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SEC Commissioner Gallagher Suggests Review of Securities Exchanges' SRO Status  

The SEC Equity Market Structure Advisory Committee, which is charged with providing advice and recommendations to the Commission on equity market structure issues, held its inaugural meeting last week. The discussion focused on an assessment of Regulation NMS Rule 611, also known as the "Order Protection Rule" or "Trade-through Rule." Rule 611 requires trading centers to have policies and procedures designed to prevent "trade throughs" - i.e., trades at prices that are inferior to displayed and immediately accessible quotations at other trading centers. 

Looking longer term, Commissioner Gallagher encouraged the Committee to reevaluate the SRO status of the national securities exchanges as it expands its review: 

The SRO framework was developed in the context of private, mutualized exchanges - a set of circumstances that no longer exist. The primary rationale behind SRO status was to leverage exchanges' ability to provide regulatory oversight of their members.  Yet, a majority of the equities exchanges today outsource their regulatory obligations and market surveillance to FINRA, and FINRA's board is increasingly filled with independent directors -which calls into question whether both the "self" and "regulatory" in self-regulatory organization are now misnomers.  

See also Chair White's Opening Remarks, and remarks from Commissioners Piwowar and Stein.  

SEC Enforcement Division Director Addresses Corporate Self-Reporting, Cooperation
 

SEC Division of Enforcement Director Andrew Ceresney spoke last week at the University of Texas School of Law's Government Enforcement Institute about the SEC's corporate cooperation program. He provided an overview of the program's tools (e.g., cooperation agreements, DPAs, NPAs, reverse proffers), and touted its multiple potential benefits.

Notably, Ceresney strongly cautioned against a failure to self-report misconduct, and observed that the bar as to what constitutes "cooperation" has been raised over time to include conducting and sharing the results of internal investigations and sharing information on individual wrongdoers:  

As for the nature of cooperation, I think that the bar has been raised for what counts as good corporate citizenship in the last 15 years or so.  For example, internal investigations have now become common, a clear best practice for any company that discovers significant potential misconduct.  And sharing the results of those internal investigations with the government has become commonplace, as companies recognize the immense benefits that can accrue to them from doing so.  Some government officials have reemphasized recently the need for companies to share information on individual wrongdoers in order to receive credit for their cooperation. I wholeheartedly agree, and this has long been a central tenet of cooperation with the SEC.   

House Addresses Capital Formation, Regulatory Burden Reduction Measures

The House Committee on Financial Services met in open markup session yesterday to consider and vote on numerous measures including:

• H.R. 1525, the "Disclosure Modernization and Simplification Act of 2015": Agreed to
• H.R. 1723, the "Small Company Simple Registration Act of 2015": Agreed to
• H.R. 1965, the "Small Company Disclosure Simplification Act": Agreed to
• H.R. 2064, the "Improving Access to Capital for Emerging Growth Companies Act": Agreed to, as amended
• H.R. 2354, the "Streamlining Excessive and Costly Regulations Review Act": Agreed to, as amended
• H.R. 2357, the ''Accelerating Access to Capital Act of 2015": Agreed to

Participants at a House Financial Services Subcommittee hearing last week generally were supportive of initiatives to bolster small-cap secondary market liquidity, including establishing venture exchanges and improving the regulatory environment. Access the archived webcast here.

Reproposal of Bank Rule to Curb Risky Compensation Practices Expected Soon 

U.S. Comptroller of the Currency reportedly told the Reuters Financial Regulation Summit last week that the Dodd-Frank-required rule to curb risky compensation practices at financial institutions will be reproposed in the near term. An earlier rule proposal was apparently stalled due to business-related concerns. The reproposal would purportedly require deferral of half of management's bonuses for three years, and may require claw back discretion if management's decisions ultimately have a detrimental impact on the business.  

