U.S. public companies recently began disclosing their CEO-to-median employee pay ratios, as required by the Dodd-Frank Act and Item 402(u) of Regulation S-K. It is still too early to draw conclusions, but this memorandum outlines some preliminary observations based on our review of the pay ratio disclosure included in 35 SEC filings through February 2018, including the range of pay ratios and calculation methodologies disclosed.
On February 21, the Securities and Exchange Commission released updated interpretive guidance on cybersecurity disclosure, reaffirming staff guidance issued in 2011, providing more detailed guidance on disclosure of cybersecurity risks and incidents, advising companies to ensure that their disclosure controls and procedures take account of cybersecurity risks and noting the implications of cybersecurity incidents for insider trading prohibitions and Regulation FD compliance.
The interpretive guidance lends the Commission’s imprimatur to the previously issued staff guidance and underscores the importance for a company to be attuned to securities law obligations when responding to or managing for cyber risks and incidents.
Senator Tammy Baldwin (D., Wis.) has placed a hold on the nomination of Robert Jackson and Hester Peirce as commissioners to the SEC, pending their responses to the questions she raised in her letters to each of them. According to news reports, the senator’s actions may delay the confirmation process for the two candidates, who were expected to be confirmed by expedited votes.
The letters she sent to Jackson and Peirce are identical except for questions related to an academic paper that Jackson, a law school professor, was involved with in 2011 that argued against shortening the 10-day window under Rule 13D , concluding that it would discourage shareholders from buying large blocks of stock that in turn imposes discipline on management. Continue Reading
The congressional spending proposal that has dominated the news maintains the SEC budget for fiscal 2017, allowing the SEC to operate with the same funding since the last fiscal year ended September 30, 2016.
Similar to prior appropriations bills, this proposal continues to prohibit the SEC from using any funds to issue rules or regulations regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations. Unlike the CHOICE Act, the bill does not stop the SEC from continuing its work on any of the Dodd-Frank mandated rulemaking.
According to Bloomberg, the SEC is bracing for future budget cuts and has imposed a hiring freeze in some departments while eliminating some contract positions. Continue Reading
SEC Chair nominee Jay Clayton’s March 23rd hearing before the Senate Banking Committee covered much of the expected ground. In a series of responses designed to avoid controversy, Clayton repeatedly returned to the three core mandates of the SEC – capital formation, investor protection and efficient markets – as touchstones for his future leadership of the Commission, should he be confirmed. Beyond these general areas, Clayton offered few specifics or signals as to how he might steer the Commission during his term as Chair. He did, however, discuss concerns about growing companies finding the U.S. public markets unattractive due to the burdens of being a public company. Continue Reading
During a recent speech on SEC initiatives, Acting SEC Chairman Piwowar invoked the “Forgotten Investor,” as the person who is “dragged” into and “victimized” by someone else’s social reform efforts and must bear those costs.
He criticized the Dodd-Frank Act for imposing numerous burdens to extract “non-material disclosures,” citing as examples the rules related to conflict minerals, pay ratio and resource extraction provisions. For that reason, he noted that in recent weeks he has directed the SEC staff to begin reconsideration of both the conflict minerals and pay ratio rules. Although the current rule on resource extraction disclosure was repealed, the statutory mandate remains. Continue Reading
Late last year, the SEC issued two orders after finding companies violated its whistleblower rules due to certain language in their severance agreements, including clauses that prohibit employees from disparaging the companies in communications with regulators unless authorized in writing or otherwise required by law. See our client memo > Continue Reading
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.
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
The SEC Division of Corporation Finance issued a rare FAQ on a proxy rule yesterday, making clear that companies must provide details when listing shareholder proposals on proxy cards. The FAQ cites Rule 14a-4(a)(3), which requires that the form of proxy must “identify clearly and impartially” each matter to be voted on, “whether proposed by the registrant or by security holders.”
