The Society's 2015 National Conference will take place June 24-27 in Chicago, Illinois at the Sheraton Chicago Hotel and Towers. Come to Chicago to "Connect, Communicate, Collaborate" with 800 of your colleagues.  

Conference registration is now open online. Members need to log in to receive member rates.

Note: If you are asked to answer questions regarding your conference selections, you must click "SAVE RESPONSES" on the right side of the screen for each set of questions. You will not be able to check out unless you have answered the required questions and saved your responses.

The conference agenda is posted here. Hotel reservation and other information is here.

If you are interested in making a contribution to the conference fund or other sponsorship opportunities click here.

SEC Chair White Backs Proxy Access Private Ordering, Fiduciary Standard Rulemaking  

At a House Financial Services Committee hearing on Tuesday entitled "Examining the SEC's Agenda, Operations and FY 2016 Budget Request," SEC Chair White reportedly told lawmakers that although she is closely monitoring current proxy access developments via private ordering under Rule 14a-8, she has no intent to resurrect a stand-alone proxy access rule:  

[S]everal U.S. House of Representatives Democrats asked White to resurrect SEC efforts to adopt "proxy access" rules, but White said she had "no intention" of doing so after a U.S. appeals court tossed out several years ago. However, she said the SEC is closely tracking the flurry of activity this proxy season, in which activists have had success convincing some companies to change their bylaws to permit proxy access, or to permit shareholder resolutions on the topic to appear on corporate ballots... 

 

The most vocal questioner on the House of Representatives financial services panel Tuesday was Massachusetts Democrat Michael Capuano, who accused the SEC of standing idly by and not taking more steps to help shareholders. "Why doesn't the SEC stand with the shareholders?" he asked. "You should be pushing harder," he added. 

 

"I think that the shareholder proposal process is working very effectively," White responded. "We are very closely monitoring that to see where it goes by way of private ordering."  

Chair White also noted in her prepared remarks that she has requested Staff to prepare rulemaking recommendations on a uniform fiduciary duty standard for broker-dealers and investment advisers, notwithstanding definitional and other challenges to doing so. However, she reportedly also cautioned lawmakers that she still needs to secure buy-in from other Commissioners, and emphasized that the SEC would be working independently from the DOL as it considers potential changes to the fiduciary definition under ERISA - an approach which some have allegedly criticized as problematic.

NYC Comptroller to Propose State Financial Adviser Fiduciary Standard Disclosure Law

In related news, NYC Comptroller Scott Stringer announced today his plans to propose a state fiduciary standard disclosure requirement. The new law would require financial advisers to disclose in plain English whether they put their own financial interests above those of their clients, i.e., adhere to the "fiduciary standard" - or whether they operate under the more permissive current law's "suitability standard." Advisers operating under the latter standard would be required to disclose that fact at the outset of any financial relationship with this statement:

I am not a fiduciary. Therefore, I am not required to act in your best interests, and am allowed to recommend investments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks, and expected returns for you.

SEC Adopts "Regulation A+" Rules; Expands Capital-Raising Options for Smaller Companies

The SEC announced today its adoption of final JOBS Act "Regulation A+" rules to facilitate smaller companies' access to capital. The new rules create two tiers of offerings under Regulation A: 
 

Tier 1:

• For offerings up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are issuer affiliates
• Subject to federal and state registration and qualification requirements; issuers may take advantage of the coordinated review program developed by the North American Securities Administrators Association (NASAA).

Tier 2:

• For offerings up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are issuer affiliates.
• Subject to preemption of state securities law registration and qualification requirements for securities offered or sold to "qualified purchasers"

Both tiers are subject to certain basic requirements, while Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements.

The rules will be effective 60 days after publication in the Federal Register.