FDIC Chair Touts Strong Corporate Governance at Bank Directors Meeting  

In his remarks last week before the American Association of Bank Directors, FDIC Chair Martin Gruenberg focused on the role of bank directors in the safety and soundness of the banking system in the context of an effective corporate governance framework. Observing that "strong corporate governance is the foundation for an institution's safe and sound operations," he described expectations of bank directors as comparable to those applicable to directors of other organizations - i.e., inclusive of the primary duties of loyalty and care. Notably, he also acknowledged that there is no one-size-fits-all governance framework:  

While we expect every bank to have sound corporate governance, we know this does not look the same at every institution. The FDIC is the primary federal regulator for more than 4,000 institutions, ranging from $3 million to $182 billion in total assets. We recognize that a bank's size, risk profile, and complexity of its activities will determine the most appropriate framework, and therefore we do not expect community bank governance to have the same level of complexity as that found in larger banks.  

Gruenberg's remarks also touched on governance challenges facing bank (particularly community bank) boards - including strategic and cyber risks, community bank outreach and technical assistance efforts to assist directors in meeting their fiduciary obligations. 

DOL Extends Public Comment Period on Fiduciary Duty Rule Proposal to 90 Days

Investment News reports that the DOL extended by 15 days (from 75 days to 90) the public comment period on the proposed fiduciary duty rule that would require brokers to act in the best interests of their clients in providing retirement investment advice. Last week, three dozen Senate Republicans sent a letter to Secretary of Labor Thomas Perez asking for an extension to 120 days, expressing concern that the current 75-day period was inadequate given the complexity and voluminous nature of the rule and its exemptions. Their request and concerns mirror those previously expressed by numerous House and Senate Democrats and financial trade groups.

House Hearing Examines Dodd-Frank Regulatory Overreach

The House Financial Services Subcommittee on Oversight and Investigations held a hearing ("The Dodd-Frank Act and Regulatory Overreach") last week to 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. You may access the archived webcast and Committee Memorandum here. See also SIFMA's Key Topics & Takeaways.

Chief of Staff Lona Nallengara Leaving SEC  

The SEC announced the June departure of SEC Chief of Staff Lona Nallengara. Nallengara, named Chief of Staff in May 2013, is the lead adviser to the Chair on all issues involving the SEC including policy development, rulemaking, strategy, and management of the agency.  

SEC Deputy Chief Accountant Dan Murdock Departing; Wesley Bricker Appointed 

Last week, the SEC announced the end of May departure of Daniel Murdock, and appointment of Wesley Bricker, as a Deputy Chief Accountant overseeing the accounting group in the agency's Office of the Chief Accountant. Mr. Bricker, a partner with PwC, has more than 15 years of experience in public accounting. Mr. Murdock is returning to the private sector.

Avon's Share Price Jumps on News of False Bid

As discussed in this DealBook article, an apparent fabricated bid for Avon Products by a supposed British investment firm was reported on Edgar last week, raising questions about the integrity and reliability of the filings on the system. The SEC allegedly responded via email stating, "'Under the federal securities laws, filers are responsible for the truthfulness of their filings, and they are subject to enforcement actions when they are false or misleading.'" Avon's shares reportedly rose by more than 20% on the news. See also this Forbes article.

Successful Activist Campaign Triggers Sweeping Governance Changes at Tempur Sealy

Tempur Sealy announced last week sweeping corporate governance reforms in response to a successful activist campaign by its largest shareholder, H Partners Management, which had reportedly criticized the company for subpar performance, poor corporate governance, and execution failures since its acquisition of Sealy Corp. in 2013.

Changes include the board's creation of a Stockholder Liaison Committee chaired by the newly named Audit Committee Chair and composed solely of independent directors "in order to create a Board-level structure for communication and engagement between the Board and stockholders and to enhance the existing stockholder communications process led by the Company's management." As previously reported, in March, Vanguard suggested companies consider creating a Shareholder Liaison Committee as one of several alternatives to formalize a shareholder engagement program.

ISS Reports on Compensation Trends: Performance-Based Pay, TSR, "Relative Awards"

ISS reports that the most significant continuing compensation trends in 2015 are the move to performance-based pay (primarily long-term equity awards) and, relatedly, the growth in use of TSR and relative awards (i.e., achievement based on performance relative to a peer or other company group). 2015 statistics include:

• Performance pay comprised about 55% of total CEO compensation
• 58% of companies use TSR (up from 51% last year), followed by earnings metrics at 48%
• 62% of companies use relative awards in this year's proxies - up from 44% in 2010

The report asserts that although the trends theoretically are good for investors, they make for more complex compensation plans. This purportedly translates to greater difficulty in understanding and communicating the value and achievability of the awards, and a greater onus on companies to improve their compensation disclosure.

