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SEC Issues Public Guidance on Forum Selection in Contested Actions

Purportedly to increase transparency, last week, the SEC's Division of Enforcement published its approach to forum selection in contested actions. In deciding whether to recommend to the Commission that an action be brought in federal district court or in an administrative proceeding before an ALJ, the Enforcement Division may consider these factors, among others:

• Availability of desired claims, legal theories and forms of relief in each forum
• Whether any charged party is a registered entity or an individual associated with a registered entity
• Cost-, resource-, and time-effectiveness of litigation in each forum
• Fair, consistent and effective resolution of securities law issues and matters

An administrative proceeding appears to be favored when a matter involves older conduct, or is likely to raise "unsettled and complex" issues under the federal securities laws or SEC rule interpretation. As to the former, hearings are held more quickly in an administrative proceeding than in district court, which the guidance notes may allow avoidance of stale witness memories and a quicker "public airing."

With respect to the latter, the guidance provides, "If a contested matter is likely to raise unsettled and complex legal issues under the federal securities laws, or interpretation of the Commission's rules, consideration should be given to whether, in light of the Commission's expertise concerning those matters, obtaining a Commission decision on such issues, subject to appellate review in the federal courts, may facilitate development of the law."

See these critiques from Dorsey & Whitney's Tom Gorman and DealBook.

SEC Commissioner Gallagher to Step Down Upon Confirmation of Successor

The Wall Street Journal reported today that SEC Commissioner Gallagher plans to leave the SEC upon confirmation of a successor by the Senate - in advance of the expiration of his 5-year term, which ends in 2016. Potential successors to Commissioner Aguilar, who is departing the agency this June upon the expiration of his term, are purportedly being vetted. They include Society member and Covington & Burling Partner Keir Gumbs and Steptoe & Johnson's Philip Khinda. According to Bloomberg, the White House has already identified candidates to succeed both Aguilar and Gallagher.

SEC Approves Tick Size Pilot Program for Small Company Stocks

Last week, the SEC approved a modified FINRA/exchange proposal for a two-year pilot program to assess whether wider tick sizes enhance the market quality of smaller company stocks. The pilot, which will begin May 6, includes stocks of companies with (i) $3 billion or less in market cap, (ii) an average daily trading volume of one million share or less, and (iii) a volume weighted average price of at least $2.00 for every trading day. See also the SEC's press release.

House Hearing Examines Dodd-Frank Regulatory Overreach

The House Financial Services Subcommittee on Oversight and Investigations is holding a hearing today entitled "The Dodd-Frank Act and Regulatory Overreach." According to the Committee Memorandum, the hearing will examine: (i) the assumption that the primary cause of the financial crisis was misbehavior by securities market participants, exacerbated by lax regulatory oversight, as well as (ii) the advisability and/or efficacy of overhauling financial regulations (as was done in the Dodd-Frank Act) in the immediate aftermath of a financial crisis.

In related news, Senator Richard Shelby (R-AL), Chair of the Senate Committee on Banking, Housing, and Urban Affairs, released yesterday a draft bill, "The Financial Regulatory Improvement Act of 2015," that would purportedly ease Dodd-Frank financial reforms for a number of major banks and financial institutions and increase oversight of the Federal Reserve. 

Democrats Seek Extension of DOL Fiduciary Rule Proposal Comment Period

Investment News and The Hill report that numerous House and Senate Democrats sent separate letters to DOL Secretary Thomas Perez last week urging a 45-day extension of the 75-day public comment period on the proposed fiduciary rules. This is consistent with the request made last month by a group of 16 financial trade groups including SIFMA, the American Bankers Association and the Chamber of Commerce. In related news, on Friday, in her remarks before the Investment Company Institute, SEC Chair White reiterated her commitment to SEC rulemaking on a uniform fiduciary duty standard applicable to investment advisers and broker-dealers - noting the SEC's efforts to ensure consistency with the DOL rules.

DGCL Fee-Shifting Bylaw and Forum Selection Amendments Pass in Senate 

Senate Bill No. 75, which proposes amendments to the Delaware General Corporation Law concerning fee-shifting and forum selection provisions, passed by a vote of 16 to 5 yesterday. As reported previously, the legislation would prohibit adoption of fee-shifting provisions and validate forum selection provisions in corporate charters and bylaws. 

PCAOB Publishes Audit Committee Dialogue

Last week, the PCAOB issued its first in a series "Audit Committee Dialogue." The inaugural issue highlights key areas of recurring concern in PCAOB inspections of large audit firms (e.g., ICFR) and emerging areas of audit risk that the PCAOB is monitoring (e.g., M&A) to assist audit committee members in their auditor oversight responsibilities. Particularly noteworthy is the inclusion of audit firms' increasing performance of non-audit work as an emerging risk area that the PCAOB has vocalized in a number of recent speeches. Each recurring concern and emerging risk is accompanied by a series of suggested questions that the PCAOB suggests audit committee members should consider asking their auditors.

