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Leg & Reg  Company Resources | Proxy-Season Related  | Investor Developments
LEGISLATIVE & REGULATORY NEWS October 11, 2017

This Week's Alert
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SEC Proposes Reg. S-K Disclosure Simplification Amendments

At its open meeting today, the SEC proposed for public comment these amendments to Reg. S-K based on staff's recommendations encompassed in the FAST-Act mandated Report on Modernization and Simplification of Regulation S-K - which was released in November 2016, and a broader review of the agency's disclosure scheme.

According to the SEC's Fact Sheet, among other things, the proposed amendments:

  • Revise rules or forms to update, streamline or otherwise improve the Commission’s disclosure framework by eliminating the risk factor examples listed in the disclosure requirement and revising the description of property requirement to emphasize the materiality threshold;
  • Update rules to account for developments since their adoption or last amendment by eliminating certain requirements for undertakings in registration statements;
  • Simplify disclosure or the disclosure process, including proposed changes to exhibit filing requirements and the related process for confidential treatment requests and changes to Management's Discussion and Analysis that would allow for flexibility in discussing historical periods; and
  • Incorporate technology to improve access to information by requiring data tagging for items on the cover page of certain filings and the use of hyperlinks for information that is incorporated by reference and available on EDGAR.

This memo from Weil summarizes key technical and substantive recommendations encompassed in the FAST-Act mandated report, including:

  • Clarifying that a description of property is required only to the extent that physical properties are material to a company’s business (Reg. S-K Item 102)
  • Clarifying that a registrant need only provide a period-to-period comparison for the two most recent fiscal years presented in the financial statements and may hyperlink to the prior year’s annual report for the additional period-to-period comparison (MD&A Item 303)
  • Allowing companies to rely solely on a review of Section 16 reports submitted on Edgar for any disclosable reporting delinquencies, and eliminating the requirement that reporting persons furnish Section 16 reports to the company (Item 405)
  • Expressly (as an addition to Item 405) requiring companies to include a Section 16(a) Beneficial Ownership Reporting Compliance section only if they have delinquencies to report
  • Allowing companies to omit attachments and schedules to filed exhibits unless the attachments/schedules contain information that has not been otherwise disclosed and is material to an investment decision (Item 601)

The comment period on the SEC's release will be open for 60 days. Comments may be submitted here.

See also these Statements from Chair Clayton and Commissioners Piwowar and Stein, and our prior report on the FAST Act-mandated report, and stay tuned for further analysis and commentary. 

Treasury Recommends Sweeping Capital Markets Regulatory Reforms

Further to our Riches post on Monday and our previous Society Alert report, the US Treasury Department released its second in a series of Executive Order-triggered regulatory reform-focused reports, which includes numerous recommended capital markets reforms consistent with the EO's economic growth and capital formation objectives.

This post from Stinson Leonard Street Partner and Society member Steve Quinlivan summarizes a number of key recommendations, including these:

  • Repealing "non-material disclosure requirements," including Dodd-Frank §1502 (conflict minerals), §1503 (mine safety), §1504 (resource extraction), and §953(b) (pay ratio) and withdrawing any rules issued pursuant to such provisions, as proposed by the Financial CHOICE Act (most recently reported on here). Absent legislative action, Treasury recommends that the SEC consider exempting Smaller Reporting Companies (SRCs) and Emerging Growth Companies (EGCs) from these requirements. (Report pg. 29)
  • Substantially revising the 30-year-old $2,000 holding requirement for shareholder proposals. The report also suggests the SEC "explore options that better align shareholder interests (such as considering the shareholder’s dollar holding in company stock as a percentage of his or her net liquid assets) when evaluating eligibility, rather than basing eligibility solely on a fixed dollar holding in stock or percentage of the company’s outstanding stock."  (Report pgs. 31-32)
  • Substantially revising the shareholder proposal resubmission thresholds for repeat proposals - from the current thresholds of 3%, 6%, and 10% - to promote accountability, better manage costs, and reduce unnecessary burdens. (Report pgs. 31-32)
  • Modifying rules that would broaden eligibility for status as an SRC and as a non-accelerated filer to include entities with up to $250 million in public float from the current $75 million, as reflected in the SEC's proposed amendments. (Report pg. 36)
  • Extending the length of time a company may be considered an EGC to up to 10 years subject to a revenue and/or public float threshold - consistent with H.R. 1645, the Fostering Innovation Act of 2017. (Report pgs. 36-37)
  • Expanding Reg. A eligibility to include Exchange Act reporting companies and increase the Tier 2 offering limit to $75 million. (Report pgs. 39-40)

