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SEC Reg Flex Agenda: Pay Ratio Disclosure Rulemaking Targeted for April 2016

The SEC latest regulatory flex agenda reveals delaying rulemaking intentions for several Dodd-Frank compensation provisions from the previously targeted October 2015 time frame to April 2016, as summarized below:

• Internal pay ratio disclosure and employee/director hedging disclosure (final rules). Companies will be required to report the pay ratio and hedging policy with respect to compensation for their first fiscal year commencing on or after the effective date of the final rules.  If the SEC finalizes rules in early 2016, as this new timeline implies, a company with a December 31 fiscal year end would first be required to report the pay ratio and hedging policy in its 2018 proxy statement. If rules are finalized sooner (i.e., before the end of 2015), a company with a December 31 fiscal year end would need to provide both disclosure requirements in its 2017 proxy statement.
• Clawbacks (proposed rules).  Additional clarity on implementation timing will likely be included in the proposed rules.

According to this Dow Jones article, the Commission is tentatively set to vote on the clawback rule proposal on July 1st, which would be followed by a release for public comment. Note that the Audit Committee Disclosure Concept Release is also tagged with an April 2016 timetable. 

Sen. Elizabeth Warren Critiques SEC Chair White; White House & Wall Street Respond

Yesterday, Senator Elizabeth Warren (D-MA) sent this letter to Chair White criticizing her leadership at the SEC. In response, Chair White reportedly released the following statement:

I am very proud of the agency's achievements under my leadership, including our record year in enforcement and the Commission's efforts in advancing more than 30 congressionally mandated rulemakings and other transformative policy initiatives to protect investors and strengthen our markets. Senator Warren's mischaracterization of my statements and the agency's accomplishments is unfortunate, but it will not detract from the work we have done, and will continue to do, on behalf of investors.  

This Politico article describes adverse reactions from Wall Street and the White House to Warren's criticisms, including this quote from White House Press Secretary Josh Ernest:

The president continues to believe that the reasons that he chose her, based on her experience and her values, continue to be important today.  The president does continue to believe that she is the right person for the job.

Senate Judiciary Committee Chair Seeks Review of Edgar Posting Standards

Last week, Senate Judiciary Committee Chair Charles Grassley sent this letter to SEC Chair White expressing concerns about the "systemic vulnerability" that was exposed by the apparent fabricated bid for Avon Products by a supposed British investment firm that was reported on Edgar in May. As previously reported, news of the bid triggered heavy trading and a spike in Avon's stock price. Noting the costs to companies and investors associated with the potential misuse of Edgar by bad actors to manipulate the markets, Grassley requested Chair White's response by June 16th to these questions:

1. What, if any, efforts are made to verify any of the filings on EDGAR? What are the time deadlines associated with these verifications?
2. How many instances of false postings to the EDGAR system have there been in the last 3 years? Please provide a list with information such as date of filing, type of filing and an explanation of the information in the filing that was determined to be false.
3. Has any attempt been made by the SEC to determine what the cost to investors and market participants was as a result of the false postings to EDGAR? If there has, please provide that information. If not, please explain why not?
4. How many of the approximately 4,000 daily filings made on EDGAR are made by first time users of the system?
5. Has any attempt been made by the SEC to determine what the costs would be to verify the information on its most common filings? If there has, please provide the results of that effort. If not, why not?
6. What other steps has the SEC taken to address the systemic vulnerabilities exposed by this incident?

SEC Commissioner Piwowar Expresses Support for PSLRA Bad Actor Waivers

In remarks yesterday at the Cato Summit on Financial Regulation, acknowledging the recent media focus around the SEC's grant of bad actor waivers, SEC Commissioner Piwowar nevertheless expressed support for waivers relating to issuers' ability to rely on the PLSRA statutory safe harbor for forward-looking statements:

It has been asserted that it may be appropriate for the Commission to refuse to grant waivers if a company has too many enforcement actions, regardless of whether those violations relate to corporate disclosure. I disagree. A policy that discourages companies from providing forward-looking information harms investors, leads to unfair, disorderly, and inefficient markets, and discourages capital formation. This result is antithetic to all three parts of our statutory mission. As some have observed, because a company's value is best judged by future prospects, rather than historical performance, reduced use of forward-looking statements is especially concerning from the perspective of allocative efficiency.