Canadian Board Practices: Board Chair/Lead Director Evaluations on the Rise

Korn-Ferry's newly released 2014 report on Canadian public company corporate governance practices and director compensation includes an in-depth discussion about the time commitment involved in serving as a Canadian public company director and, where relevant, comparative U.S. data. Noteworthy findings include:

• 56% of Canadian boards had an independent chair, compared to 34% of boards in the U.S.
• The average age of directors is slowly increasing, and percentage of younger directors decreasing.
• 11% of boards reported a term limit for directors - compared to 4% in 2010.
• 29% of boards addressed gender specifically when discussing their board diversity practices, compared to 18% in 2012 and 15% in 2011.
• There is a steady increase in evaluating the performance of the board chair or lead director and committee chairs. Additionally, in 2013, 90% of boards reportedly assessed individual directors - compared to 42% in the U.S.
• 28% of companies used both a questionnaire and individual meetings/interviews with directors in their board evaluation process.

Proxy Advisors Urge "No" Vote For Intel Director eBay CEO for Poor Attendance 

Both ISS and Glass-Lewis reportedly recommended a "no" vote for re-election of Intel director eBay CEO John Donahoe based on his 2014 attendance record. In a letter to stockholders last week, Intel's board chair and lead director attributed Donahue's failure to attend 75% of the board and committee meetings to his unusually demanding responsibilities at eBay last year, and urged stockholders to support his re-election:  

Based on extenuating and extraordinary business circumstances at eBay Inc., Mr. Donahoe's attendance was below the 75% level of the 19 Board and Board committee meetings during 2014. 2014 was an extraordinary year for Mr. Donahoe, culminating in a decision to split eBay into two public-traded enterprises. As CEO, Mr. Donahoe was deeply involved in that work and his time in 2014 was constrained on account of that special circumstance. We strive for 100% attendance from members of our Board and have enjoyed consistently high levels of participation. Prior to 2014, Mr. Donahoe had a strong attendance record. Even when events at eBay conflicted with some of Intel's Board and Board committee meetings in 2014, he was a productive and active Board member and made himself available for ad hoc engagements. Mr. Donahoe's attendance record in 2015 at formal meetings has already returned to historic levels. We believe it is contrary to the interests of the stockholders and Intel to reject his re-election on account of one year's special circumstances.  

The letter also reiterated the board's opposition to a stockholder proposal requesting that the board adopt an independent board chair policy.  

Recent Voting Results - Shareholder Proposals

- Proxy Access:

• Shareholder proxy access proposals at these companies reportedly passed: Anadarko Petroleum, Cimarex Energy, Kohl's, Range Resources,
• Chipotle had both a shareholder and a management proxy access proposal on its ballot, and neither reportedly was approved.
• Pioneer Natural Resources filed supplemental proxy materials two days before its annual meeting reiterating the board's opposition to a stockholder's 3 years/3%/25% of the board proxy access proposal, but reporting its intent to adopt a 3 years/5%/20% of the board proxy access bylaw before its 2016 annual meeting.
• See also Stinson Leonard's blog.

- Other Proposals:

• Anadarko Petroleum reported that a stockholder proposal regarding carbon risk reporting was not approved.
• Chipotle reported that shareholder proposals to issue an annual sustainability report, adopt a senior executive stock retention policy, and adopt a policy restricting acceleration of equity vesting upon a change of control, were not approved.
• Kohl's reported that a stockholder proposal on incentive compensation clawbacks was not approved.
• Genworth Financial reported that a stockholder proposal regarding an annual sustainability report was not approved.
• Morgan Stanley reported that a shareholder proposal regarding a simple majority vote-counting bylaw change was not approved.
• Aetna reported that a stockholder proposal regarding political contributions disclosure was not approved.
• Stockholders at JPMorgan reportedly approved retaining CEO and board chair Jamie Dimon's dual roles.

