SEC Investor Advisory Committee Receives Updates on 14a-8(i)(9), Proxy Season 

At a public meeting last week, the SEC's Investor Advisory Committee received updates from ISS and the NYC Comptroller's Office on the 2015 proxy season, as well as from SEC Deputy Chief Counsel Jonathan Ingram regarding the status of the Staff's review of Rule 14a-8(i)(9). Highlights reportedly include:

• Ingram expressed his belief that a number of reasonable conclusions could be drawn from the Staff's 14a-8(i)(9) research, which is now complete. He noted some of the issues being discussed, including whether: (i) Staff's analysis should differ depending on if a company proposal follows rather than precedes the shareholder proposal, and (ii) other exclusions (e.g., 14a-8(i)(10)) may be impacted by Staff's recommendation on 14a-8(i)(9). Comment letters are here.
• NYC Assistant Comptroller Mike Garland expressed concerns about what he deemed to be "inappropriate" restrictions imposed by company-implemented proxy access provisions such as shareholder aggregation limits and restrictions on compensation for dissident nominees. He also reportedly expressed concern about the lack of protections for loaned shares to count toward ownership.
• ISS's Pat McGurn touted the significant role of shareholder engagement in tempering the number of environmental and social shareholder proposals that went to a vote, and in say-on-pay-related disclosure and approval. He also noted the significant "momentum" this year on proxy access proposals.

An archived webcast of the meeting is available here.  

SEC Advisory Committee Discusses Regulatory Relief for Smaller Reporting Companies

In an open meeting last week, the SEC's Advisory Committee on Small and Emerging Companies discussed extending some of the JOBS Act regulatory relief currently afforded to EGCs to smaller reporting companies. Pay ratio disclosure and mandatory audit firm rotation (if mandated) in particular reportedly garnered further deliberation. The committee also proposed discussing at its September meeting the definition of an "accelerated filer," which it previously recommended be redefined to include companies with a public float of $250 million or more, but less than $700 million. An archived webcast of the meeting will be available here.  

SEC Awards Third Highest Whistleblower Bounty to Company Insider 

Last week, the SEC announced an award of more than $3 million to a company insider whose information reportedly comprehensively disclosed a fraudulent scheme that would have been difficult for investigators to detect, and whose initial tip also led to related actions that increased the award amount. Among other things, the award notes that the claims review staff considered the whistleblower's "unreasonable delay" in reporting to the SEC, but didn't apply that factor as severely as it may have in other cases had the delay occurred entirely after the whistleblower award program was established. The payout is the third highest to date under the SEC's whistleblower program.  

Chair White Responds to Sen. Warren - Outlines Enforcement & Rulemaking Record 

On July 10, SEC Chair White responded to Senator Elizabeth Warren's recent criticisms of her leadership at the SEC (reported on here). In addition to evidencing the pursuit and ongoing achievement of the SEC's core goals of strengthening enforcement and advancing financial crisis-triggered and other mandated rulemaking, Chair White's letter specifically responds to Senator Warren's concerns regarding: (i) the timing of the pay ratio rulemaking, (ii) Chair White's recusals from certain matters, (iii) the SEC's new admissions policy (reported on here), and (iv) bad actor waivers. The letter also effectively acknowledges differences in viewpoints, while inviting constructive dialogue going forward:  

In closing. I am proud of the agency's many important accomplishments during my tenure as SEC Chair. In that role and to best further the SEC's mission, I apply the same independent and objective approach that has guided my entire career, thoroughly analyzing the policy and legal questions to reach the conclusions I think are right. Though we may ultimately not agree on particular issues or priorities, I have always been, and continue to be, ready to engage in a constructive dialogue with you on all of the important work of the SEC.

Pay Ratio Comment Letters Address DERA Analysis on Excluding Certain Employees

A handful of the most recent comment letters on the proposed pay ratio disclosure rule specifically address DERA's June 4 and June 30 analyses of the potential effect on the ratio of excluding different percentages of certain categories of employees (reported on here), including:

• The Center on Executive Compensation (which doesn't support the rule) recommends that the rule include a principles-based exclusion that would permit companies flexibility to exclude substantial percentages of employees where the data is difficult to obtain and where the impact would not be significant.
• The Business Roundtable (which doesn't support the rule) observes that it can't specifically comment on DERA's analysis without understanding how the SEC plans to apply it, and that the analysis in many ways illustrates the problem with the proposed rule. The letter recommends that the rule be limited to full-time U.S. employees.
• The National Association of Manufacturers' letter reiterates its support for a full repeal of the proposed disclosure and expresses disappointment that DERA's analyses don't address its comments and concerns.
• WorldatWork (which doesn't support the rule) supports excluding part-time, seasonal, temporary or international employees from the pay ratio calculation to determine the median employee.
• The AFL-CIO and Public Citizen don't believe the SEC has the rulemaking flexibility under Dodd Frank to permit exclusion of categories of employees, and believe that DERA's analyses understate the likely impact of doing so.