The SEC staff appears to believe that companies are being too general in naming proposals on proxy cards. According to the FAQ, just as it would not be appropriate to describe a management proposal to amend a company’s charter to increase the number of authorized shares as “a proposal to amend our articles of incorporation,” it is also not permissible for a company to describe a shareholder proposal to amend a company’s bylaws to allow for 10% or more shareholders to call a special meeting as “a shareholder proposal on special meetings.”
The FAQ provides several examples of descriptions of shareholder proposals that would not satisfy the rule, including:
- A shareholder proposal on executive compensation;
- A shareholder proposal on the environment;
- A shareholder proposal, if properly presented; and
- Shareholder proposal #3.
This is the first of a multipart series on SEC updates related to corporate governance areas discussed during the recent SEC Speaks conference.
The SEC Staff in Corporation Finance is considering recommending rulemaking on universal proxies. A universal proxy means that both management and dissident candidates would be named on the same proxy card. It would allow shareholders to vote the way they could if they actually attend the annual meeting.
The Staff emphasized that the goal is to view the issue from the shareholder’s perspective, not to provide companies or dissident candidates with any advantages. It is unclear which party would benefit in any case, and it may depend on individual situations. Continue Reading
A recent GAO report concluded that the SEC has no plans to require more climate-related disclosure.
In guidance issued in 2010, the SEC staff identified four categories of climate-related topics that could cause disclosure: impacts of legislation and regulation; the impact of international accords; indirect consequences of regulation or business trends and physical changes, such as the effect of severe weather. The guidance was issued when Congress was considering legislation that would have limited greenhouse gas emissions by establishing a cap-and-trade program, but it was never enacted.
At the time the guidance was issued, the SEC and its Investor Advisory Committee indicated that they would determine whether further guidance or rulemaking was necessary by monitoring the impact of the guidance, holding a roundtable and putting it on the agenda for the Investor Advisory Committee. Continue Reading
A complaint to force the SEC to adopt rules requiring public companies to disclose the use of corporate funds for political activities was dismissed by the U.S. District Court for the District of Columbia. The Plaintiff and Citizens for Responsibility and Ethics in Washington (CREW) submitted a petition for rulemaking to the SEC in May 2014, and about a year later sued the SEC under the Administrative Procedure Act (APA) to challenge the agency’s inaction as arbitrary, capricious, and contrary to law, as well as to compel the SEC to act.
The Plaintiff claims that without regulation to provide transparency, he cannot determine whether corporate political contributions are in the best interest of companies and therefore is unable to fulfill his duties as a shareholder. Continue Reading
NYSE listed companies are currently required to notify the Exchange before disseminating material news so that it can halt trading if needed. Now the NYSE has proposed, in a rule filing with the SEC, to expand the pre-market hours during which companies are required to notify the Exchange, the circumstances under which it can stop trading and also provide guidance related to the release of material news after the close of trading.
Currently, Section 202.06 requires listed companies to notify the Exchange at least ten minutes in advance of releasing material news shortly before trading opens or during trading hours (9:30 a.m. Continue Reading
An SEC press release announced that a whistleblower who had already attained an award in 2012 received an additional $150,000, for a total of $200,000, after the SEC collected more money from one of the defendants in the case. The award represents 30% of the amount collected by SEC enforcement, the maximum allowed. The press release noted that the SEC is barred from providing information which could expose the identity of the whistleblower.
This announcement is interesting because it obscures the fact that so far in 2014, this is the only award the SEC has allowed after denying three other claims. Continue Reading
The SEC has announced its agenda and panelists for the roundtable on cybersecurity to be held on Wednesday, March 26 at 9:30 a.m. EST. The event will be webcast live as well as archived.
The proceedings will likely be followed with great interest by Senator John D. Rockefeller IV, who in late January sent a letter to Target asking why the company has not yet reported its well-publicized security breach to the SEC (presumably on Form 8-K although the letter does not specify), given the SEC’s 2011 guidance regarding disclosure of material cybersecurity risks and incidents. Target had previously issued several press releases at the end of 2013. Continue Reading
At the recent Securities Regulation Institute, Keith Higgins, the head of the SEC Division of Corporation Finance, indicated that the SEC staff will be looking for less detailed disclosure in the S-1 regarding a company’s historical practice and grant by grant valuation description for establishing the fair value of the company’s common stock in connection with stock-based compensation in IPO registration statements.
