Calling all Small and Mid-Cap companies, register and attend the Investor Forum.

 

With 28 breakouts to choose from, you can customize 

your own conference experience. Come to Chicago to "Connect, Communicate, Collaborate" with colleagues and industry experts. 

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

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 Announces Approximately $1.5 Million Whistleblower Award to Compliance Officer 

The SEC announced today a Dodd-Frank Act whistleblower award of approximately $1.5 million to a compliance officer who provided information that reportedly assisted the SEC in an enforcement action against the whistleblower's company. The release states that the compliance officer had a reasonable basis to believe that disclosure to the SEC was necessary to prevent imminent misconduct from causing substantial financial harm to the company or investors. 
 

When investors or the market could suffer substantial financial harm, our rules permit compliance officers to receive an award for reporting misconduct to the SEC," said Andrew Ceresney, Director of the SEC's Division of Enforcement.  "This compliance officer reported misconduct after responsible management at the entity became aware of potentially impending harm to investors and failed to take steps to prevent it. 

SEC Commissioner Aguilar Seeks State Collaboration in Fraud Prevention, Reg. A+ Implementation

In a speech last week before the NASAA, SEC Commissioner Aguilar called on state securities regulators to continue collaborating with the SEC in efforts to protect retail investors against fraudulent schemes, and to assist the SEC with implementation of new Reg. A+. With respect to the latter, he discussed how the new rules contemplate a greater role for state regulators than what was initially proposed, suggesting that even in state-preempted Tier 2 offerings, state regulators would have opportunity during the 21-day period between the filing of offering statements with the SEC and qualification to preview the offerings before any potential sales could occur in their respective states. Commissioner Aguilar also noted that Chair White is entertaining his suggestion to assign a NASAA representative to the SEC to assist with Reg. A+ implementation.

Regulatory Reform Bills Clear House Judiciary Committee

The House Judiciary Committee approved theRegulations from the Executive in Need of Scrutiny (REINS) Act of 2015 (H.R. 427) last week by a vote of 15 - 10. As previously reported, the Act would require federal agencies to submit rules with an annual economic impact of $100 million or more to Congress for approval before they could take effect. Also approved by a 14 - 9 vote was the All Economic Regulations are Transparent (ALERT) Act of 2015 (H.R. 1759), which would require federal agencies to consistently make enumerated disclosures (e.g., rule summaries, objectives of and legal basis for the rules, estimated costs and economic effects) about rules they propose or enact.

Last week, several watchdog groups (Citizens for Responsibility and Ethics in Washington, the Government Accountability Project and New Rules for Global Finance) sent this letter to the Senate Committee on Banking, Housing and Urban Affairs and the House Committee on Financial Services seeking Congressional action requesting changes to the Exchange Act Schedule 13(d) reporting requirements. Specifically, the letter calls on Congress to: (i) change the current 10-day reporting time frame for 5% owners to one day, (ii) impose a 2-day "cooling off" period following a filing during which the investor can't acquire more shares, and (iii) "modernize" the definition of "beneficial ownership" to "prevent activists from acquiring control using stealth techniques and derivative instruments to evade the reporting requirements."

Among other things, the letter cites a 2014 Wall Street Journal report documenting activist investors' behind-the- scenes communications with one another during the 10-day window to the detriment of "ordinary" investors, and laws in several other countries that impose shorter reporting deadlines.

PCAOB Board Member Seeks Academic Research on Rise of Audit Firm Advisory & Consulting Services

At the 2015 PCAOB Academic Conference last week, PCAOB Board Member Steven Harris addressed investor concerns about the rise of audit firm advisory and consulting services, and called on the academic community to research the implications of this trend on auditor independence and quality.

He identified these "fundamental" concerns for investors:

• Potential distraction by the firm and firm leaders away from audit and its core values as they try to grow their advisory and consulting practices.
• Potential use of inappropriate partner and staff performance measurements, such as emphasizing the promotion of new business and profits over audit quality.
• Potential independence impairment stemming from insufficient monitoring of various services provided to audit clients by the firm and its affiliates.
• Potential rise of internal conflicts within the firm.

DOL Proposes New Fiduciary Standard for Retirement Investment Advisers

Last week, the Department of Labor published for comment a proposed rule that would require retirement advisers to put their clients' best interests first. Specifically, the rule would require retirement investment advisers and their firms to formally acknowledge fiduciary status, and enter into a contract with their customers in which they commit to fundamental standards of impartial conduct - including giving advice that is in the customer's best interest and making truthful statements about investments and their compensation.

Those advisers who wish to receive payments from companies selling products they recommend and forms of compensation that create conflicts of interest would need to meet one of several proposed prohibited transaction exemptions. Comments are due within 75 days after publication in the Federal Register, which is expected this week. See also this DOL press release.

