Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

This CFO.COM article indicates finance executive make little use of the SEC’s XBRL filings.  In fairness I would say that SEC registrants felt the same about EDGAR when it first came out, but look at its utility today.  So maybe there is hope.  The SEC has however updated its XBRL FAQs.  The new FAQs are annotated “(New 02/05/2013)”.  Most of the FAQs are technical in nature and are oriented towards those that prepare the XBRL filings.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

SEC Commissioner Luis A. Aguilar recently gave a speech setting forth his views on proxy disclosure.  Some of the more interesting points were:

  •  Mr. Aguilar noted that issuers should go beyond the requirements in compensation risk disclosures: “A key provision of the 2009 amendments is Item 402(s) of Regulation S-K, which requires a narrative discussion of a company’s compensation policies and practices relating to risk management. Although, by its terms, this rule requires such disclosure only “to the extent” that risks arising from the issuer’s compensation policies and practices are “reasonably likely to have a material adverse effect,” it would be prudent and appropriate for all issuers to discuss the role of compensation in risk management in their proxy statements.”
  • A theme of the Commissioner’s speech was to avoid boilerplate disclosure.  For instance, he stated “Many issuers provide only minimal discussion in response to the board leadership question. If the same person serves as both principal executive officer and chairman of the board, the reason given is often simply “efficiency,” “streamlined decision-making,” or “depth of knowledge.”  . . . Although Item 407(h) specifically requires the disclosure to indicate why the registrant has determined that its leadership structure is appropriate “given the specific characteristics or circumstances of the registrant,” such analysis is often missing.”
  • U.S. proxy rules require companies to disclose whether, and if so how, a corporate board or nominating committee considers diversity in identifying nominees for director.  Although the rules do not define diversity for this purpose, and the adopting release acknowledges that companies may define diversity in various ways, Mr. Aguilar stated “numerous commenters cited by the Commission in the adopting release made clear that investors are particularly interested in board policies regarding gender and/or racial diversity, and find such information useful in making voting and investment decisions.” He continued to state that “The proxy statement should disclose how the board defines diversity. If a company has no women or persons of color on its board, it should state whether or not it has considered increasing the size of its board to enhance diversity — and if not, why.”

As noted by Ning Chiu in this blog, Mr. Aguilar’s views may not be in harmony with those of at least one other Commissioner, who recently gave a speech and stated the governance aspects of Dodd-Frank rulemakings appear, in his view, to “affect the behavior of companies and boards rather than to provide information that investors would find useful.”

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The SEC has disclosed data related to complaints in fiscal year 2012. During Fiscal 2012, the SEC’s Office of Investor Education and Advocacy closed 29,291 files relating to complaints, questions, and other contacts received from investors, a decrease of 4,341 files compared to FY 2011.

  • Complaints related to ponzi and pyramid schemes were up 1,328%.  A footnote to the data discloses “The vast majority of these complaints related to a particular highly publicized SEC enforcement action.”
  • Complaints related to specific market events were up 565%. A footnote to the data discloses “The vast majority of these complaints related to a particular highly publicized initial public offering.”  We’re guessing it was Facebook.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

A California court recently granted Symantec’s demurrer in a lawsuit that challenged its proxy statement disclosures in connection with an annual meeting.  For those of us who haven’t been to law school recently, a demurrer appears to be the equivalent of dismissal for failure to state a cause of action.

The court did not have a hard time finding the well-worn boiler plate fiduciary duty standard before tossing out plaintiff’s suit:  “”[A] board of directors is under a fiduciary duty to disclose material information when seeking shareholder action:  It is well-established that the duty of disclosure represents nothing more than the well-recognized proposition that directors of, Delaware corporations are under a fiduciary duty to disclose fully and fairly all material information within the board’s control when it seeks shareholder action.” (Malone v. Brincat (Del. 1999) 722 A.2d 5, 9, footnotes and quotation marks omitted.).”

Among other things,  plaintiff alleged a violation of the duty of disclosure affecting the Symantec shareholders’ right to an informed vote on the say-on-pay proposal.  In what may be a word to the wise, the court noted it could not conclude as a matter of law that the advisory nature of the say-on-pay vote nullifies the defendants’ duty to communicate information about the corporation’s affairs with due care, loyalty and in good faith.  According to the court, the foregoing conclusions were fortified by the statement in the proxy that the Compensation Committee and Board “will consider the outcome of the vote in establishing compensation philosophy and making future compensation decisions.”