EU Legal Affairs Committee Narrowly Backs Loyalty Rewards for "Long-Term" Shareholders

The European Parliament Legal Affairs Committee narrowly backed proposed changes to the EU's Shareholder Rights Directive last week. As previously reported, the controversial proposals would reward "long-term" (≥ 2 years) shareholders in the form of, e.g., additional voting rights, tax incentives, loyalty dividends or loyalty shares. The proposal still must be approved by the Council of Ministers and Parliament.

Also noteworthy, in an effort to increase the level and quality of engagement by institutional investors and asset managers, the draft Directive would require institutional investors and asset managers to disclose how they take the long-term interests of their beneficiaries into account in their investment strategies and how they incentivize their asset managers to act in the best long-term interests of institutional investors.

Trian Fund Loses Bid for Board Representation at DuPont; Retail Votes a Factor

The Wall Street Journal reported today that activist investor Trian Fund Management, led by Nelson Peltz, failed to win the support of a majority of shareholders in its widely publicized quest for four seats on DuPont's board at today's annual meeting. Egan-Jones supported all four of the nominees. ISS reportedly had supported Peltz and one other candidate, while Glass Lewis had supported just Peltz. CalPERS reportedly voted in support of DuPont's nominees.  The retail vote was a significant factor given that 33% of DuPont's shares are so held.

Microsoft Demonstrates Transparency on Investor Engagement Practices

Last week, Microsoft's VP and Deputy GC John Seethoff posted this blog on Microsoft on the Issues, Microsoft's Legal and Corporate Affairs department blog.  The blog features a video interview with a Microsoft director that touches on topics such as Microsoft's leadership, how the board operates, and the importance of shareholder engagement. The company's board video series and Microsoft on the Issues blog are two of several referenced components of its investor outreach efforts. The blog also includes a diagram depicting the company's annual investor outreach and corporate governance cycle. 

Emerging Growth Companies Include Independent Directors & Staggered Boards

In this new report, Morrison & Foerster shares information about the corporate governance practices of Emerging Growth Companies in connection with their IPOs based on a survey of over 400 EGCs that completed their IPOs between January 1, 2013 and December 31, 2014.

Key findings include:

• 86% of non-controlled companies had a majority of independent directors at IPO pricing
• 69% had staggered or classified boards
• 60% separated the CEO and Board chair positions
• 68% had all independent directors on the three key committees upon completion of the IPO
• 93% had an "audit committee financial expert" at pricing
• 35% had exclusive forum provisions in bylaws
• 75% had super-majority shareholder voting provisions
• 51% allowed shareholders to take action by written consent under specified conditions
• 20% were Foreign Private Issuers

The report also includes additional, helpful resources including benefits associated with EGC status, a diagram of the EGC IPO process, EGC SEC disclosure requirements, and NYSE vs. Nasdaq principal quantitative listing requirements and listing standards. 

Interim Vote Tallies Sample Confidentiality Agreement Template Posted

The Society has posted for members only a draft confidentiality agreement template that issuers may consider for purposes of sharing interim vote results with investors on particular voting items if requested.

Proxy Monitor: 2015 Proxy Season Early Report

This recently published Proxy Monitor report summarizes 2015 proxy season shareholder proposals and voting results for the Fortune 250 through April 24th. Data includes the percentage of shareholder proposals by type (e.g., corporate governance, social policy, executive compensation) and subtype (e.g., separate CEO/Chair, proxy access, political spending).

Trends include:

• Companies are facing more shareholder proposals on average than they have in any year since 2010 (up 14% from 2014) - largely due to proxy access proposals.
• Proxy access proposals have had mixed success.
• The percentage of social/policy proposals has declined.

Recent Voting Results - Shareholder Proposals

- Proxy Access: Shareholder proposals on proxy access were reportedly not approved at Peabody Energy, NVR, and CONSOL Energy. St. Jude Medical reported that its shareholder proposal requesting proxy access was approved and that the board would "carefully consider the shareholder vote and ongoing developments in the corporate governance community with respect to this topic." Shareholder proxy access proposals at these companies also reportedly passed: Citigroup (with management support), CBL & Associates, Conoco, eBay, HCP, Inc., and Occidental Petroleum.

- Independent Board Chair: Stockholder proposals requesting adoption by the board of a policy that the board chair be an independent director reportedly were not approved at American Express, Express Scripts and Oasis Petroleum.

- Other Proposals

• CONSOL Energy reported that its shareholder proposal regarding a climate change report was rejected.
• Express Scripts Holding reported that its stockholder proposal regarding political disclosure and accountability was rejected.
• Occidental Petroleum reported that its shareholder proposals regarding (i) a review of lobbying at federal, state and local levels, (ii) a report on methane emissions and flaring, and (iii) recovery of unearned management bonuses, were not approved.
• Bank of America reported that all of its directors were elected, the advisory vote on executive compensation was approved, and none of its stockholder proposals were approved.
• American Express reported that shareholder proposals relating to lobbying disclosure, action by written consent, and annual disclosure of EEO-1 data were not approved.