Regional Director & Head of Financial Fraud Task Force Departing SEC

The SEC announced that David Woodcock, Regional Director of the Fort Worth office and leader of the Enforcement Division's Financial Reporting and Audit Task Force, is leaving the SEC later this spring. Woodcock helped form the accountant and attorney task force, which was launched in 2013 to prevent, detect and investigate potential fraud in financial statements with the aid of innovative methods and technology. Associate Regional Directors Marshall Gandy, who oversees the office's examination program, and David Peavler, who oversees its enforcement program, will serve as co-acting Regional Directors upon Mr. Woodcock's departure.

CCMC Expresses Concerns About SEC Whistleblower Enforcement on Confidentiality Agreements

On April 9, the Chamber Center for Capital Markets Competitiveness sent this letter to SEC Chair White (i) expressing its concerns about the SEC's recent enforcement action against KBR, Inc. for allegedly violating Dodd-Frank's whistleblower protection rules; (ii) suggesting that the SEC's actions demonstrated rulemaking by enforcement rather than the regular notice and comment process; and (iii) seeking formal guidance on permissible confidentiality language. As previously reported, the SEC charged KBR with violating Dodd-Frank's Rule 21F-17 for allegedly using improperly restrictive language in employee confidentiality agreements with the potential to stifle the whistleblowing process.

Among other things, the letter notes that the use of confidentiality agreements in business activities is routine, and questions the legal basis for the SEC's action. The letter also criticizes the SEC's recent informal letter campaign requesting copies of seemingly targeted companies' employee confidentiality, severance, and other agreements deemed to have the potential to interfere with an employee's ability to report potential wrongdoing to the SEC.

Eugene Scalia Urges Caution in Reacting to SEC's KBR Whistleblower Enforcement Action

In related news, see this recent Wall Street Journal op-ed by Gibson Dunn's Eugene Scalia, urging companies to be cautious in reacting to the SEC's KBR enforcement action. In the opinion, Scalia questions the legal basis for the SEC's recent action relative to the terms of Dodd-Frank's whistleblower rule, and discusses the implications of "bowing to SEC pressure" on companies' confidentiality interests and constitutional rights:  

Whistleblowers deserve protection, but employees are not federal agents. U.S. companies should consider all the implications before signing agreements that give employees carte blanche to funnel company information to law-enforcement agencies.

PwC Annual Securities Litigation Study Outlines Trends, Potential Future Class Action Triggers
 

PwC's recently released annual securities litigation study reveals these key findings:

• Federal securities class action cases remained at one of the lowest levels since 1995 (PSLRA enactment); however, the number of cases increased slightly for a second consecutive year.
• Accounting-driven federal securities class actions increased both in total number of cases and as a percentage of all cases filed, which PwC attributes to the SEC's and other regulators' actions. The most commonly cited triggers were internal controls and revenue recognition.
• 66% of federal securities class action defendants were small-cap or micro-cap companies.

The report also advises companies to consider these key emerging issues, which PwC believes may be susceptible to new regulations, increased scrutiny and possible follow-on federal securities class action litigation with the potential for very large settlements:

• Enforcement of anti-corruption statutes such as the FCPA
• Cyber breaches
• New complexities in financial markets
• Increase in IPOs and the robust M&A market

CFA Institute Releases Updated CD&A Template

In related news, the CFA Institute just released an updated CD&A template designed to assist companies with developing their CD&A. The sections of the model CD&A are reportedly arranged in order of importance from an inves­tor's perspective, starting with an overview of the company's corporate performance for the previous year and an explanation of the link between that performance and executive pay. The remaining sections delve into detail about compensation elements and decisions, compensation-setting process and policies, and other areas of interest.

Private Company Governance: Director Time Commitment on the Rise, CEO Succession Plans Lacking 

NACD recently released its 2014-2015 Private Company Governance Survey, providing benchmarking data on a wide range of board practices for private company directors. Highlights include:

• Increasing Director Time Commitment - Including a new category designed to capture informal meetings/conversations with management, average annual time commitment increased from 180 hours last year to 247 hours this year. Even excluding the new category, director time commitment increased year over year to 195 hours.
• Formal CEO Succession Plans Lacking - 68% lack a formal CEO succession plan. Of those that have one, 35% are "very satisfied" with it. Among those whose succession planning process consists only of informal discussions, only 9% are "very satisfied."
• Dissatisfaction with Board Information - More than 45% of private company respondents expressed dissatisfaction with the quality and 57% were dissatisfied with the quantity of information provided by management regarding cybersecurity and information-technology risk.
• Stakeholder Pressure on Executive Compensation - The most common change made by private boards in response to stakeholder pressure or a stakeholder request was the revision of an executive compensation plan (cited by 43% of respondents).
• Full Board Preferred for Risk Oversight - 54% favor allocation of the majority of risk oversight tasks to the full board. 33% of private company directors on boards that currently allocate these responsibilities to the audit committee believe that risk oversight should instead be chiefly performed by the full board.