Resolution to Address Regulatory Reform Assigned to Congressional Committee

The Regulation Sensibility Through Oversight Restoration Resolution of 2015 was recently assigned to a congressional committee for consideration before possibly sending it to the House or Senate as a whole. The resolution establishes a joint select committee charged with:

• Conducting a systematic review of the process by which rules are promulgated by agencies;
• Holding hearings on the effects of and how to reduce regulatory overreach;
• Conducting a review of the CFR to identify rules and sets of rules that should be repealed; and
• Submitting to the Senate and the House recommendations for, among other things, ways to reduce the financial burden placed on the various sectors of the economy in order to comply with rules.

This is a Senate concurrent resolution, which is often used for matters that affect the rules of Congress or to express the sentiment of Congress. It must be agreed to by both the House and the Senate in identical form, but is not signed by the President and doesn't carry the force of law.

PCAOB Seeks Input on Auditor's Use of Work of Specialists

The PCAOB issued this consultation paper last week seeking input from investors, companies, audit firms and others on the potential need to improve its standards governing the auditor's use of the work of specialists (e.g., valuation experts, appraisers, actuaries). The paper notes that current standards remain largely as adopted by the AICPA in the early 70's, despite the increasing use and importance of specialists due - in part - to the increasing complexity in business transactions and the resulting complexity of information needed to account for and audit those transactions.  

Alternative regulatory approaches upon which Staff is seeking comment are:

• Auditor's Specialist - Oversight: The paper includes potential requirements to improve the auditor's oversight of the work of an auditor's specialist, whether employed or engaged.
• Auditor's Specialist - Objectivity: The paper includes potential requirements to improve the auditor's evaluation of the objectivity of an auditor's engaged specialist. Those requirements are based on the independence requirements in Rule 2-01 of Regulation S-X.
• Company's Specialist: The paper includes alternatives that, in the Staff's view, would improve the auditor's evaluation of the work of a company's specialist. Both alternatives would require more rigorous procedures than those required by AU sec. 336.

The PCAOB Standing Advisory Group's June 18 meeting agenda includes a discussion of the consultation paper. The meeting is open to the public and will also be webcast live. Comments on the consultation are due July 31, 2015.

NYSE Proposal: Issuers Seeking Delisting Review Must First Pay All Fees Owed

Last week, the NYSE published this notice for comment on a proposed amendment to Section 804.00, "Procedure for Delisting" of the Listed Company Manual. The proposed rule change would require issuers that are seeking a review of a delisting decision made by NYSE Staff to have paid all prior fees owed to the Exchange before an appeal fee will be accepted.

UK FRC Provides Guidance to Audit Committees on Evaluating Audit Quality

In response to the UK's Corporate Governance Code provision (see Section C.3.8) adopted in 2012 that the audit committee report include an explanation as to how the committee has assessed the effectiveness of the external audit process and resulting requests for practical guidance from audit committee members, the Financial Reporting Council issued last week this Audit Quality Practice Aid.

The Practice Aid, developed  based on feedback from audit committee members, investors, financial management and auditors, focuses on how audit committee members can assess audit quality. In addition to providing a framework for the committee's evaluation, the Practice Aid offers practical suggestions on how audit committees might tailor their evaluation in the context of the company's business model, strategy, and business risks, and the audit committee's perception of investor and other stakeholder expectations. See also this helpful overview pamphlet.

Business Groups Suggest Near-Term Modernization Improvements to Edgar

The Business Roundtable, CAQ, FEI and CCMC filed this joint comment letter last week in response to the SEC's Disclosure Effectiveness initiative. The letter suggests a number of logical, near-term Edgar improvements pending SEC rulemaking. The recommendations focus on consolidating and updating current Edgar search features by improving their visibility and organization and additional enhancements, including improvements to the company search page, filings detail screen and output functionality. Recommendations are well-illustrated via mock-ups of existing web pages accompanied by additional helpful commentary.