Appendix B of the report (see pg. 205+) conveniently lists all of its recommendations by major topic (e.g., Access to Capital) and subtopic (e.g., Public Companies & IPOs) - including the recommended action, method of implementation (Congressional and/or regulatory action), and corresponding EO Core Principles. Remarkably few of the recommendations call for legislative action - signaling a call for the SEC and CFTC , both of whose chairs Jay Clayton and Christopher Giancarlo, respectively, reportedly "provided extensive input to the 'thoughtful' report and supported its recommendations" - to act at the agency level.    

Cadwalader observes:

The prior Administration viewed financial markets as creators of risk that had to be controlled; this Administration appears to view financial markets as creators of growth that would benefit from decreased controls. This is simply a tremendous difference in perspective and tone.

There will and should be a fair amount of discussion over these many and specific recommendations. One broad recommendation, however, stands out: restoring to both the SEC and the CFTC complete exemptive authority as to the requirements of the statutes that they enforce [see pgs. 179-180 of the Report]. Depriving the regulators of this authority in the wake of the Congressional enthusiasm for Dodd-Frank had limited the regulators ability to fix Congressional mistakes and over-reaches in drafting. The prior Administration had simply become so locked into defending Dodd-Frank against any criticism that it had become impossible for the regulators to consider, or even discuss, what aspects of it might be working or not. The new Administration does not bear the burden of justification.

See also the report's accompanying Fact Sheet; these memos from Ropes & Gray and Morrison & Foerster; our Proxy Season report:"Keith Higgins Suggests Modest Shareholder Proposal Reforms"; and numerous additional resources on our Regulatory Reform topical page

Treasury: Retain Anti-Corporate Inversion Regs (For Now), But Ease Documentation

Treasury's  Executive Order-triggered report aimed at reducing tax regulatory burdens - released last week - notably revealed its determination to develop proposed alternative, streamlined documentation requirements associated with the IRC §385 Obama administration-issued anti-corporate inversion-related regulations, but retain the balance of these regulations aimed at preventing earnings stripping pending fundamental tax reform, which Treasury's release indicates should eliminate the need for the regulations entirely. As previously reported, in July, Treasury issued this Notice seeking public comment on the potential rescission or modification of this, along with seven other, enumerated tax regulations issued since January 1, 2016.  

See also this Paul Weiss memo, this Deloitte piece: "The Board’s Role in Creating a Sustainable BEPS [Base Erosion and Profit Shifting] Plan," and our prior reports in Leg & Reg here: "New Executive Order Will Revisit Corporate Inversion Rules" and here"US Chamber & TX Business Group Challenge New IRS Anti-Inversion Rule"; in Company News here: "Communications Challenges for Tax Inversion Deals"  and here: "U.S. Issues New Rules to Combat Tax Inversions"; and in Leg & Reg here: "Inversions/Spinversions Reach Fever Pitch in Washington" and here: "Stop Corporate Inversions Act of 2014."

DOJ on Corporate Wrongdoing: Yates & Other Policy Memos Under Review

Last week, in his NYU Program on Corporate Compliance & Enforcement Keynote Address on the DOJ's corporate prosecution policies, Deputy AG Rod Rosenstein affirmed (see "DOJ Signals Forthcoming Changes to Corporate Fraud Policy") that the individual accountability-focused Yates memo is among the DOJ's policy memos under review. While he didn't announce new policy, and he in fact committed to stem the agency's tendency to "manage by memo" (i.e., articulate policies and guidance by Deputy AG-issued memos in lieu of properly updating the DOJ (aka US Attorneys') Manual), he did share this much: 

I am not certain that the existing memos, talking points, and “F.A.Q.” documents got it exactly right.  But any adjustments or changes we make will reflect several common themes. First, any changes will reflect our resolve to hold individuals accountable for corporate wrongdoing. Second, they will affirm that the government should not use criminal authority unfairly to extract civil payments. Third, any changes will make the policy more clear and more concise. And they will reflect input from stakeholders inside and outside the Department of Justice.

