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SEC's OCIE 2015 Exam Priorities Include Proxy Advisory Firms and Investment Advisers

The SEC announced its Office of Compliance Inspections and Examinations' priorities for 2015 - which focus on protecting retail investors, assessing market-wide risks, and using data analytics to identify signs of potential illegal activity.  Additional priorities include examination of proxy advisors - specifically:

Proxy Services. We will examine select proxy advisory service firms, including how they make recommendations on proxy voting and how they disclose and mitigate potential conflicts of interest. We will also examine investment advisers' compliance with their fiduciary duty in voting proxies on behalf of investors.

SEC Launches Program to Facilitate Analysis of Corporate Financial Data

The SEC recently announced its launch of a pilot program to facilitate investor analysis and comparisons of companies' financial statement data. Under the new program, XBRL exhibit financial statement data filed with the SEC on EDGAR will be combined and organized into structured data sets, and posted for bulk downloads on the SEC's website for use by investors and academics. The data sets will be expanded in 2015 to include data in footnotes to the financial statements. The new program is attributed to the House Oversight & Government Reform Committee's prior criticisms of the SEC for its lack of progress on XBRL implementation. See also this article.

House Passes Regulatory Accountability Act

The Regulatory Accountability Act (a previous version of which was considered in 2013) was reintroduced and passed in the House this week. The Hill notes (here and here) these aspects of the bill:

• Federal agencies would be required to consider a proposed rule's impact on jobs and the economy while searching for less expensive alternatives. They would then be compelled to move forward with the "'least costly rule considered during the rule making.'"
• Agencies would have to submit an advance notice of proposed rule-making 90 days before announcing any major rule. However, the measure would allow more costly rules if their benefits to protect public health or safety are sufficiently justified.
• The Act would limit the guidance and interim final rules federal agencies can issue, and require them to be more open about the data they use to justify regulations.
• Federal agencies would be required to hold public hearings for rules expected to be particularly costly. While many agencies already do so, the bill would extend the requirement to the entire federal apparatus.
• The regulations could also be challenged in court before they are finalized.

SEC Developing New Rules for Transfer Agents

The SEC is in the early stages of developing new rules governing transfer agents. This Reuters article reports that SEC Chair White said that the Commission plans to kick off the rulemaking process with a "high-level policy document that will be used to solicit public feedback and formulate the rules." Among the main objectives of the new regulatory scheme will be for transfer agents to help minimize trading of stock for fraudulent purposes by having them more closely scrutinize - and in some cases, reject - improper requests for removal of stock transfer restrictions. Commissioner Aguilar reportedly told Reuters that "there is no doubt that transfer agents are gatekeepers who hold a 'unique position' to identify and prevent unregistered, restricted shares from being sold illegally."

Current transfer agent registration requirements and associated regulation are perceived as inadequate. Note also that transfer agents are among the SEC's OCIE's 2015 examination priorities.

NYSE Proposes Exempting Early Stage Companies from Shareholder Approval to Issue Shares to Related Parties  

The NYSE has proposed amending its standards to exempt early stage companies from having to obtain shareholder approval before issuing shares to related parties and affiliates of related parties, or entities in which a related party has a substantial interest. The move was prompted by the NYSE's recognition that many early stage companies often need to rely on capital-raising via their founders or other significant existing shareholders, rather than through traditional means. The NYSE recently amended its standards to allow initial listing by companies that demonstrate a total global market cap of at least $200 million so as to compete with Nasdaq.  

PCAOB Updates Agenda - Proposed Auditing Standard on Accounting Estimates Forthcoming

The PCAOB just released an updated Standard-Setting Agenda, which anticipates that the board will propose a standard and related amendments on auditing accounting estimates - including fair value measurements and related disclosures. The proposed standard is expected to be released for public comment in the 4th quarter of 2015. Next steps on other standard-setting projects of interest include a supplemental request for comment on disclosure of the audit engagement partner and a re-proposal on the auditor's reporting model - which are slated for the January - June 2015 time period.

