Corporate Governance Update: Developments At The SEC, ISS And More

Friday, March 21, 2014 - 08:15

Public companies in the U.S. must meet the challenge of keeping abreast of increasingly important U.S. Securities and Exchange Commission (SEC), state law and securities exchange developments in corporate governance. Included are some of the recent developments that reflect the different trends and shifts concerning securities laws and norms.

1. SEC Enforcement Chief Speaks To Washington Post

In an interview with the Washington Post, Andrew Ceresney, enforcement chief at the SEC, discussed a new policy initiative that involves demanding admissions of wrongdoing in certain matters. The criteria the SEC will consider when deciding whether to demand admissions include harm to large numbers of investors, significant risk to investors and/or the markets, and situations where admissions would put investors on notice in future dealings with defendant in a way that is unambiguous. Additionally, Ceresney noted that the SEC will boost its enforcement efforts under the recently created Financial Reporting and Audit Task Force, which focuses on detecting misconduct involving accounting and financial reporting disclosures, as well as audit failures.

The article can be found here.

2. SEC Staff Seeks More Succinct Disclosure On Stock Valuation For IPO Registration Statements

After the questionable value of significant disclosure in a form S-1 was raised in the SEC’s own report examining the disclosure requirements in Regulation S-K, commenters recommended eliminating or reducing the disclosure 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 as the information is not significant to investors. As such, Keith Higgins, the head of the SEC Division of Corporate Finance, recently indicated that the SEC staff will be looking for less detailed disclosure in the form S-1 regarding a company’s historical practice for establishing the fair value of the company’s common stock in connection with stock-based compensation. SEC staff will no longer require or expect the level of detail that companies had been providing and instead will expect a few paragraphs describing the historical valuation methodology and what it will be post-IPO.

More information about the less onerous requirements can be found here.

3. ISS’s QuickScore 2.0 May Cause Companies To Expand Director Independence Disclosures

Though the deadline for companies to verify the factual information pertaining to them for ISS’s QuickScore 2.0 has passed, companies should note the ISS’s new approach moving forward. Namely, companies may want to expand their new director 8-Ks to include information addressing their independence so that the information is recorded by QuickScore and directors avoid being “unclassified.”

The full ISS Update can be found here. Additionally, a more thorough exploration of the changes can be read here.

4. Corp Fin Issues Interpretive Guidance Under Rule 14a-6 Based On Foreign Law

In a recent letter, Corp Fin stated that Schlumberger Limited, and any other issuers organized in Curacao, may file a definitive proxy statement without filing a preliminary proxy statement for certain matters subject to an annual stockholder vote under the laws of Curacao that are not among the matters specifically enumerated in Exchange Act Rule 14a-6(a).

The letter can be found here.

5. SEC Approves PCAOB’s 2014 Budget

On February 5, 2014, SEC commissioners approved the PCAOB’s 2014 budget. The PCAOB’s 2014 budget is approximately $258 million, and the annual accounting support fee is $252 million. Additionally, in response to a question from an SEC commissioner, PCAOB Chair Jim Doty stated that he will no longer pursue mandatory auditor rotation.

SEC Commissioner Luis A. Aguilar’s comments on the budget approval can be found here.

6. SEC’s Proposed Rules Under The JOBS Act

The Jumpstart Our Business Startups Act (the JOBS Act) was enacted to, among other goals, legalize securities crowdfunding, lift the ban on the mass marketing of private offerings, and foster an IPO on-ramp for so-called emerging growth companies. In December, the SEC proposed rules under another section of the Act (Title IV) that would permit companies that register a “mini-IPO” with the SEC to raise up to $50 million from the general public in a 12-month period. This exemption, called “Regulation A+,” could be useful to companies looking to raise capital as state registrations would not be required. Further, a small company would be able to raise $50 million from the public, deal in unrestricted securities (which have the practical effect of being immediately re-sellable), engage in “testing the waters” to gauge investor interest, and promote the offering to the broad marketplace.

A more thorough exploration of Regulation A+ can be found here.