Rosenstein also indicated that the agency is reviewing and enhancing its training of prosecutors and agents on corporate investigations and fraud, and "working to incentive, reward, and even partner with companies that demonstrate a commitment to combating corporate fraud." 

See also this new Harvard Law post: "The Yates Memo: Looking for “Individual Accountability” in All the Wrong Places," this WSJ article: "Costly Corporate Investigations Have No Natural End-Point," and these prior Society Alert reports in Reg & Leg: "DOJ Posts Corporate Compliance Program 'Guidance," "FCPA: DOJ Reiterates Focus on Individual Accountability," "DOJ: Yates Memo in Practice," "DOJ Elaborates on "Yates Memo" & Publishes Updated Guidance," and "DOJ Issues New Guidance on Individual Accountability for Corporate Wrongdoing."

New PCAOB Revenue Recognition Resource Also Instructive for Companies

Last Thursday, the PCAOB issued this Staff Audit Practice Alert No. 15: Matters Related to Auditing Revenue from Contracts with Customers to assist auditors in applying PCAOB standards when auditing companies' implementation of the new revenue recognition standard. The Practice Alert reportedly highlights PCAOB requirements and other considerations for auditing the company's implementation of the new standard, including:

  • Transition disclosures and transition adjustments
  • Internal control over financial reporting
  • Fraud risks
  • Revenue recognition
  • Disclosures

As was the case with the PCAOB's recently-issued Staff Inspection Brief (reported on here), although billed as a resource for its registered audit firms, the Practice Alert also serves as indirect guidance to audit committees and issuers in preparing for the company's 2017 YE audit, particularly since the Brief identified the new revenue recognition standard as a key audit inspection focus area. 

See also the PCAOB's release; our most recent of numerous relevant reports: "SEC Prods on New Accounting Standards Implementation" in Leg & Reg, "New Revenue Recognition Standard: Q2 Disclosure Benchmarking" in Company, "New Accounting Standards Planning & Communications: Here’s How," and "Sample Revenue Recognition Transition Disclosures"; and additional resources on our Auditing/Audit Firms and Financial Reporting topical pages.

company resources & developments

Pay Ratio Teleconference: Register Now

As a reminder, the Society Securities Law Committee's next  pay ratio teleconference: "Pay Ratio Rules: Your Questions Answered - Next Steps" will be held on Thursday, October 19 from 3:00 – 4:30 pm ET. The event is open to all Society members. Register for the teleconference here. Access oodles of resources on our Pay Ratio topical page.

Minute Drafting Guidance

In this new, time-well-spent 10-minute episode of Inside America's Boardroom's: "Guidance for Documenting Board & Committee Minutes," Wilson Sonsini discusses best practice considerations for board and committee minute drafting - specifically addressing:

  • The appropriate level of detail
  • Documenting individual director dissents
  • The most common minute drafting mistakes

Access numerous additional resources on our Minutes and Corporate Secretary's Office topical pages.

Key Cybersecurity Lingo Explained

Although addressed to HR professionals, this new Bryan Cave memo: How Employers Can Become Experts at Data Breaches: Understand the Lingo - which explains the differences between the oft-misused cybersecurity-related lingo: "events," "incidents," and "breaches," and related implications - is just as applicable to the vast majority of us who are not cyber-experts, but are increasingly required to be well-versed and vigilant in this area simply to perform our ordinary course day-to-day job responsibilities. 

Access numerous additional practical cyber-related resources here.

Ransomware Threat Management 101

Part One - Background and Reality of former Chief of the SEC's Office of Internet Enforcement, now-consultant John Reed Stark's three-part series on managing ransomware threats, shares important - albeit sobering - statistics and other realities on ransomware trends and delivery channels, recent "headline" events, and common responses.