SEC Investor Advisory Committee to Discuss Proxy Access, Rule 14a-8(i)(9)

The SEC announced last week that its Dodd-Frank Investor Advisory Committee will meet on April 9 from 9:30 am - 4 pm at its Washington, DC headquarters. The meeting will be open to the public and webcast live on the SEC's website. Agenda topics include a discussion of proxy access and staff review of Rule 14a-8(i)(9) (which may include a recommendation), and an update on the SEC proxy voting roundtable.

Earlier today, the Society submitted to SEC's Division of Corporation Finance Director Keith Higgins, and filed with the SEC's Investor Advisory Committee, this letter expressing our views on the SEC's historical application of Rule 14a-8(i)(9) and concerns about the near-term and broader implications of the SEC's recent decision to express no view on the application of the rule during the 2015 proxy season.

SEC Enforcement Chief Defends Use of Administrative Proceedings

There was considerable focus on the SEC's use of administrative proceedings rather than the courts at a House subcommittee hearing last week on "Oversight of the SEC's Division of Enforcement." According to SIFMA's hearing summary and this Investment News article, House representatives questioned and criticized Enforcement Director Andrew Ceresney about the agency's reliance on administrative law judges rather than the courts, including expressing concerns about the SEC having a "home court advantage" and depriving defendants of due process. Ceresney purportedly replied that defendants were afforded quicker relief and additional protections in administrative proceedings, while noting that the majority of cases are still brought in district courts. According to the IN article, 57% of the cases were brought in federal court last year - compared to 43% brought before ALJs.

Among the SEC's enforcement priorities Ceresney addressed in his prepared remarks were financial reporting, accounting and disclosure; insider trading; the FCPA; and the importance of gatekeepers, including attorneys, accountants, board members, transfer agents and others.

Bill Seeks to End "Revolving Door" at SEC

Last week, Congressman Stephen Lynch (D-MA) introduced H.R. 1463, the "SEC Revolving Door Restriction Act of 2015," which would amend the '34 Act to generally require SEC employees to wait at least one year after they leave the SEC before working for a company whose enforcement action they handled in the preceding 18 months. According to Lynch's release, the bill defines "enforcement action" as court actions, administrative proceedings or Commission opinions.

Bill Proposes to Impose Bad Actor Disqualification Waiver Process on SEC

On Tuesday, Rep. Maxine Waters (D-CA) proposed a bill titled the Bad Actor Disqualification Act of 2015, which would require that the SEC undertake a "more rigorous, fair, and public process" before waiving "bad actor" securities laws disqualification provisions. Specifically, as noted in the Summary, the bill would:

• Require the waiver process to be conducted and voted on at the Commission level, rather than the staff level;
• Require the Commission to consider whether granting a waiver would be in the public interest, protective of investors, and promote market integrity;
• Provide the public a notice and comment period and the opportunity to request a hearing on whether a particular waiver should be granted or denied and;
• Require SEC staff to keep complete, public records of all waiver requests and denials (formal and informal) and create a public database of all bad actors.

As reported last week, the SEC's Division of Corporation Finance just issued this policy statement identifying the factors it will consider in evaluating whether to grant waivers, following a robust speech by Chair White about the Commission's rigorous waiver evaluation/grant process. 

Regulatory Process Reform Bills Move Forward 

The Searching for and Cutting Regulations that are Unnecessarily Burdensome or SCRUB Act of 2015, which would task a commission with determining which rules should be repealed or eliminated to reduce regulatory costs, was reportedly reported out by the House Judiciary Committee yesterday. The Committee also reported out of Committee the "Providing Accountability Through Transparency Act," which would require 100-word summaries in plain English to accompany proposed rulemakings.  

PCAOB Member Addresses Audit Committee & Issuer Concerns, Auditor Reporting Model

In this speech last week, PCAOB Board Member Jay Hansen identified principle requests and concerns expressed by audit committees and issuers through the PCAOB's ongoing outreach activities, as well as the status of certain standard-setting projects.