Group Sues SEC for Not Initiating Rulemaking on Political Spending Disclosure

A new public advocacy interest group, Campaign for Accountability, filed suit against the SEC last week on behalf of an investor for failing to initiate rulemaking requiring public company disclosure of political spending in violation of the APA. The investor, along with Citizens for Responsibility and Ethics in Washington (CREW), filed a petition with the SEC last year seeking formal rulemaking - further to and incorporating by reference an academics-sponsored petition filed in 2011.

The suit claims that the APA's legislative history makes clear that agencies must "fully and promptly" consider rulemaking petitions, "take such action as may be required, and... notify the petitioner in case the request is denied," and that failure to do so is subject to judicial review. It states that the SEC's failure to do so here is arbitrary, capricious, and contrary to law. However, according to Keith Bishop, Rule 192 of the Commission's Rules of Practice requires only that the Commission acknowledge receipt and give notice of any action it has taken.

For more information, see Jim Hamilton's blog. 

CalSTRS Releases First Sustainability Report, Highlights Proxy Voting Transparency  

Last week, CalSTRS released its inaugural 2013-14 Sustainability Report: The Next 100 Years, announcing that it is the first U.S. public pension fund to complete the rigorous and detailed sustainability reporting guidelines consistent with the Global Reporting Initiative.  The report purportedly evaluates comprehensive initiatives in these areas:

• Retirement security: legislative approval of a CalSTRS full funding plan.
• Investment impact: 288% increase in green bond holdings over fiscal year 2012-13.
• Business transparency: public access to all of our proxy votes through the CalSTRS.com website. 
• Environmental efforts: 22% decrease in water usage from the year 2013 at the LEED Platinum-certified CalSTRS Headquarters building.

Proxy Advisor Vote Recommendations Don't Promote Good Corporate Performance

In this new paper, University of Calgary Law Professor Bryce Tingle discusses the influence of proxy advisors on corporate board decision-making, the assumptions that underlie their voting recommendations, and the corresponding negative corporate performance implications. Among other things, the paper describes how the voting recommendations assume boards and committees should function almost exclusively as "monitoring devices" (with independence being paramount) - largely failing to recognize all of the board's other critical roles that promote its ability to positively impact corporate performance.

The paper also undermines the potential bases for the voting recommendations' shareholder primacy framework, and explains how even seemingly more flexible voting recommendations that appear to take a nuanced approach based on a company's particular facts and circumstances are much more akin to a one-size-fits-all, "check-the-box" governance approach.

While acknowledging that proxy advisors are likely here to stay (the assumption being that there is no real alternative if we expect institutional shareholders to vote), the author suggests "regulatory intervention" to mitigate the adverse consequences of their influence in the voting scheme. Specifically:

• Companies should be provided advance notice of, and allowed to directly address, proxy advisor recommendations
• Companies should be permitted to make their case to the proxy firm analysts, or at least to the firm's fund manager clients
• Directors should have an opportunity to review and comment on the recommendations
• The board should be allowed to explain in the proxy advisor's report why it disagrees with the voting recommendations, and why the recommendations are not in the company's best interest

Although geared toward Canadian companies, the paper's analysis is equally applicable to the U.S. scheme, and many of the statistics used to support the author's assertions are in fact U.S.-based.

This week's highlighted question from the Huddle is:

Does your company have a specific Board "Cyber Security Committee" or similarly named committee that has specific responsibility for oversight of your company's cyber security and related functions?

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

Society member Steven Shapiro of Krasnow Saunders wrote an excellent LinkedIn post which addresses this. Here is an excerpt: 

 

"Some commentators have made specific suggestions for reporting and oversight. For example, some suggest that a separate board committee be created to oversee cyber risk. Others recommend delegating certain responsibilities to technical consultants, cyber risk oversight committees or cyber risk governance committees. All of those are helpful suggestions, but a board of directors should consider its organization, people and processes and then craft an effective structure to the particular circumstances of its company."  

Check out the Society Huddle.