Obama Proposes Data Security Measures

Earlier this week, President Obama announced new data security and consumer privacy initiatives. This Hunton & Williams blog outlines these four measures previewing proposals that the President purportedly will make at next week's State of the Union address:

• National data breach notification standard will require companies to notify their customers within 30 days of a data breach. This legislation also will close "loopholes" to enable action against criminals who are overseas.
• Improved access to credit score early warning system will notify consumers of fraudulent activities on their financial accounts.
• Comprehensive privacy legislation will include basic principles on what data may be collected and how it may be used.
• Student privacy legislation will ensure that data collected "in the classroom" will be used only for educational purposes and not for commercial purposes, such as targeted advertising or student profiling.

See also this Wall Street Journal article. 

SEC Announces New Equity Market Structure Advisory Committee Members 

The SEC announced the members of a new Equity Market Structure Advisory Committee. The members represent different sectors of the financial services industry, academia and public interest groups. Among the issues the committee is expected to address are those relating to the role of exchanges in the current market structure. The committee is expected to hold public meetings approximately 4x/year and has a 2-year, renewable term. See also this Reuters article.

Monsanto Proxy Summary Gets Kudos

Word has it that the Monsanto proxy gets high marks on format for its concise summary and for including the company's pledge on the inside cover. Monsanto filed its proxy December 10, 2014, and its meeting is January 30, 2015. For those of you drafting, please take a look.

Responses to OECD Principles of Corporate Governance Consultation

In late 2014, the OECD invited public comment on its draft updated Principles of Corporate Governance. These principles (first published in 1999) have long been among the most influential sources of corporate governance guidelines for regulators, stock exchanges, investors and companies world-wide, and continue to be referenced as a benchmark for good governance practices. The draft introduces or expands on several topics such as proxy access, political spending disclosure and board leadership structure. Comments on the draft, which were due January 4, 2015, include these from CII, the International Federation of Accountants, the CAQ, and the International Corporate Governance Network.

Vanguard Prefers 5%/3Year Proxy Access Provisions; Posts Voting & Engagement Examples 

Vanguard is updating its proxy voting guidelines to indicate a preference for a proxy access by a shareholder or group of shareholders with 5% of the stock holding for 3 years, for 20% of the board seats, as follows:

Proxy access
We believe that long-term investors may benefit from having "proxy access", or the opportunity to place director nominees on a company's proxy ballot. In our view, this enhances shareholders' ability to participate meaningfully in director elections while potentially enhancing boards' accountability and responsiveness to shareholders.

 

That said, we also believe that proxy access provisions should be appropriately limited to avoid abuse by investors without a meaningful long-term interest in the company. As such, we generally believe that a shareholder or group of shareholders representing 5% of a company's outstanding shares held for at least 3 years should be able to nominate directors for up to 20% of the seats on the board.

 

We will review proposals regarding proxy access on a case-by-case basis. The funds will be most likely to support access provisions with the terms described above, but may support different thresholds based on a company's other governance provisions, as well as discussions with shareholder proponents and/or the company and its board.

Note also that, further to our report last week about Vanguard's plans to "publish new details" about how it votes at annual meetings, it has since posted specific examples of how its engagement and voting influenced changes at particular (but unnamed) companies.

CII Broadens Response to Whole Foods Proxy Access Proposal

Late last week, CII sent this letter to Keith Higgins, SEC Director of the Division of Corporation Finance, requesting that the SEC Staff alter its interpretation of Rule 14a-8(i)(9), which allows companies to exclude a proposal if it "directly conflicts with one of the company's own proposals to be submitted to shareholders at the same meeting."  In its letter, CII distinguishes between directly conflicting proposals, and the Whole Foods scenario consisting of a non-binding shareholder proposal and binding management proposal seeking "the same general direction of reform, but with differing terms." In CII's view, the two proposals in the Whole Foods scenario would not be "conflicting." 

CII also sent this form of letter to approximately 20 companies expressing its disappointment with their plans to propose their own proxy access bylaw proposals with "unreasonably high thresholds," and urging them to revise them to be "in line with prevailing U.S. shareowner views for a viable ownership threshold."