New Edition of OECD Corporate Governance Factbook Published

The OECD recently published the second edition of its Corporate Governance Factbook. The book provides corporate governance-related information on more than 40 OECD and partner jurisdictions including Argentina, Brazil, Hong Kong, India, Indonesia, Lithuania, Saudi Arabia and Singapore, across these four principle topic areas: 1) corporate landscape; 2) corporate governance framework; 3) rights of shareholders and key ownership functions; and 4) board of directors.

State Treasurers Urge SEC to Adopt Political Spending Disclosure Rule

Five state treasurers (OR, NC, RI, WA, VT) sent this joint letter to the SEC yesterday urging adoption of a political spending disclosure rule. The letter notes that in the absence of SEC rulemaking on this topic, there has been an uptick in voluntary disclosure by many companies, but asserts that comprehensive reform is still needed:

Amid the encouraging signs are grim realities about the need for comprehensive reform. The patchwork adoption of various disclosure policies leaves shareholders like us with a complex system of partial and disjointed information to consider. This has a substantial financial implication. After last November's election, the Center for Responsive Politics noted a jump in dark money spending from $135 million to $170 million since the previous mid-term election. Far too many companies can cloak donations from shareholders behind the anonymous 501(c)(4) groups and other intermediaries that have grown in prominence the past several election cycles. A comprehensive system of disclosure is needed to complete the shift towards disclosure to all companies and along a uniform structure.  

See also this article from The Hill.

Institutional Investors Call on SEC to Seek Better Disclosure of Climate Change-Related Business Risks

Last week, Ceres sent this letter to Chair White from 62 institutional investors asking the SEC to push for better disclosure by oil and gas companies of climate change-related business risks such as cap-ex on high cost oil and gas exploration projects, government efforts to limit carbon emissions, and the potential for relatively near-term, reduced global demand for oil. The letter asserts that these material risks constitute "known trends" under SEC rules (Reg. S-K, Item 303 - MD&A) and associated interpretive guidance, and specifically requests SEC Staff scrutiny of carbon asset risk Form 10-K disclosures and issuance of targeted comment letters addressing reduced demand scenarios and other risks.

CII Files Hedging Disclosure Comment Letter Supporting Rule as Proposed

CII sent this comment letter to the SEC last week indicating its support of the hedging disclosure rule generally as proposed. Although the letter makes clear that CII's policy opposes hedging entirely for executives and directors (hedging by other employees is discouraged), it acknowledges that the proposed disclosure will be particularly beneficial for investors' investment and voting decision-making relative to those companies that haven't adopted its hedging policy.

Other comment letters that have been submitted to the SEC to date, including Davis Polk's, are available here. See below for the Society's letter.

ISS Launches Governance Risk Reports for Global Asset Owners; Uses QuickScore

Yesterday, ISS launched "Governance Risk Reports" for global asset owners to assist them in monitoring governance risk across their investment managers' portfolios. The reports purportedly depict portfolio risk by, among other things, identifying the percentage of, and largest positions in, the portfolio deemed high risk based on ISS Governance QuickScores of 8 or higher.

Lack of Shareholder Proposal Detail in Notice of Meeting Deemed to Violate State Law

In Gwyn R. Hartman Revocable Living Trust U/A/D 11/16/93 v. Southern Michigan Bancorp and John H. Castle, the U.S. Court of Appeals for the Sixth Circuit held that Bancorp's annual meeting notice of a shareholder's proposal was insufficient to satisfy Michigan corporate law. Bancorp shareholder Gwyn R. Hartman Revocable Living Trust submitted to Southern Michigan Bancorp a shareholder proposal concerning director compensation clawbacks for inclusion on Bancorp's annual proxy statement for its upcoming annual meeting. The company's proxy statement didn't include the proposed resolution or anything about its substance, but merely disclosed a shareholder's plan to propose a resolution urging the board to amend the company's bylaws and the board's intent to vote it down by treating proxies as no-votes absent instructions to the contrary.

Michigan law requires annual meeting notices to "include notice of shareholder proposals that are proper subjects for shareholder action and are intended to be presented by shareholders who have notified the corporation in writing of their intention to present the proposals at the meeting." Citing Michigan case law as well as its own view of what constitutes adequate "notice," the court concluded that Bancorp's notice failed the satisfy the statute's "purpose-notice" requirement, which the court said "is designed to help shareholders 'study [a] proposal, arrive at a position, and either oppose it or support it' before the meeting itself."