See also these Wall Street Journal articles: CFOs Prep for Pay Ratio Rules and Companies Disclose Pay Ratio Before SEC's Final Rule. 

Chair White Reports on SEC's Dodd-Frank-Related Accomplishments  

SEC Chair White issued this Statement last week on the Dodd-Frank Act's 5th anniversary summarizing the Commission's Act-imposed rule-making and other relevant reforms to bolster the financial system. The Statement was accompanied by this Spotlight, which details the SEC's implementation of the Act. 

In related news, this recent study by the American Action Forum reveals that from 2010 - 2014, the Dodd-Frank Act has imposed approximately $22 billion in costs and 61 million paperwork burden hours - including a combined $6 billion in costs for Conflict Minerals and Resource Extraction Issuers rulemaking. Costs are continuing to climb, as about 1/4 of the Act purportedly has not yet been implemented. See also this Chamber of Commerce blog illustrating Dodd-Frank's effects in chart form. 

SEC Promotes Michele Anderson to Associate Director in Division of Corp. Fin. 

SEC Division of Corporation Finance M&A Chief Michele Anderson was reportedly promoted to Associate Director of the division commencing later this month. She will oversee the work of the division's Offices of M&A and International Corporate Finance.  She also will be responsible for overseeing rulemaking initiatives and no-action, interpretive, and exemptive positions taken by the division on domestic and cross-border mergers and acquisitions transactions, multinational offerings, and offerings by U.S. foreign issuers. 

Legislation Roundup - Bills We Are Monitoring

• H.R. 1723: Small Company Simple Registration Act of 2015, which directs the SEC to revise Form S-1 to permit smaller reporting companies to use forward incorporation by reference in their registration statement, passed in the House last week and goes to the Senate next for consideration.
• H.R. 2064: Improving Access to Capital for Emerging Growth Companies Act passed in the House last week and goes to the Senate next for consideration. The bill reduces the number of days before a road show that EGCs may file a draft registration statement for the SEC's confidential nonpublic review before their IPO; prescribes a one year (or earlier IPO) grace period during which an issuer that was an EGC at the time it filed its confidential or publicly filed registration statement will continue to be treated as an EGC; and directs the SEC to prescribe conditions under which pre-IPO EGCs may omit historical financial information.

At the state level, note that more than 60 Boston legislators and citizens filed this Petition last week to the Senate and House for the adoption of resolutions to encourage gender diversity on Boston-based company public and private boards. The resolution seeks (i) public disclosure by all such companies of the number of women and total number of directors on their boards, and (ii) by the end of 2018, a minimum of 3 women directors on boards with nine or more members, and a minimum of 2 women directors on boards with fewer than nine members. As previously reported, California and Illinois have passed resolutions encouraging gender diversity on their public company boards.

Agenda's (subscription required) latest Directors' and Officers' Outlook survey reportedly reveals a significant increase in director engagement with institutional investors. Findings include:

• 41% of respondents increased their engagement with mutual funds - compared to 21% last year
• 35% of respondents increased engagement with pension funds vs. 20% last year
• 84% of respondents reported increased engagement with institutional investors generally

Among other things, the article notes a recent report from EY, which shows a spike in proxy disclosure among the S&P 500 about their investor engagement practices - from 6% in 2010 to 56% in 2015. The Society is quoted in the Agenda article as attributing the rise in engagement to a number of factors, including increased transparency among institutional investors and the uptick in activists and special interest group campaigns.