See also this Davis Polk blog.

CalPERS Publishes Voting Decisions for Over 300 Companies Prior to Annual Meetings

CalPERS is disclosing its proxy voting decisions in advance of annual meetings for about 300 companies where it has the largest stakes in order to encourage other shareholders to vote the same way. According to Jim McRitchie's blog, this is merely a precursor to CalPERS' plan to disclose its votes at all of its portfolio companies by the end of the 2015 proxy season. Voting decisions of several other funds that pre-disclose (including BNY Mellon, Fidelity, Morgan Stanley, Oppenheimer, Schwab and T Rowe Price) are available on ProxyDemocracy. 

We previously reported on SEC Commissioner Gallagher's and former Commissioner Grundfest's paper challenging Harvard's Shareholder Rights Project's efforts to de-stagger boards under Rule 14a-8, and Yale Law School University Prof. Macey's response opposing Gallagher's and Grundfest's arguments.  The extremely unusual, widely publicized debate has since blossomed, with other notable parties, including former SEC Chair Harvey Pitt, chiming in.

This recent New York Times article, which quotes Society member and former SLC Chair Bob Lamm, outlines how the debate has continued to unfold and expand into unchartered territory, including a public battle over the propriety of the debate itself. See also this Securities Regulation Daily blog discussing recent developments.

Wal-Mart Appeals 14a-8(i)(7) Case to Third Circuit in Expedited Appeal

As we previously reported, the U.S. District Court for the District of Delaware recently held that Wal-Mart improperly excluded a shareholder proposal from its proxy statement for which it had previously been granted no-action relief by the SEC under Rule 14a-8(i)(7)'s ordinary business exclusion. Wal-Mart has appealed that decision, which the court has agreed to hear on an expedited basis - with briefing to be completed by February 13, 2015.  The Society will file an amicus brief in the case.

Federal Judge Rejects HP's Proposed Settlement of Autonomy Shareholder Litigation

As discussed in this Reuters article, a federal judge recently rejected HP's proposed settlement of shareholder litigation over a multi-billion dollar write-off resulting from its 2011 acquisition of Autonomy where Autonomy's revenue had been misrepresented, resulting in HP overpaying for the company. The rejection was based on the judge's determination that the proposed settlement was overbroad. Even though it was rejected, however, HP was apparently encouraged that "'the Court recognized that a settlement releasing the HP directors and officers from Autonomy-related claims represents a fair and reasonable resolution of the litigation," and it "'remains committed to holding the architects of the Autonomy fraud accountable.'" 

Society to Participate in IAC Panel Discussion on Proxy Access

We are pleased to report that the Society - along with representatives of Blackrock and the NYC Office of the Comptroller - have been invited to the next public meeting of the SEC Investor Advisory Committee to participate in a panel discussion on proxy access.  Society President & CEO Darla Stuckey will represent the Society at the meeting.  The meeting will take place on February 12, 2015, at the SEC's headquarters in Washington, D.C.

This week's highlighted question from the Huddle is:

There has been recent interest from board directors to attend Audit Committee meetings when there are topics of discussion that are of interest to them. I am interested in what is considered common and good practice. Is it common/good practice to open Audit Committee meetings to non-members? Or should the meetings be kept to members only and select company staff? If your company currently allows board directors to attend Audit Committee I would also be interested in the logistics. Are board directors formally invited to attend, provided with Audit Committee agendas in advance for review, do they receive complete Audit Committee meeting material, are they compensated for their time or is it voluntary participation?

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

Our policy was to permit any director to attend any board committee meeting on a voluntary and unpaid basis. Committee meetings continued to be scheduled based solely on the schedules of committee members (i.e., without regard to whether non-members could attend), and non-members had no input on the agenda, which remained primarily a committee chair responsibility. However, non-member attendees were otherwise provided full access to meeting materials to maximize their participation and understanding of what was going on. This practice was definitely a success both in terms of enhancing directors' understanding of issues that they then carried to other committee and board responsibilities, as well as seamlessly effecting some unanticipated (as well as planned) committee composition changes later on.

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