Recent 2016 studies allegedly reported ransomware being included in 40% of all spam emails, and 460,000 ransomware attempts with an average demand of more than $1,000 - up significantly from 2015. Employees clicking on files or links purportedly are the primary ransomware delivery channel; however, ransomware is also delivered via "seemingly legitimate downloads" such as software updates (e.g., fake Adobe Flash updates) or resume files. And while the official federal law enforcement view espouses reporting incidents to the FBI and not paying ransom demands, the unofficial reality is that many or perhaps even most ransomware victims (including some law enforcement officials) pay the ransom to seek to avoid losing access to their data.

See also our prior Cybersecurity report: "Establish Board-Approved Ransomware Approach & Logistics Now," and watch for our future Society Alert reports on Parts Two and Three of this series, which reportedly will address ransomware response elements and implications, and other ransomware essentials including notification requirements, ransomware remediation, and ransomware cyber insurance.   

Benchmarking Your Nonprofit Board Practices

Heidrick & Struggles' just-released report on its benchmarking survey of association and nonprofit board members (58% charitable organizations/49% industry trade associations/26% professional societies), reveals these and other key board practice trends:

  • Respondents' organizations most commonly (66%) have 11 - 25 board members, and fewer than 50 employees (60%).
  • 68% of respondents' boards have director term limits.
  • Just 53% of respondents said their organization has a defined onboarding process to help them assume their duties as a board member, and only 46% said their new director onboarding experience properly prepared them to be an effective board member. 35% said their onboarding experience neither helped or hurt their preparedness, and 15% said it didn't properly prepare them. See the onboarding gaps on page 18.
  • The vast majority of directors believe they need to receive the board materials at least a week (67% said 7 days, and 20% said 14 days) before the board meeting to be properly prepared.
  • 68% of respondents said their board is focused on the organization's future and where it should be in five years, but 31% said their board is not future-oriented.
  • Respondents overwhelmingly serve because they support the organization's mission (91%), and believe they could make the organization more effective with their board service (68%).

The report includes numerous other noteworthy data points, as well as guidance to address survey-revealed areas of opportunity for boards to consider.    

Access numerous additional resources on our Non-Profits topical page.

Proxy Season-Related developments & Resources

Consultation Launched on Proxy Advisor Best Practice Principles

The Best Practice Principles for Shareholder Voting Research & Analysis (BPP) Steering Group and representatives of the five signatories to the BPP (inclusive of ISS and Glass Lewis) launched a consultation today seeking investors' and companies' input on whether the 2014-launched BPP have been effective in ensuring the integrity and efficiency of proxy advisory services.

Steering Group independent chair Chris Hodge commented on the Consultation objectives:

The role of proxy advisors is a subject than can often generate more heat than light. This review is an opportunity to shed more light on their activities, and to identify ways in which the standards in the Principles might be strengthened and reporting against them made more informative. We are particularly keen to get first hand evidence from investors who use the services of voting research providers and from companies who have had direct dealings with them.

Your input on the Consultation may be provided in these two ways:

A copy of the questionnaire is also available in a downloadable .pdf format HERE. Comments on the Consultation are due December 15, 2017. 

Access numerous relevant resources on our Proxy Advisors topical page.

ISS Instructs Investors & Others on Evaluating CEO Pay Ratios

As blogged earlier this week, pending broad, mandated disclosure of CEO pay ratios in 2018, ISS developed it own "outside-in" pay ratio methodology using publicly available employee and CEO data (from the US Bureau of Labor Statistics, and its own ExecComp Analytics platform for Russell 3000 CEOs, respectively) to illustrate the likely significant variations among pay ratios by industry and company size, and suggest factors investors and others consider in evaluating the reasonableness of CEO compensation once the 2018 disclosures are out.

This table depicts industry variations:

And this one show variations by company size:

In a welcome move, the post correctly notes that key company-specific and/or other relevant factors that don't bear on the reasonableness of the CEO's compensation (e.g., a strategically-driven workforce composition) may underlie differences in pay ratios among companies. As such, ISS believes institutional investors will look to companies' narrative disclosure to provide important context:

For institutional investors, narrative disclosure on the pay ratio is likely to be the most important aspect of the disclosure mandate as they look to understand the factors impacting CEO and employee pay, the drivers behind the board’s compensation-setting process, and how they reinforce the company’s management strategy.