Key Takeaway:  Courts will dismiss baloney lawsuits on compensation matters after a long fight.  However, even though the say-on-pay vote is advisory, typical fiduciary duties apply.

Our thanks to Broc Romanek and The Conference Board Blog for pointing this out.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The Office of Compliance Inspections and Examinations, or OCIE, administers the SEC’s nationwide examination and inspection program.  The National Examination Program, or NEP, has published its examination priorities to communicate with investors and registrants about areas that are perceived by the staff to have heightened risk.  The examination priorities call out hedge funds and private equity groups in the following areas (materials are verbatim extracts from the priorities list):

  • Conflicts of Interest Related to Allocation of Investment Opportunities. Advisers managing accounts that do not pay performance fees (e.g., most mutual funds) side-by-side with accounts that pay performance-based fees (e.g., most hedge funds) face unique conflicts of interest.  While reviewing portfolio management practices, the staff will confirm that the registrant has controls in place to monitor the side-by-side management of its performance-based fee accounts, such as certain private investment vehicles, and registered investment companies, or other non-incentive fee-based accounts, with similar investment objectives, especially if the same portfolio manager is responsible for making investment decisions for both kinds of client accounts or fund.
  • New Registrants. Since the effective date in early 2012 of Section 402 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, approximately 2,000 investment advisers have registered with the SEC for the first time. The vast majority of these new registrants are advisers to hedge funds and private equity funds that have never been registered, regulated, or examined by the SEC. The IA-IC Program therefore intends to launch a coordinated national examination initiative designed to establish a meaningful presence with these newly registered advisers. The initiative is expected to run for approximately two years and consists of four phases: (i) engage with the new registrants; (ii) examine a substantial percentage of the new registrants; (iii) analyze our examination findings; and (iv) report to the industry on our observations. In addition to the new registrant initiative, the IA-IC Program will also prioritize examinations of private fund advisers where the staff’s analytics indicate higher risks to investors relative to the rest of the registrant population, or there are indicia of fraud or other serious wrongdoing.
  • “Alternative” Investment Companies. The IA-IC Program is focusing on the growing use of alternative and hedge fund investment strategies in open-end funds, exchange-traded funds (“ETFs”), and variable annuity structures. More specifically, the staff will assess whether: (i) leverage, liquidity and valuation policies and practices comply with regulations; (ii) boards, compliance personnel, and back-offices are staffed, funded, and empowered to handle the new strategies; and (iii) the funds are being marketed to investors in compliance with regulations.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The Dodd-Frank Wall Street Reform and Consumer Protection Act established the Office of Financial Research, or OFR, within the Treasury Department to improve the quality of financial data available to policymakers and to facilitate more robust and sophisticated analysis of the financial system.  The OFR has recently posted updated FAQs on legal entity identifiers, or LEIs.

The LEI is a reference code to uniquely identify a legally distinct entity that engages in a financial transaction. Currently, there are many ways to identify entities, but there is no unified global identification system for legal entities across markets and jurisdictions. The establishment of a global LEI system is expected to be a significant achievement in responding to the vulnerabilities of the global financial system and providing meaningful long-term benefits for both the public and private sectors. When Lehman Brothers collapsed in 2008, financial regulators and private sector managers were unable to assess quickly the extent of market participants’ exposure to Lehman or to explore quickly and fully how the vast network of market participants were connected to one another.

In January 2013, the FSB-sponsored work reached a milestone when an implementation group concluded its work, and handed responsibility for launching and overseeing the global LEI project to a stand-alone group called the Regulatory Oversight Committee, or ROC. On January 24-25 in Toronto, Canada, the ROC held its inaugural meeting and continued to make progress toward the G-20 target of March 2013 for launch of the system. Among the earliest decisions, ROC members appointed an OFR official as the first Chair.

