be able to prevail in 14a-9 actions against Harvard; and/or (iii) courts have the authority and discretion to void prior votes that caused boards to declassify.

See also Yale Law School University Prof. Macey's response analyzing and opposing Gallagher's and Grundfest's arguments.  

PCAOB IAG Meeting Provides Context for Forthcoming Audit Committee Report Release

Earlier this week, the PCAOB posted the transcript from its October 2014 Investor Advisory Group (IAG) meeting, where the IAG considered - among other things - the role and responsibilities of the audit committee. These four questions were posed:

1. Should the audit committee report on its role alongside the CEO, CFO and audit firm? In other words, should the audit committee report in 10-Qs and 10-Ks instead of just the proxy statement?
2. Should auditors be required to assess and report on the duties and operational effectiveness of the audit committee, or should some other body take that responsibility?
3. Should the auditors' evaluation of the audit committee's role be reported to the full board or more publicly than just to the board?
4. Should the auditor be required to assess the objectivity of the audit committee and expect that the auditor's independence be protected by the audit committee?

After noting the importance of "a highly capable and functioning audit committee" to audit quality, the IAG encouraged the SEC and PCAOB to "seek ways for auditors and audit committees to continue to support the effectiveness of their interdependent roles. " SEC Chair White then remarked: "You can't overstate the importance of the audit committee in functioning at the highest possible level. The staff is working on the audit committee report and, probably early in the year, a concept release will come out on that. We'd look forward to everybody's comments on that as well. So we see many of those same issues and are quite actively engaged on that."

The Conference Board Reports on Common Social and Environmental Proposals

Although almost 40% of all shareholder proposals submitted at Russell 3000 companies for the 2014 proxy season were related to social and environmental policy issues, average support on those voted was just 19.5%, according to this new report from The Conference Board. Most social proposals related to corporate political activities - primarily disclosure of political participation, including lobbying. Proposals seeking sustainability reporting were the most predominant type of environmental-related proposal. The report reviews the content of the social and environmental proposals voted on most frequently, including those that received the highest average shareholder support. The report also includes examples of proposals, board responses and company disclosures.

Society/Deloitte Release 2014 Board Practices Report

We're excited to announce our just-released Society/Deloitte 2014 Board Practices Report: Perspectives from the Boardroom. Society members should have received their copy for download via email earlier this week. Based on responses from 250 companies, the report provides useful trend information from questions posed in earlier surveys, and covers newer topics such as CEO succession, board composition and refreshment, and activism.

ISS Negative Say-on-Pay Recommendation Causes 25% Reduction in Shareholder Support

A new paper reports on the results of a study that explores ISS's impact on voting results. It addresses both the extent and source of ISS's influence. The authors conclude that:

• A negative ISS recommendation on a say-on-pay proposal causes a 25% reduction in voting support for the proposal.
• Of two potential channels through which ISS recommendations may affect votes - conveying new information to investors and playing a "certification" role, the evidence is most consistent with ISS's certification role, which allows investors to protect themselves from potential criticism and litigation.

As to the certification role, the authors note, "because institutions, and mutual funds in particular, are under strong pressure to vote in their investors' best interests, following ISS recommendations may protect them from potential criticism and litigation. For example, the SEC rules explicitly state that an institution 'could demonstrate that the vote was not a product of a conflict of interest if it voted client securities in accordance with a pre-determined policy, based upon the recommendations of an independent third party.'"

The U.S. Chamber (CCMC) will hold a half-day event titled "Will the SEC's Guidance on Voting Corporate Proxies Calm the Seas, or Rock the Boat?" on Wednesday January 7, 2015 to discuss the upcoming proxy season and role of proxy advisory firms.  At this event, the Chamber will release a white paper on the June 2014 SEC guidance on proxy advisory firms (Staff Legal Bulletin No. 20).

Confirmed Speakers Include:

• Robert Coury, Executive Chairman, Mylan Inc.
• The Honorable Dan Gallagher, Commissioner, U.S. Securities and Exchange Commission
• Edward Knight, Executive Vice President and General Counsel, Nasdaq OMX Group
• Robert McCormick, Chief Policy Officer, Glass Lewis & Co., LLC
• The Honorable Harvey Pitt, President, Kalorama Partners LLC; Former Chair, SEC
• David Whissel, Research Analyst, Proxy Mosiac, LLC
• Janet Wright, Vice President, Corporate, Securities and Finance Counsel and Assistant Secretary, Dell Inc.

Register here.

The GC's Role in Corporate Governance

On This Week in the Boardroom, Host Erica Salmon Byrne welcomes Nelea Absher, SVP, Managing Director Corporate Development & & Associate General Counsel, Brown-Forman Corp., to discuss the increasing role of GC's in the boardroom and best practices for communications with the board.

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