CCMC Seeks Meeting with PCAOB and SEC to Address SOX 404 & Audit Concerns

The CCMC sent this letter to SEC Chief Accountant James Schnurr and PCAOB Chair James Doty last week requesting a meeting of issuers and other stakeholders, the PCAOB, and the SEC to address SOX 404 and audit-related concerns that purportedly are eroding management judgment and impairing capital formation via increased costs and burdens on issuers. The letter addresses concerns in three areas: (i) management review controls, (ii) a "checklist" or "one-size-fits-all" approach, and (iii) materiality. Each area of concern is described by multiple examples of company experiences that have been shared with the CCMC's Financial Reporting Working Group. In addition to a near-term meeting, the letter requests an ongoing dialogue with the PCAOB and SEC on the issues to avoid further inadvertent consequences of regulatory-related developments.

Audit Committee Collaboration Releases External Auditor Assessment Tool  

The Audit Committee Collaboration just released an updated version of its External Auditor Assessment Tool. The resource is designed to assist audit committees in evaluating their external auditor to assess the quality of the audit, or select or recommend retention of the audit firm. The Collaboration specifically notes that the Tool avoids a "one-size-fits-all" approach, instead offering a scalable resource that encourages proactive efforts by audit committees. Among other things, it contains sample questions that the audit committee may consider to gauge the quality of: 

• Auditor's services and resources;
• Communication and interaction with the auditor; and
• Auditor's independence, objectivity, and professional skepticism. 

The resource also includes a sample form and rating scale for obtaining input from company personnel about the auditor, additional reading resources for audit committees and others, and a detailed appendix that highlights relevant U.S. requirements and standards. This Accounting Web article summarizes the sample questions. 

Directors Survey: Cybersecurity on Most Board Meeting Agendas

According to a recent NYSE/Veracode survey of approximately 200 public company directors across multiple industries, more than 80% of directors say cybersecurity is discussed at every or most board meetings. Additional noteworthy findings include:

• 66% of directors are "less than confident" that their companies are properly secured against cyberattacks.
• Boards are most likely to hold the CEO accountable after a major breach, followed by the CIO and the entire executive team (a close third).
• Directors are most worried about brand damage due to customer loss resulting from a cyberattack, followed by breach response costs, followed by loss of competitive advantage.
• When asked how they would like cybersecurity information to be presented to them, about 1/3 of directors expressed a preference for high-level security strategy descriptions and about 1/3 expressed a preference for risk metrics. Another approximately 20% preferred either security and risk posture compared to peers or a description of security technologies.

Investor Input Prompts Changes to Executive Compensation 

This article from The Hill reports that NACD's 2014-2015 Public Company Governance Survey (available for purchase) found that 57% of the more than 1,000 company respondents said their boards expanded compensation explanations in their proxy statements, and 30% changed their executive compensation plans, as a result of investor feedback. 

This new Latham & Watkins Alert discusses affirmative action steps companies may consider in light of the Delaware Chancery Court's recent decision in Calma v. Templeton. As previously reported, the court held that stockholder ratification of a compensation plan that doesn't specify the actual compensation or set meaningful limits on the amount to be received by directors will be subjected to the entire standard fairness of review rather than the waste standard of review typically applied to director compensation decisions that involve stockholder ratification. 

Suggestions include:

• Review existing director compensation arrangements
• Amend existing equity compensation plan to institute a specific director compensation limit and seek stockholder approval
• Adopt a standalone director compensation plan and seek stockholder approval
• Seek stockholder approval of past director compensation
• Consider effects on stockholder approval and director pay disclosure

Importantly, the memo acknowledges that there is no one-size-fits-all approach; rather, proactive review and consideration of alternatives based on the company's particular facts and circumstances - before a potential problem surfaces - is encouraged.

Proxy Access

• Failures of shareholder proxy access proposals were reported by Level 3 Communications, Southern Company, United-Guardian and Walgreens Boots Alliance.
• SBA Communications reported approval of its management proxy access proposal and failure of its stockholder proxy access proposal.
• McKesson announced its adoption of a 3%/3/20% proxy access by-law, subject to shareholder approval at the company's 2015 annual meeting. The amendment to the company's by-laws will become effective immediately if approved by shareholders.