7. NASAA Objects To SEC’s Regulation A+ Proposal

NASAA, the association for state securities regulators, submitted a comment letter on the SEC’s Regulation A+ proposal to voice their objection to potentially being exempted from these offerings. The Regulation A+ proposal would provide for preemption of state securities law registration and qualification requirements for securities offered or sold to “qualified purchasers.” NASAA’s letter was a response to a decades-long trend whereby federal regulators preempt state securities regulators’ authority to require qualification or registration of offers and sales of securities within their states. The letter was co-signed by the California Commissioner of Business Oversight Jan Lynn Owen and requests to meet with SEC Chair Mary Jo White and the leadership of the Division of Corporate Finance.

To read the comment letter in full, click here.

8. Corp Fin Updates Its Financial Reporting Manual

Corp Fin updated its Financial Reporting Manual for issues related to critical accounting estimate disclosures for share-based compensation in IPOs. Among the updates, companies may be able to scale back their disclosures in the management’s discussion and analysis (MD&A) section of a Registration Statement relating to events and business developments that affected their estimates used to value stock-based compensation awards granted before the company’s IPO. Additionally, while SEC staff will continue to issue comments to help it understand unusual valuations, the staff will not expect expanded disclosure in the MD&A related to the underlying events and business developments that affected such valuations. The updated Manual also states that companies should continue to disclose methods used to determine the fair value of the company’s shares, the extent to which such estimates are considered highly complex and subjective, and that such estimates will not be necessary for new awards once the shares begin trading. The updates to the Manual reflect a broader push toward helping companies reduce tedious disclosure requirements.

To read the updated Financial Reporting Manual, click here.

9. SEC Hires The Investor Advocate

Dodd-Frank created a new position within the SEC called the Investor Advocate. The SEC filled the position with Rick Fleming, who formerly worked at NASAA (the state securities regulators association) as the deputy general counsel.

The full press release can be found here.

10. SEC Provides Broker-Dealer Relief

The SEC’s Division of Trading and Markets issued a no-action letter, entitled “M&A Brokers,” that allows a person giving advice on M&A deals to receive transaction-based compensation under certain conditions without having to register as a broker-dealer. This letter is a significant departure from prior guidance, but it is subject to numerous conditions, some of which may limit its applicability, including the limitation that it only relates to the sale of privately held companies and that the M&A broker may not directly or indirectly through its affiliates provide financing for an M&A transaction.

The letter can be read in its entirety here.

11. SEC Hosted Cybersecurity Roundtable

The SEC announced that it hosted a roundtable to discuss cybersecurity and the issues and challenges it raises for market participants and public companies. Further, the SEC discussed how it is addressing cybersecurity concerns. Given the recent attention on cybersecurity breaches, the SEC hopes to raise awareness about how various market participants can effectively manage cybersecurity threats.

The press release can be found here.

12. ISS Updates Proxy Voting Guidelines

ISS updated its proxy voting guidelines on January 31, 2014, to address shareholder proposals that address proxy voting topics. Among the updates, ISS discussed the controversial topics of interim vote tallies, confidential voting policies, and treatment of abstentions and broker non-votes.

The updated guidelines can be found here.

13. More Briefs Filed In Halliburton Fraud-On-The-Market Case

The Supreme Court will decide whether to abandon the fraud-on-the-market presumption of reliance that has facilitated class actions brought under Section 10(b) and Rule 10b-5 in Halliburton Co. v. Erica P. John Fund, No. 13-317. The decision is expected in June following oral arguments that commenced on March 5.

The briefs that have been filed thus far can be read here.

14. Chevron Seeks Delaware Supreme Court Certification

The Delaware Chancery Court upheld the use of exclusive forum bylaws where the validity of Chevron’s and FedEx’s forum provision bylaws were challenged. Plaintiffs decided not to appeal that decision. Notwithstanding, Chevron asked a California judge for a similar case to be certified to the Delaware Supreme Court to bring more certainty to the use of exclusive forum bylaws.

Chevron’s request can be found here.

Patricia M. Lee is a Partner in the firm’s New York office. She focuses her practice on project finance, telecommunications finance, lending and corporate finance transactions. Alina C. Mejer is an Associate in the firm’s New York office. 

 

Please email the authors at plee@kelleydrye.com or amejer@kelleydrye.com with questions about this article.