Specifically, Hansen noted concerns that inspectors are engaging in standard-setting by inspection rather than through the formal standard-setting process, and also that the PCAOB's actions are driving a "compliance mentality" among auditors. With regard to the former, he described the rigorous quality control process that he believes generally ensures that reported findings are backed by specific auditing standards. With respect to the latter, he stated that:

[W]e and firms have to be diligent to avoid this as much as possible. As firms are trying to drive audit quality, often through remedial measures implemented in response to our inspection reports, firms have provided more training, imposed more firm specific requirements, and demanded more documentation from their audit teams. In general, these are positive steps that have positive results. I would caution auditors at all levels, however, about the danger of trading in their judgment and experience for compliance with documentation and check-list requirements...This is an issue that we at the PCAOB will be mindful of, as we move forward with our 2015 inspections and remediation discussions with firms, as well as in the context of our standard setting activities.

JOBS Act Emerging Growth Companies Dominate IPO Field in 2014

Proskauer's newly published analysis of US-listed 2014 IPOs reveals some interesting findings including:

• EGCs dominate: 76% of IPOs filed as Emerging Growth Companies under the JOBS Act, all of which elected to confidentially submit, and most of which included two years of audited financials rather than three
• Majority board independence: Consistent with 2013, boards averaged 7 - 8 directors, with majority independence.
• Jump in material weaknesses: Number of issuers disclosing a material weakness in internal controls jumped from 17% in 2013 to 30% in 2014.

See also this CFO article.

Fortune 500 Companies Increase CEO Stock Ownership Requirements

Towers Watson just released this analysis of Fortune 500 executive stock ownership guidelines and retention policies disclosed in 2014 proxy statements. Notably, the median CEO ownership requirement has increased to 6x base salary after many years of holding steady at 5x. Other findings include:

• Multiple of salary is the most common measure used
• Most companies provide five years to meet the guidelines
• Unvested restricted shares are excluded for purposes of determining compliance by 26% of companies
• Almost half of the companies have retention guidelines, most of which require retention of shares only until the ownership guidelines are met
• 30% of companies made changes to their guidelines or policies during the past two years - most commonly to increase the stock ownership or retention requirements

Appraisal Rights Cases Spike; PetSmart Actions Could Be Largest Ever

According to Fried Frank, appraisal rights cases reportedly jumped from 5% of eligible deals between 2004 - 2010 to 17% in 2013. In this article, Reuters discusses the increasingly popular strategy that allows hedge funds to generate a solid return while cases are pending due to Delaware law's controversial interest rate accrual provision. Three funds holding approximately 10.5 million or $870 million worth of PetSmart's shares have supposedly filed appraisal actions that would generate more than $50 million of accrued interest annually (subject to increase based on compounding quarterly) even if the court ultimately determines that the deal price was fair.

As we recently reported, the Corporation Law Section of the Delaware Bar Association has proposed legislation to address potential abuse of Delaware's appraisal statute (DGCL Section 262), including providing a method by which a company can stop appraisal claims from accruing interest; however, the proposal has been criticized as being inadequate.

Dispute Prompts Rare Director Resignation Form 8-K Disclosure

Plastics manufacturer Myers Industries made a rare Item 5.02 Form 8-K filing disclosing that one of its directors had resigned as a result of the board's decision not to re-nominate him, and taking issue with negative comments the director had made about the board in his (also disclosed) resignation letter:

The Company takes exception to the opportunistic and negative comments made by Mr. Lee about the Board in his resignation letter. In particular, the Company disagrees with Mr. Lee's assertion that the Board exhibited a "careless attitude" in any respect. The members of the Board take their responsibilities and decision making very seriously, whether related to compensation, acquisitions, divestitures, capital allocation, or otherwise, and have the utmost respect for their fiduciary duties to the Company and its shareholders.