Society Files Comment Letter on Proposed Hedging Disclosure Rules

The Society submitted a comment letter on the SEC's proposed hedging disclosure rule earlier this week, which includes the following suggestions:

• Proposed rules should be limited to disclosure of hedging in the registrant, or reporting, company's equity securities
• Only directors and executive officers should be subject to the proposed disclosure requirement
• Proposed rules should not apply to emerging growth companies or smaller reporting companies

Cleary Gottlieb and TCB to Host Conference on Income Inequality and the American Corporation 

On May 8, 2015, Cleary Gottlieb Steen & Hamilton LLP and The Conference Board Governance Center are hosting a conference on the topic of income inequality and the American corporation.

Speakers include:

• Edward D. Kleinbard, former Chief of Staff of the U.S. Congress' Joint Committee on Taxation, Johnson Professor of Law and Business at the University of Southern California's Gould School of Law, and 
• Steven L. Rattner, member of the Inclusive Prosperity Commission Convened by the Center for American Progress and lead adviser to the Presidential Task Force on the Auto Industry for the Obama administration.  

On the panel:

• Alan L. Beller, former head of the SEC's Division of Corporation Finance and retired partner of Cleary Gottlieb Steen & Hamilton LLP
• David Chun, CEO and Founder of Equilar, Inc.
• Donna Dabney, Executive Director, The Conference Board Governance Center
• Michael Garland, Assistant Comptroller, NYC Office of the Comptroller
• Ira T. Kay, Managing Partner, Pay Governance LLC
• Arthur H. Kohn, Partner, Cleary Gottlieb Steen & Hamilton LLP
• Steven Pearlstein, Robinson Professor at George Mason University
• Darla Stuckey, President and CEO of the Society of Corporate Secretaries and Governance Professionals

To attend or register for the live webcast, please contact Renee DaCruz: 212-339-0326 or renee.dacruz@conference-board.org.

Study: Board-Level Risk Oversight Effects Greater Oversight Than Dedicated Stand-Alone Committee

In this paper, authors Christopher D. Ittner, The Wharton School, University of Pennsylvania, and Thomas Keusch, Erasmus University Rotterdam, Harvard Law School Corporate Governance Program, discuss the results of their study of the influence of board risk oversight responsibilities and practices on the company's risk management processes and risk-taking. Using survey data for almost 300 companies in 28 countries and publicly available data, they make noteworthy findings on the allocation of board risk oversight responsibilities; the association between the level of board involvement and the company's risk management processes; and the effects of board risk oversight practices and risk management maturity on risk-taking. Among the findings are that delegating all board oversight responsibilities to one or more committees is associated with lower board oversight involvement than assigning risk oversight responsibilities to the board as a whole.

The study described in this new paper examined board gender disparity among companies in conservative "red" (Republican) vs. liberal "blue" (Democratic) states. In the study, authors Ying Li Compton, SEC, Sok-Hyon Kang, The George Washington Business School, and Zinan Zhu, National University of Singapore, investigated whether and to what extent female board representation depends on where companies are headquartered based on director composition between 2002 and 2012 for S&P 1500 companies.  

Companies were characterized as "red" or "blue" based on how their home state voted in the past four presidential elections between 2000 and 2012, or the margin of votes cast for Republican or Democratic presidential candidates in those four elections. The study found that female board representation is consistently lower for companies headquartered in "red" states than for those headquartered in "blue" states even after controlling for major variables including industry, size, and availability of female labor force. The authors also found that, for both red and blue states, average female director compensation is lower than that of their male counterparts by about 2 - 4%.

This week's highlighted question from the Huddle is:

We are holding our annual meeting in a few days and I am wondering how many of you announce the vote result at the meeting aloud--such as "the advisory vote on executive compensation passed, with a vote of 95% in favor"--and how many just state whether it passed or failed?  Does your answer change if there is a shareholder proposal on the ballot and the proponent is present?  If you don't announce the number (or percentage) of votes received, do you tell the proponent after the meeting, as a courtesy, or do you just wait until you file the 8-K?

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

We announce an estimated vote and percentage at the annual meeting, and follow up with an 8-K with the final numbers soon after the meeting. 

Check out the Society Huddle.

What Matters Most to Investors

On Inside America's Boardroom, host TK Kerstetter and Ron Schneider, Director of Corporate Governance Services, RR Donnelley Financial Services Group, discuss the "2015 Investor Survey: Deconstructing Proxy Statements - What Matters Most to Investors" that RR Donnelley conducted with Stanford University and Equilar, the compensation data company.