ISS further suggests that both companies and investors use these three questions to evaluate disclosures - particularly once a mass quantity of 2018 pay ratio disclosures is out: 

  • How does the company’s ratio compare with peer companies?
  • What is driving any difference uncovered in the ratio? Is it the CEO’s pay, the median employee’s pay, or both?
  • Are there labor force issues, such as use of contractors, significant use of part-time employees, or offshore labor sourcing, that drive differences?

As previously reported, investor and company responses to ISS's annual global benchmark policy survey revealed divergent views between the two groups on the utility of the disclosure - with 72% of investor respondents indicating that they intend to either compare the ratios across companies/industry sectors, assess year-on-year changes in the ratio at an individual company, or both - compared to 44% of companies and other non-investors indicating  that they are not planning to use the information.

See ISS's "outside-in" pay ratio methodology on page 3, this Parker Poe post: "Pay Ratio Disclosures are an Employee-Relations Opportunity...Really," and numerous additional resources on our Pay Ratio topical page.   

Proxy Disclosure Benchmarking

Labrador's newly-released Proxy Statement Benchmark review of 238 of the Fortune 250's (as listed in the Appendix) proxy statements filed between September 1, 2016 and August 31, 2017 reveals these - among many other - noteworthy findings and associated firm insights:   

- Board Composition

  • A majority of companies highlighted their directors' experiences and qualifications in some manner.
  • 69% of companies included director nominees' photos, which the firm identifies as a best practice.
  • 33% included a board skills & qualifications matrix. Some other companies disclosed skills on an aggregated rather than individualized level.
  • 37% of companies used graphics to break down board tenure.
  • 12% used graphics to depict directors' ages.
  • 21% used graphics to highlight the number of women on the board.
  • New trend observation: Using graphics or tables to describe the board evaluation process 

- Shareholder Engagement

  • 57% included disclosure about their shareholder engagement efforts.
  • Best practice insight: Using infographics that highlight the feedback received and responsive actions taken, and including in the Governance section of the proxy the broad theme of engagement in the form of "who, why, when and what" 

- ESG

  • Half the companies included a discussion on their sustainability efforts. 

- Compensation

  • 61% included a "what we do and don't do" table to describe their compensation practices
  • 49% used graphics to highlight company performance. 

- Readability

  • 67% of companies included a proxy summary - up from 36% five years ago. 

Also noteworthy: Labrador expects pay ratio disclosures to vary considerably - ranging from bare minimum disclosures to expansive narratives and use of graphics - and disclosure placement to vary widely from the most unobtrusive location in the proxy, to emphasis in the proxy or CD&A summaries.  

Access numerous additional resources on our Disclosure Reform and Annual Meeting topical pages.

Preparing for the 2018 Proxy & Annual Report Season

Mayer Brown's "Preparing for the 2018 US Proxy and Annual Reporting Season-Are You Ready?" will certainly put you closer to "Yes" along the proxy season preparedness spectrum. The firm's annual memo provides a nice overview of a number of key considerations for the already-upcoming proxy and annual report season - including those relating to pay ratio and other compensation-related disclosures, beyond-the-minimum (as is increasingly common) audit committee disclosure, shareholder proposals, institutional shareholder initiatives, virtual meetings, non-GAAP disclosure requirements, and Form 10-K risk factors and form-related developments. 

See also our recent prior reports: "Start Now to be Well-Positioned for the 2018 Proxy Season" and "2018 Proxy Season Considerations," and numerous resources on all of these important topics on our ever-expanding list of topical pages

Keith Higgins Suggests Modest Shareholder Proposal Reforms

Further to our Riches blog last week, in this recent post: "Finding Common Ground on Shareholder Proposals," Ropes & Gray Securities & Governance Practice Chair, Society member and former SEC Corp Fin Director Keith Higgins suggests a series of modest shareholder proposal reforms that reflect his robust, seasoned perspective and a thoughtful approach.