In the United States, the Commodity Futures Trading Commission, or CFTC, has issued a rule requiring swap counterparties to be identified by a legal entity identifier by July 16, 2012. Because the global LEI system would not yet be functioning at that time, the CFTC provided for a CFTC Interim Compliant Identifier, or CICI, that conforms to the endorsed global LEI standard, and has made an explicit commitment for the CICI to transition to the global LEI. The U.S. Securities and Exchange Commission has also issued a proposed rule that would require the use of an LEI, if available, for derivatives reporting and a final rule for private fund use of an LEI in meeting reporting requirements.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

Craig M. Lewis, Chief Economist and Director, Division of Risk, Strategy, and Financial Innovation, U.S. Securities & Exchange Commission, described the SEC’s “Accounting Quality Model,” or AQM.  This model is being designed to provide a set of quantitative analytics that could be used across the SEC to assess the degree to which registrants’ financial statements appear anomalous.  More particularly, it is a model that allows the SEC to discern whether a registrant’s financial statements stick out from the pack, while taking into account the contemporaneous attributes of that pack.  The goal is to facilitate comparison across firms within their industry while accounting for and illustrating industry differences as well.

One use of AQM is to identify “earnings management.” Importantly, the phrase “earnings management” is broad enough to capture both aggressive accounting practices that fall within GAAP and fraudulent accounting practices that violate GAAP.  Mr. Lewis noted outlier discretionary accruals can be a powerful indicator of attempts to manage earnings.

Mr. Lewis also described other successful uses of analytical models by the SEC.  In particular he noted the SEC developed an analytical model that uses performance data to identify hedge fund advisers worthy of further review by the Office of Compliance, Inspections and Examinations (which inspects investment advisors and broker-dealers) and the Division of Enforcement’s Asset Management Unit (which targets fraud by hedge funds and others).

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The NYSE has proposed amendments to  NYSE Rules 451 and 465, and the related provisions of Section 402.10 of the NYSE Listed Company Manual.  Those rules provide a schedule for the reimbursement of expenses by issuers to NYSE member organizations for the processing of proxy materials and other issuer communications provided to investors holding securities in street name.  Some of the basic changes being proposed are:

  • More significant stratification of charges, providing economies of scale to larger issuers.
  • Notice and access fees, which were previously unregulated, will now be regulated.
  • A new Enhanced Brokers’ Internet Platform fee, or EBIP fee.  The EBIP fee is meant to encourage the development of systems to facilitate retail voting that allow investors to receive notices of upcoming corporate votes and the ability to access proxy materials and vote, through their own broker’s web site.

A side-by-side comparison of existing charges and proposed charges on some of the basic portions of the proposal is set forth below:

Fee Type Current Rate Proposed Rate Comments
       
Basic Processing Fee 40 cents for each account beneficially owning shares in the issuer that is distributing proxy material

–50 cents for each account up to 10,000 accounts

 –47 cents for each account above 10,000 accounts, up to 100,000 accounts

 –39 cents for each account above 100,000 accounts, up to 300,000 accounts

 –34 cents for each account above 300,000 accounts, up to 500,000 accounts

 –32 cents for each account above 500,000 accounts

 Charge made according to the number of nominee accounts through which the issuer’s securities are beneficially owned.  Proposed rule refers to it as a “Processing Unit Fee”
       
Nominee Fee $20 per nominee served by an intermediary $22.00 for each nominee served by the intermediary that has at least one account beneficially owning shares in the issuer The average issuer is held by approximately 100 nominees per the rule proposal
       
Additional Fee (to compensate the intermediary based on the number of accounts at nominees served by the intermediary that beneficially own shares in the issuer)

–5 cents per account for issuers owned by 200,000 or more street name accounts;

–10 cents per account for issuers owned by fewer than 200,000 street name accounts.

–14 cents for each account up to 10,000 accounts

 –13 cents for each account above 10,000 accounts, up to 100,000 accounts

 –11 cents for each account above 100,000 accounts, up to 300,000 accounts

 –9 cents for each account above 300,000 accounts, up to 500,000 accounts

 –7 cents for each account above 500,000 accounts

 

 Proposed rule refers to it as an “Intermediary Unit Fee”
       
Incentive Fee (applies whenever the need to mail materials in paper format to an account has been eliminated)

–25 cents per account for issuers owned by 200,000 or more street name accounts

 

–50 cents per account for issuers owned by fewer than 200,000 street name accounts

 32 cents per position affected (16 cents for positions in managed accounts) Proposed rule refers to it as a “Preference Management Fee”
       
Notice and Access Fee Currently unregulated

Incremental fee based on all nominee accounts through which the issuer’s securities are beneficially owned as follows:

 –25 cents for each account up to 10,000 accounts

 –20 cents for each account over 10,000 accounts, up to 100,000 accounts

 –15 cents for each account over 100,000 accounts, up to 200,000 accounts

 –10 cents for each account over 200,000 accounts, up to 500,000 accounts

 –5 cents for each account over 500,000 accounts

Follow up notices will not incur an incremental fee for Notice and Access.