Shareholder Support for Directors and Executive Pay Plans Declines in Latter 2014

Shareholder support declined for directors and executive compensation plans in the 2014 "mini" proxy season (i.e., meetings held between 7/1/14 - 12/31/14) compared to the same period the prior year according to Broadridge's/PwC's new Proxy Pulse. Highlights include:

• Director elections: 125 directors failed to receive majority shareholder support - a 26% increase over the 2013 mini-season. Additionally, 344 directors failed to attain at least 70% support - an important benchmark for many companies and proxy advisors.
• Say-on-Pay: Average shareholder support for pay plans declined by 3% compared to 2013; 35 companies failed to attain majority support for their say-on-pay vote.
• Retail voting participation: Over 22 billion retail shares - just over 29% of street shares outstanding - went unvoted during 2014.
• Ownership and voting: Institutional ownership rose by 3% to 59% of street shares - consistent with recent trends. While institutions voted 83% of their shares, retail shareholders voted only 28% of their shares.

Bank of America Adopts Proxy Access

Bank of America announced last week its adoption of a proxy access bylaw that would allow up to 20 shareholders owning 3% for 3 years to nominate up to 20% of the board.

T. Rowe Price Expands Published Proxy Voting Policies

In more proxy access news, T. Rowe Price has updated its Proxy Voting Policies detailing its proxy administration process (including retention of ISS) and discussing how it manages potential conflicts of interest. The updated policies also outline its views on proxy access: 

T. Rowe Price believes significant, long-term investors should be able to nominate director candidates using the company's proxy, subject to reasonable limitations comparable to those contained in the SEC's 2010 proxy access rule. We believe the orderly process required under these provisions would ultimately prove to be a better corrective mechanism in the U.S. markets than our current state, where activist shareholders drive many of the changes on corporate boards, whether or not they share long-term investors' objectives.  

 

Generally, FOR shareholder proposals offering a balanced set of limitations and requirements for proxy access. We support proposals suggesting ownership of three percent of shares outstanding as the standard for access to the proxy. We also support a minimum two-year holding period, with a maximum of three years. We do not believe there should be significant impediments to a proponent's ability to aggregate holdings with other shareholders in order to qualify for access to the proxy. Generally, we will vote AGAINST proposals (whether sponsored by shareholders or by management) putting forth requirements materially different from these thresholds.  

United Brotherhood of Carpenters Refiles 2011 Petition to Eliminate Withhold Votes from Proxy Ballots Citing Confusion about Legal Effect  

The United Brotherhood of Carpenters and Joiners of America has resubmitted a 2011 petition requesting a rulemaking to amend Rule 14a-4(b)(2) to eliminate the "withhold authority to vote" option for director elections. The Petiton notes that:  

The director election ballot prescribed by Rule 14a-4(b)(2) has not kept pace with the majority vote standard reform that has taken place in the market over the past decade. The Withhold Vote has outlived its usefulness in light of the broad adoption of a majority vote standard, and its continued use is problematic for it is the root cause of misleading proxy statement disclosure and uncertain shareholder expectations regarding the outcomes of director elections. Rule 14a-4(b)(2) should be updated to clearly identify the appropriate proxy card vote options for elections conducted under either a majority vote standard (For, Against and Abstain) or a plurality vote standard (For and Abstain).  

The Petition further states that the move to majority voting "has spawned considerable confusion among shareholders, corporations, academics, and proxy advisory firms concerning the Withhold Vote at companies with a plurality vote standard." He notes that:

Vote standard disclosure narratives in corporate proxy materials are routinely inaccurate and misleading; Institutional Shareholder Services . . . conflates the Against and Withhold Vote options in its director election voting guidelines; and director election studies by respected corporate governance entities present inaccurate descriptions of election vote standards and election outcomes. There is abundant evidence that points to growing confusion in the marketplace about the legal effects of the director election vote options required on the form of proxy by the current Rule 14a-4(b)(2).  