Suggestions for SEC consideration include: 

  • Increasing resubmission thresholds - perhaps comparable to the SEC's 1997 proposal, i.e., 6%/15%/30% in lieu of the current 3%/6%/10%
  • Increasing the initial eligibility ownership requirement to three years from the current one-year requirement
  • For proposal by proxy scenarios, requiring those acting on shareholders' behalf to submit a current, specific authorization to act
  • Allowing companies to redact factual inaccuracies from shareholder proposals and supporting statements that are otherwise required to be included in the proxy statement, subject perhaps to independent director approval of the redaction and the company's proxy statement disclosure about the fact that a portion was redacted
  • Modifying the 5% "relevance" exclusion (14a-8(c)(5)) for proposals relating to operations - whose current, subjective "and is not otherwise significantly related to the registrant's business" qualification effectively eliminates the availability of the exclusion - so that it is based on an objective bright-line threshold of 5% (or other reasonable percentage) of total assets 

Access numerous additional, relevant resources on our Shareholder Proposals and  Regulatory Reform topical pages.

investor developments & resources

Trust in Company Drives Investment Decision-Making

Edelman's inaugural Trust Barometer Special Report: Institutional Investors, based on a June/July 2017 online quantitative survey of 101 institutional investors in 14 countries (59% US), revealed thought-worthy findings, particularly for public companies seeking to understand the leading factors that will build - and engender trust and strengthen their relationships with - their investor base.

Noteworthy findings include:

  • Almost half of the respondents believe their firm's actions can have a meaningful role in influencing a company's corporate governance.
  • 87% of respondents will support a reputable activist investor at one of their investee companies if they believe change is necessary, and 80% say most companies aren't prepared to handle an activist campaign.
  • 76% say companies should take a public stand on one or more social issues - with education reform/training, environmental issues and free trade topping the list.
  • 69% say how the company treats employees, i.e., prioritizing employee commitment to the company - impacts their trust of the company; 87% say a company's customer service satisfaction impacts their trust.  
  • 66% say they have to trust a company's board of directors before making or recommending an investment, and 65% say an engaged & efffective board is important when considering whether to invest in a company

One caveat based on an observation of the survey demographics (page 2): 92% of respondents were male and just 8% female. Assuming a more diverse respondent pool, it's quite possible the survey results would have differed.   

See also the Drivers of Trust rankings on page 33 of the Report, Edelman's release, this 2-page summary infographic, this Institutional Investor article, and Edelman's Executive Summary (accessible here) of the companion Global Annual Study.

AllianceBernstein Elaborates on Board Diversity Expectations

Proxy Insight's just-published interview (pg. 5) with asset manager Alliance Bernstein's Head of Responsible Investment Linda Giuliano provides some important color to the investor's perspective on its board diversity-related proxy voting approach:

Q: In your 2017 policy, you updated your section on board diversity. Could you give us a brief overview of how AllianceBernstein approaches diversity?

A: We think of diversity in the broadest terms, and ultimately want cognitive diversity. So, when we are reviewing a board, we assess whether its members bring a broad skill set to effectively oversee the strategic direction of the firm, including having the right management in place. More specifically, the things that we look for are whether a board has members with direct industry experience, strong financial expertise and is diverse in  gender, age and tenure.

We also look at board diversity from a geographical standpoint. For instance, if we are looking at a multi-national corporation, is it bringing in people with broad international experience and, even better, directors who reside in a market where the corporation has a strong presence?

The main change in our voting policy with regards to board diversity is how we think about board refreshment. At AllianceBernstein, we really want to understand how a board is evaluating the skills of its current members, and whether or not their skills match the board’s current needs, i.e. where are the skill gaps?

And most importantly, what is the process by which the board attempts to fill those gaps, and how are they going about ensuring that they have a diverse pool of prospective board candidates?

I would also add that along with our transition to a digital economy, cybersecurity has become increasingly important for boards. While we can’t expect every board to have a cyber expert – there just aren’t enough – we do expect boards to take this issue seriously and look at a variety of ways to ensure they get access to that expertise.

So, it really comes down to process in understanding how a board approaches diversity. 

See also last week's reports on Board Diversity, and numerous additional resources - including proxy voting policies and guidelines - on our Institutional Investors topical page.