Other Proposals

• BlackRock reported the failure of a shareholder proposal to produce an annual report on certain trade associations and lobbying expenditures.
• Chesapeake Energy reported failure of these stockholder proposals: climate change report, political spending report, creation of a risk oversight committee.
• Chevron reported the failure of these stockholder proposals (among others): corporate charitable contributions, lobbying, independent chair, independent director with environmental expertise.
• Comcast reported failure of shareholder proposals to prepare an annual report on lobbying activities, to prohibit accelerated vesting upon a change in control, and to provide each share an equal vote.
• Ensign Group reported that its stockholder proposal regarding the issuance of a sustainability report was rejected.
• Exxon Mobil reported the failure of these (among other) shareholder proposals: independent chair, climate expert on the board, board quota for women, report on lobbying.
• Home Depot reported that stockholder proposals for an independent board chair and a change in the percentage of shares to call special shareholder meetings were not approved.
• Northrop Grumman reported that a shareholder proposal regarding an independent board chair was not approved.
• Pinnacle West reported that its stockholders did not approve a stockholder proposal regarding a lobbying report.
• Raytheon reported that these shareholder proposals were not approved: lobbying activities, political expenditures, independent board chair.
• Southern Company reported that its stockholders approved a written consent bylaw.
• Staples reported that a stockholder proposal for an independent board chair did not pass.
• Walgreens Boots Alliance reported failure of stockholder proposals regarding: executive equity retention policy, accelerated vesting upon a change of control, linking executive pay to sustainability performance.

PwC and the University of Delaware's John L. Weinberg Center for Corporate Governance are hosting a complimentary, hour-long webcast on Monday, June 15th, at 2 pm EDT on "Current Issues Relating to Board Composition." Panelists will review the critical issues of board composition and discuss how boards can address investor governance concerns including industry expertise and other director skill sets, diversity, board evaluations, tenure and refreshment.  

Panelists:

• Catherine Bromilow, Partner, PwC's Center for Board Governance
• Charles M. Elson, Director of the John L. Weinberg Center for Corporate Governance, the Edgar S. Woolard, Jr., Chair in Corporate Governance and Professor of Finance
• Ann C. Mulé, Associate Director, John L. Weinberg Center for Corporate Governance

Longer Director Tenure Linked to Effective CEO Counterbalance 

This new Harvard Law School Forum post refutes the notion that lengthy director service equates to "cozy relationships with management," i.e., an erosion of independence. Rather, the authors assert that the trend toward director term limits is based on "faulty logic," and is associated with poorer governance practices and corporate performance. In contrast, long tenure is reportedly associated with a higher level of director commitment and corporate performance, and helps to counterbalance the CEO's authority.  

The authors base their assertion both on declining CEO tenure (thus limiting the potential duration of the director/CEO relationship), and a forthcoming study (Dou, Y., S. Sahgal and E. Zhang, 2015, "Should Independent Directors Have Term Limits? The Role of Experience in Corporate Governance," Financial Management (abstract here), which reportedly found that: 

• Experienced directors (defined as >15 years of experience on the same board) were more likely to attend board meetings and become members of board committees; and
• Companies with a higher proportion of experienced directors:
  
  • Paid their CEOs less
  • Were more likely to change CEOs when performance faltered
  • Were less likely to misreport earnings intentionally
  • Were less likely to make acquisitions (which purportedly often expand a chief executive's power while diminishing shareholder value). When they did, the acquisitions were of higher quality.

This week's highlighted question from the Huddle is:

Would be curious how companies with dozens of subsidiaries around the world keep apprised of liability risks/exposures for their subdiary officers & directors under so many different local laws. We have a corporate parent D&O policy, but I know some local laws require something more than that in order to provide maximum D&O protection.

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

We periodically meet with our D&O insurance broker to evaluate jurisdictions in which we should place local policies in order to keep our officers and directors fully covered. We examine factors such as size of operations, number of employees, number of subsidiaries and appointments, risk of litigation and other liability, whether there's a requirement for a locally admitted policy, and whether local laws allow for indemnity. 

Check out the Society Huddle.