Investor Voice Launches Simple-Majority Vote Counting Initiative 

In related news on vote counting, Investor Voice formally initiated this shareholder initiative asking all companies to use a "Simple-Majority" vote counting formula to determine the passage of proposals. The initiative is based on a joint (Investor Voice/Cook ESG/Sustainable Investments Institute) analysis of the theoretical impact on the vote outcomes of having used a "simple majority" formula for all votes cast on shareholder proposals over the past 11 years (6,379 discrete ballots), as compared to other formulas that were actually used for those proposals that counted abstentions in the denominator.  

A "Simple-Majority" vote counting formula is defined as For/For + Against votes, as compared to a so-called "Modified Delaware" formula that includes abstentions in the denominator. The analysis purportedly found that 63 shareholder proposals that failed during that period would have passed based on a simple majority vote counting formula. Of those, almost 40% had an "abstention gap" (i.e., the degree to which votes are reduced when abstentions are counted using the Modified Delaware formula) of ≤2%. 

A September 2013 report prepared by GMI Ratings supposedly found that 52% of the S&P and Russell 1000 include abstentions in the denominator; just under 48% exclude them; and less than 1% include them only if necessary to constitute a quorum.

According to Investor Voice, the proposed Simple-Majority vote proposal, which generally seeks that companies amend their governance documents to provide that all matters presented for a vote other than the election of directors be decided by a simple majority of the shares voted "FOR" and "AGAINST" an item - is expected to be voted on at eight companies this proxy season.

In Omnicare Inc. vs. Laborers District Council Construction Industry Pension Fund, the U.S. Supreme Court held that statements of opinion in registration statements that turn out to be incorrect are generally not actionable under �11 of the 1933 Securities Act if honestly made. However, an opinion not honestly made or that omits material facts about the issuer's inquiry into or knowledge about an opinion may be actionable:

If a registration statement omits material facts about the issu�er's inquiry into, or knowledge concerning, a statement of opinion, and if those facts conflict with what a reasonable investor, reading the statement fairly and in context, would take from the statement itself, then �11's omissions clause creates liability. . . .

See also this Proskauer memo.

At Tulane University Law School's Annual Corporate Law Institute last week, while SEC Chair White touted the benefits of increased shareholder-company engagement resulting from increased activism, Delaware Supreme Court Chief Justice Strine reportedly urged changes to the SEC's beneficial ownership reporting requirements that would make potentially activist positions more transparent sooner. In contrast to current requirements, which gives investors 10 days to disclose a greater than 5% ownership stake, Strine purportedly suggested disclosure be required "real time," and based on a 2% rather than 5% threshold:  

He said investors crossing the 5% threshold should disclose their stakes in "real time," perhaps within as little as 24 hours. He also raised the possibility of lowering the disclosure threshold to 2%, saying changes to the rules would increase transparency in the markets. Mr. Strine said investors should be forced to report ownership of options and other derivatives, which aren't counted under current rules but which can eventually be used for voting. 

 

Activists have long maintained that faster disclosure would tip their hand prematurely, reducing the financial incentive to take such stakes and potentially depriving all shareholders of needed corporate change. 

 

Mr. Strine also recommended doing away with a rule that requires investors above the 5% threshold who plan to be active, or press for corporate change, to file one form, known as a 13D, while so-called passive filers, such as many mutual-fund companies, use another, known as a 13G.  

See also this DealBook article.

This week's highlighted question from the Huddle is:

I am curious if any of your companies state in the Insider Trading Policy when insiders can expect open windows to occur and how long the windows are typically open for?  For example ours states that the window will open two business days after the earnings release and close on the 4th day of the last month of the quarter.  Of course we have the caveat that the Corporate Secretary can decide to close the window or not open it depending on what is happening in the Company at the time. 

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

Our Insider Trading Policy does state when window periods begin and end. The policy also provides that the window periods are subject to trading moratoriums. It also states that window periods are a compliance requirement and do not constitute a legal right to trade in the company's securities. We post a notice to our intranet at immediately prior to the open window period to let employees know the exact date the window opens and closes.
 

Check out the Society Huddle.