As You Sow Releases ESG Proxy Voting Guidelines

As You Sow, in collaboration with Proxy Impact, released these Proxy Voting Guidelines last week, which purportedly offer socially responsible investors a resource to align their investments with their values. The Guidelines provide principles and specific vote recommendations across a broad spectrum of ESG issues including corporate governance and executive compensation topics.

CREW & Others Send Letter of Support to SEC for Political Spending Disclosure Petition

Citizens for Responsibility and Ethics in Washington (CREW) and a group of more than 50 corporate reform coalition members recently sent this letter to SEC Chair White in support of the 2011 academics-sponsored Petition to the SEC to require public companies to disclose their political spending. Among other things, the letter expresses shareholder concern about the "business sense" of corporate political spending:

The growing number of shareholder resolutions demanding greater investor oversight of corporate political spending further demonstrates the vast shareholder support for such transparency. Shareholders have been concerned about the business sense of corporate political spending for some time - but the concerns have become more pronounced as the scope and nature of corporate political activity has expanded under Citizens United. Since 2010, shareholders have filed 530 resolutions on corporate political activity, making it by far the most common shareholder proposal, including 110 resolutions in 2014. 

Additional comments received on the Petition to date are available here.

CII Expresses Support for Fee Shifting Legislation, Opposes Forum Selection Legislation

CII sent this letter to Delaware Senator Bryan Townsend last week expressing its support for the draft legislation (since approved in the Senate) that invalidates fee shifting provisions in corporate articles and bylaws, but expressing a lack of support for the legislation's proposed forum selection provisions. The proposed legislation allows Delaware corporations to include in their articles or bylaws a forum selection clause for shareholder disputes provided that Delaware is the selected forum. CII's letter claims that while this is generally consistent with the existing view of Delaware courts, it's not consistent with corporate governance best practices or CII's approved policy that frowns upon companies' imposition of exclusive forum provisions. 

Investors Concerned About Differential Reporting Requirements for Private Companies

A newly released CFA Institute study reveals investor concerns about current standard-setter initiatives to create differential or reduced financial reporting requirements for nonpublic companies, extend these alternative reporting requirements to public companies, and change certain public company reporting requirements. The CFA Institute's 2014 member survey found that:

• 82% of respondents believe differential standards will decrease comparability - so, create comparability issues for those investing across public and private companies
• 73% believe differential standards will increase complexity rather than reduce it
• 65% believe differential standards will result in the loss of information useful to their financial analyses

The report also notes that FASB is currently considering whether to extend certain private company accounting alternatives (reportedly meant to reduce compliance costs) to public companies - a move favored by only 6% of CFA Institute members.

Webinar: The Evolving Role of Corporate Secretaries

The IFC is hosting an hour-long webinar on Tuesday, May 19th at 10 a.m. EDT about the evolution of the role of the corporate secretary. The discussion will draw on ICSA (Institute of Chartered Secretaries and Adminstrators) research and will address, among other things:

• Breadth of responsibilities & opportunities for greater engagement and influence of a high performing company secretary
• Qualities now expected of a successful company secretary and how these can be gained or learned
• Challenges to the role
• Pros and cons of combining the role with that of General Counsel
• Lack of recognition for the role in many emerging markets

Space is limited. If interested, please register by close of business on Thursday, May 14th. The webinar will also be recorded and available online on IFC Sustainability website after the event.

Identifying Opportunities for Nonprofit and For-Profit Boards to Learn From Each Other

In this recent Stanford Closer Look Series, "What Can For-Profit and Nonprofit Boards Learn from Each Other About Improving Governance," Stanford Graduate School of Business' Nicholas Donatiello, David Larcker and Brian Tayan identify common core attributes of for-profit and nonprofit boards, as well as opportunities for each to learn from other. Here are their principle observations:

Nonprofit boards might learn from their for-profit counterparts in the following areas:

• Formal governance processes -particularly in the areas of financial reporting, performance measurement, and board evaluation.
• Greater focus on their fiduciary roles.
• Greater expertise and stability at the board level.

Corporate boards of directors might learn from their nonprofit counterparts in the following areas:

• More power sharing with the CEO
• CEO compensation levels
• Gender balance

For-profit and nonprofit organizations could both improve in the following areas:

• Non-financial performance measurement
• CEO succession planning
• Racial diversity

The referenced nonprofit governance survey, which we reported on previously, is here.

This week's highlighted question from the Huddle is:

Do any of you make recordings of Board and committee meetings to help with writing the minutes?   If so, do you destroy the recording afterward, or does it become part of the corporate record? What are the "best practices" with regard to recording meetings? 

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

Good minutes record the actions taken and support that the board was well-informed in taking those actions, rather then including a "who said what" transcript. In addition to litigation concerns, people tend to edit their comments before they speak if they know they are being taped. But boards are the most effective when directors feel safe to share their candid, unedited thoughts with one another.  

Check out the Society Huddle.