Implications for Issuers from Recent Auditor Independence Enforcement Cases

The SEC recently found that EY violated the auditor independence rules in two cases based on the audit partners’ close personal relationships with members of the issuer finance teams.  In addition to a specific list of prohibitions, the SEC rules on auditor independence includes a catch-all that an accountant is not independent if a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the accountant is not capable of exercising objective and impartial judgment.  We focus here on the consequences of those cases for issuers, including additional inquiries that audit firms may pose to management regarding their knowledge of any personal relationships between their employees and the engagement team.  Continue Reading

Public Officials Weigh in on SEC Regulation S-K Concept Release

Current and former holders of political office are among the many who wrote in to the SEC with comments on its Regulation S-K concept release. Former New York City Mayor Bloomberg, current chair of the Sustainability Accountability Standards Board (SASB) weighed in, favoring disclosure about sustainability and climate risks, particularly sector-specific standards.

Three U.S. senators (Senators Whitehouse, Markey and Boxer) urged the Commission to provide investors with more information about the risks associated with climate change. Another letter signed by six Congressmen (Cartwright, Lieu, Lowenthal, Pocan, Ellison, Tonko) echoed this view. In addition, thirteen U.S. senators, led by Senator Franken, want the SEC to require large public companies to include country-by-country reporting of certain financial, tax and operational data in their annual reports, primarily to provide enhanced tax disclosure that would make more clear the amount of corporate profits residing in other countries. Continue Reading

A Snapshot of the SEC Whistleblower Office

Andrew Ceresney, the director of the Division of Enforcement at the SEC, gave a speech recently about the success of the SEC whistleblower program. It contained some interesting data that provides a sense of the SEC’s efforts:

  • The SEC has paid out over $107 million to 33 whistleblowers involving case with more than $550 million ordered in sanctions.
  • 18 dedicated staff members at the SEC are responsible for the initial review and intake of tips, as well as tracking them and evaluating award claims.
  • There has been a 30% increase in tips since inception, from 3,001 in fiscal 2012 to nearly 4,000 last year.
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2017 Proxy Statement Reminders

While several major SEC disclosure requirements remain in the proposal stage and the pay ratio disclosure does not come into play until the proxy statement for 2018 meetings, companies should be aware of a few new items for the 2017 proxy statement:

  • Audit Committee Communications with Auditors.  Item 407 of Regulation S-K requires the audit committee report to state whether the committee has discussed with the independent auditors the matters required to be discussed by the statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T.
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A Look at Retail Shareholders and Other Results from the 2016 Proxy Season

73% of the shareholders at large-cap companies and 77% of those at mid-cap companies are institutional investors, according to the latest edition of ProxyPulse, a joint publication by Broadridge and PwC that examined 4,200 annual meetings held between January 1 and June 30, 2016. But retail investors play an important role in contested issues, and they tend to side with the company. During the 2016 proxy season, only 15% of retail shareholders supported proxy access shareholder proposals compared to 60% of the institutions that voted.

An analysis of retail shareholders found some interesting differences relative to the U.S. population. Only 20% are less than 40 years of age compared to 31% of the overall population, and 22% have graduate degrees, 11% more than U.S. Continue Reading

SEC Proposes Requiring Hyperlinks to Exhibits Filed with Registration Statements and Exchange Act Reports

Yesterday, the SEC proposed rules that would require companies to include a hyperlink to each exhibit listed in registration statements and periodic and current reports, including among others Forms S-1, S-3, S-4, S-8, S-11, 8-K, 10-Q and 10-K. The rules would also apply to filings by foreign private issuers made on Forms F-1, F-3, F-4 and 20-F, but not Form 6-K. Since ASCII cannot support functional hyperlinks, exhibits must be submitted in HTML format. 99% of filings made in 2015 were in HTML format.

Currently, anyone trying to access an exhibit that has been incorporated by reference instead of filed with the document must first review the exhibit index to determine which company filing includes a particular exhibit, and then search through the company’s Edgar history to find the exhibit. Continue Reading

GAO Offers Bleak Assessment on Achieving Goal of Conflict Minerals Disclosure Rules

Most companies filing reports on their use of conflict minerals remain unable to confirm their origin or whether those minerals financed or benefited armed groups, concluded a GAO report released last week.  The GAO is required under Dodd-Frank to study annually the effectiveness of the SEC rule on conflict mineral disclosure in promoting peace and security in the DRC.  The United Nations has indicated that armed groups continue to generate significant revenue from the control or looting of conflict minerals.

The GAO randomly sampled 100 reports from the population of 1,283 filed in 2015, met with a range of stakeholders and visited processing facilities in Asia as part of its fieldwork.  Continue Reading

SEC Requests Comments on Subpart 400 of Regulation S-K, Including Governance and Executive Compensation Disclosures

The SEC released an 8-page request for comments to ask for input on Subpart 400 of Regulation S-K, including Item 401 (director and officer information), Item 402 (executive compensation), Item 404 (related person transactions) and Item 407 (corporate governance disclosures).

In contrast to the over 300-page Regulation S-K concept release issued earlier this year (see Davis Polk’s comment letter here), which contained detailed discussions and alternative proposals, this simple release reiterates the requirement under the FAST Act for the SEC to examine Regulation S-K generally and (a) determine how best to modernize and simplify the disclosure in a way that provides material information while reducing costs for issuers; (b) figure out how to permit a company-specific approach that still allows comparability of information across issuers and avoids boilerplate and (c) evaluate how disclosure is presented to discourage repetition and immaterial information. Continue Reading

Why Individual Investors File Shareholder Resolutions

A new report from the Rock Center for Corporate Governance with the provocative title “Gadflies at the Gate” tries to answer the question so many companies have asked themselves:  Why do individual investors submit shareholder proposals?

Individual investors can represent up to 25% of the total number of shareholder proposals annually, with over 1,100 submissions in a ten-year time span.  Although those proposals received only 29% support on average, and only a handful of subject matters brought forth by individual investors had any kind of meaningful, favorable vote tallies, the report notes that individual investors can have influence.  The first individual shareholder activism, which dates back to the 1930s, focused on topics that were then viewed as highly controversial, including elimination of classified boards and allowing shareholders to ratify the selection of auditors. Continue Reading

SEC Charges Two Companies’ Severance Agreements Violate Commission’s Whistleblower Program

The SEC this month has brought two actions for violation of whistleblower rules. According to a SEC cease-and-desist order released on August 10, at one company in 2011 to the present the vast majority of non-management employees who received severance payments signed agreements that prohibited an employee from sharing with anyone confidential information that the employee had learned during his employment, unless compelled otherwise by law. If required by law, the confidentiality provisions dictated that employees must either provide written notice to the company or obtain written consent from the legal department before providing such information. The SEC order alleged that the agreements did not contain any exemptions permitting an employee to provide information voluntarily to the SEC or other regulatory or law enforcement agencies, and between September 2011 and mid-2013, approximately 18 employees signed agreements that included one of these provisions. Continue Reading