Currently, companies provide lengthy discussions of how stock was valued and ultimately the difference between the estimated IPO price and the historical fair value of stock at various points in time as private companies. Companies disclose in MD&A the analysis to support their judgments and estimates regarding the valuations. Continue Reading
The Enforcement Division recently settled with KPMG for its actions involving three companies, none of which were identified. In one case, the firm hired an employee who had just retired from a senior position at the company and then loaned him back to the company to do the same work he had previously done as an employee. Working with the company was his sole responsibility during the term of KPMG’s engagement related to his service. The Enforcement Division determined that this caused the loaned employee “acting as a manager, employee and advocate” for the company.
The SEC also found that KPMG provided prohibited non-audit services at another company, including restructuring, corporate finance and expert services. Continue Reading
Recognizing the particular interest in the performance of its enforcement division, the Commission issued a press release in December announcing its enforcement results for fiscal 2013; in a small footnote, the release indicated that this information is part of the Agency Financial Report, of which enforcement makes up only one part.
The first number touted in the press release is $3.4 billion in monetary sanctions from disgorgement and penalties, an increase of 10% over 2012 and 22% over 2011, when the agency filed the highest number of actions in its history. The SEC filed 686 enforcement actions for 2013, although another footnote indicates that in future years certain categories will be excluded so that number will be 676. Continue Reading
Commissioner Gallagher recently echoed Chair White’s comments regarding the possibility of modifying public company disclosure requirements, which we previously discussed here, noting that under her leadership, “the Commission will begin to make real headway on disclosure reform.” While intensely critical of the mandates under the Dodd-Frank Act as “needlessly clutter[ing] disclosure documents,” he indicated that the soon-to-be-released Regulation S-K study called for under the JOBS Act will be important to these reform initiatives.
Commissioner Gallagher criticized several types of SEC filings and provided specific suggestions. Proxy statements need to be “streamlined,” such as by allowing tables, other than the summary compensation table, to be included in an appendix. Continue Reading
The SEC’s recent denial of a request for a whistleblower award reinforces its earlier decision in a separate proceeding this past July that claims made for tips submitted before the enactment of the Dodd-Frank Act do not constitute “original information,” but also, for the first time, addresses whether the rules afford claimants fair proceedings.
In this case, the claimant provided information to, and met with, the SEC staff until July 2009. The staff opened an investigation regarding an allegation of sales of unregistered non-exempt securities in March 2009, and filed an action in June 2010. Dodd-Frank was enacted a month later. Continue Reading
The SEC today announced that its staff will host a public roundtable on December 5 to discuss the use of proxy advisory firm services by institutional investors and investment advisers. The roundtable will be open to the public and webcast live on the SEC’s website. No word yet on the agenda and participants.
The press release noted that the role of proxy advisory firms was among the issues explored in the 2010 proxy plumbing release, including the services provided by proxy advisory firms and potential conflicts of interest and transparency in the proxy advisory industry. The release is brief, but includes the statement that “[S]ome proxy advisory firms also provide consulting services, including to publicly traded companies that may use these services to help develop proposals to be put to a shareholder vote or to improve their corporate governance ratings.”
This will be the fourth roundtable that the SEC hosts in 2013. Continue Reading
As companies begin digesting the SEC’s proposed pay ratio rule (which we discuss here) and analyzing its impact, here are answers to some frequently asked questions. Final rules may affect the responses.
Is there a safe harbor for the use of any particular method to identify the median employee?
No, the SEC specifically declined to establish any “safe harbor methodologies” or a “menu of alternatives” for determining the median employee.
Do the compensation measures used to identify the median employee need to meet any requirements?
The proposal requires the use of “any consistently applied compensation measure” and mentions several possibilities, such as total direct compensation (salary or wages and performance-based pay); annual cash compensation; or amounts reported in payroll or tax records such as W-2s. Continue Reading