No incremental fee will be imposed for fulfillment transactions (i.e., a full package sent to a notice recipient at the recipient’s request), although out of pocket costs such as postage will be passed on as in ordinary distributions
       
Enhanced Brokers’ Internet Platform Fee (EBIP) None For five years after the effective date of the rule, there shall be a supplemental fee of 99 cents for each new account that elects, and each full package recipient among a brokerage firm’s accounts that converts to, electronic delivery while having access to an EBIP This is a one-time fee, meaning that an issuer may be billed this fee by a particular member organization only once for each account covered by this rule. Billing for this fee should be separately indicated on the issuer’s invoice and must await the next proxy or consent solicitation by the issuer that follows the triggering election of electronic delivery by an eligible account. For the avoidance of doubt it is noted that accounts receiving a notice pursuant to the use of notice and access by the issuer, and accounts to which mailing is suppressed by householding, will not trigger the fee under this provision
       

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The CFPB has issued a final rule that establishes procedures for the public to obtain information from the Bureau of Consumer Financial Protection, under the Freedom of Information Act, the Privacy Act of 1974, and in legal proceedings. This final rule also establishes the CFPB’s rule regarding the confidential treatment of information obtained from persons in connection with the exercise of its authorities under Federal consumer financial law.

Subpart A of the final rule consists largely of definitions of terms that are used throughout the remainder of the part.

Subpart B of the final rule implements the Freedom of Information Act, 5 U.S.C. 552. FOIA grants the public an enforceable right to obtain access to or copies of Federal agency records unless disclosure of those records, or information contained within them, is exempt from disclosure pursuant to one or more statutory exemptions and exclusions.

Subpart C of the final rule sets forth procedures for serving the CFPB and its employees with copies of documents in connection with legal proceedings, such as summonses, complaints, subpoenas, and other litigation-related requests or demands for the CFPB’s records or official information. Subpart C also describes the CFPB’s procedures for considering such requests or demands for official information. These regulations (which are sometimes referred to as Touhy regulations) are modeled after similar regulations of other Federal agencies.

Subpart D of the rule pertains to the protection and disclosure of confidential information that the CFPB generates and receives during the course of its work. Various provisions of the Dodd-Frank Act require the CFPB to promulgate regulations providing for the confidentiality of certain types of information and protecting such information from public disclosure. Other provisions of the Dodd-Frank Act, however, require or authorize the CFPB to share information, under certain circumstances, with other Federal and State agencies to the extent that they share jurisdiction with the CFPB as to the supervision of financial institutions, the enforcement of consumer financial protection laws, or the investigation and resolution of consumer complaints regarding financial institutions or consumer financial products and services.

Subpart E contains the CFPB’s rule implementing the Privacy Act. The Privacy Act serves to balance the government’s need to maintain information about individuals with the rights of individuals to be protected against unwarranted invasions of their privacy stemming from Federal agencies’ collection, maintenance, use, and disclosure of personal information about them. The regulations in this subpart establish procedures by which members of the public may request access to information or records that the CFPB maintains about them, request amendment or correction of such information or records, and request an accounting of disclosures of their records by the CFPB.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The GAO recently published a study in which it reviewed empirical and other studies on the impacts of financial crises and the Dodd-Frank reforms, as well as congressional testimonies, comment letters, and other public statements by federal regulators, industry representatives, and others.  Among other things, the study found:

  • While the Dodd-Frank Wall Street Reform and Consumer Protection Act’s reforms could enhance the stability of the U.S. financial system and provide other benefits, the extent to which such benefits materialize will depend on many factors whose effects are difficult to predict.
  • The Dodd-Frank Act imposes compliance and other costs on financial institutions and restricts their business activities in ways that may affect the provision of financial products and services. While regulators and others have collected some data on these costs, no comprehensive data exist.
  • Financial institutions may pass increased costs on to their customers. For example, banks could charge more for their loans or other services, which could reduce economic growth. Although certain costs, such as paperwork costs, can be quantified, other costs, such as the Act’s impact on the economy, cannot be easily quantified. Studies have estimated the economic impact of certain of the Act’s reforms, but their results vary widely and depend on key assumptions.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.