SEC Staff Denial of No-Action Requests Jumps to 39% in 2015

This Gibson Dunn memo provides an overview of 2015 shareholder proposals including statistics (e.g., numbers, types, proponents, withdrawals), no-action requests and responses, voting results and litigation. Notably:

No-action Requests/Responses (through May 31)

• The percentage of no-action requests denied by Staff increased to 39% (of 318 requests submitted) from 29% (of 295 submitted) last year.
• 48 (15% of total requests submitted) no-action requests failed to receive a response from Staff due to its review of Rule 14a-8(i)(9)
• The principal reasons for Staff's grant of no-action requests were: procedural arguments (35%), ordinary business (32% - compared to 24% of total denials), substantial implementation (21% - compared to 28% of total denials), vague or false and misleading (2% - compared to 58% of total denials, and 18% granted in 2014)

Voting Results

• The four top principal proposal topics garnering majority support as of June 1 were: proxy access (38 proposals), distantly followed by majority voting (7), board declassification (6), and elimination of supermajority vote (6).
• Of the 108 proxy access shareholder proposals submitted before June 1, 85 companies included the proposal in their proxy statement (66 of which just recommended votes "against") and 15 excluded on some basis. The disposition of the remaining 8 is not yet known.

The memo also discusses Rule 14a-8(i)(3) (materially false or misleading) and Rule 14a-8(i)(7) (ordinary business) developments, and the Trinity v. Wal-Mart litigation.

ISS Recommends "No" Vote for Over 3,500 Directors in 2015

Sullivan & Cromwell's comprehensive proxy season review includes statistics and analysis of shareholder proposal trends by principal type (inclusive of proxy access detail), an analysis of ISS's negative recommendations against directors, and a summary of say-on-pay voting results. Notable statistics as of June 30 include:

• Non-S&P 500 companies received 20% of all proposals voted on
• Average support for governance proposals was approximately 50% when ISS supported, but dropped to about 20% when ISS didn't support
• ISS issued negative recommendations for 3,560 directors at over 1,200 different companies, but less than 2% of those directors (about 50) received more "against" than "for" votes
• The top three most common reasons for ISS's "no" or "withhold" recommendations against directors were, in descending order: independence issues; excessive non-audit fees or failure to disclose a fee breakdown; and absence of a formal nominating or compensation committee (even if company was in compliance with listing standards)
• ISS's withhold recommendations for directors for lack of "responsiveness" near doubled compared to 2014

The memo also includes guidance for companies considering the implementation of proxy access either in response to a shareholder vote or proactively; suggested safeguards for management proposals on shareholder written consent rights; and, where relevant, ISS's policy positions.

CII Roundtable: SEC Initiatives & Issues Affecting Institutional Investors

CII just published this summary of key issues identified and discussed at its April 1st Market Structure Roundtable. The roundtable was reportedly convened to provide a vehicle for CII and its members to provide input on these two issues:

1. Flaws in the existing market structure that are detrimental to institutional investors
2. How those flaws might best be remedied to meet investor needs

Roundtable partipants included chief investment officers from several of CII's general member funds, SEC Division of Trading and Markets Director Stephen Luparello, and representatives from BlackRock and JPMorgan.

Study Reveals Auditor Rotation May Inhibit Professional Skepticism

A recent article, "Are There Adverse Consequences of Mandatory Rotation? Evidence from the Italian Experience", published in a leading accounting journal (available for purchase) undermines the case for mandatory audit firm rotation. Authors Cameran, Francis, Marra and Pettinicchio describe the impacts of mandatory rotation based on an examination of the impacts in Italy, where mandatory rotation of auditors (every nine years) has been required since 1975. Key findings include:

• Final year audit fees are 7% higher than normal, which the authors observe may indicate opportunistic pricing.
• Fees of incoming auditors are discounted by 16% despite 17% higher engagement hours in the first year, which the authors indicate is suggestive of lowballing.
• Subsequent year fees for incoming auditors following rotation are abnormally higher and exceed the initial fee discount.
• The quality of audited earnings is lower in the first three years following rotation relative to later years of auditor tenure.

This CFO article, which discusses the findings, notes that contrary to popular regulatory belief, the study finds that rotation actually inhibits the auditors' professional skepticism rather than promotes it.  

The study's authors conclude that "[s]ince rotation is costly and earnings quality improves with longer auditor tenure, the evidence from Italy does not support the case for mandatory rotation." See the abstract.

This week's highlighted question from the Huddle is:

Our non-executive, independent Chairman of the Board, currently serves as an Ex Officio member of all Board Committees. I am curious if other companies use that structure, whether it is a recommended practice and how is the Chairman paid for membership on those committees. Our Chairman is paid an additional retainer in cash and restricted stock, and receives all committee fees (including increased chair fees) for all committees. As an Ex Officio member, he attends all meetings, is counted for a quorum and votes.

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

Our Chairman of the Board is invited to attend and participate in all committee meetings. However, he is not a member of any of the committees; he does not get paid a meeting fee for attending committee meetings; and he does not vote and is not counted towards the quorum for committee meetings.

Check out the Society Huddle.