Month: September 2017

SEC Advisory Committee recommends changes to Rule 701

On Wednesday of last week, at the final meeting of the SEC Advisory Committee on Small and Emerging Companies (soon to morph into the Small Business Capital Formation Advisory Committee), the Committee heard a presentation on Rule 701, the exemption from registration typically relied on by private companies for equity compensation issued to employees, directors and consultants under compensatory benefit plans or contracts. At the conclusion of the presentation, the Committee resolved, as one of its final actions, to advise the SEC to adopt the presentation’s recommendations for changes to the Rule.

Update on pay-ratio rule

Rumor has it that, at the recent ABA Business Law Section Annual Meeting in Chicago, Corp Fin Director Bill Hinman confirmed—in case there was any doubt—that the pay-ratio rule would be in place for reporting in 2018.

SEC Committee on Small and Emerging Companies completes final report and recommendations

At the final meeting yesterday of the SEC Committee on Small and Emerging Companies (apparently soon to morph into the Small Business Capital Formation Advisory Committee), the Committee finalized the discussion draft of its Final Report to the SEC and heard  presentations on SOX 404(b), the most recent bête noire of deregulation advocates. (The Committee also heard a presentation on Rule 701, which will be addressed in a subsequent post.)

Studies show hedge fund activists have adverse impact on board diversity and target more firms with women CEOs

While more and more institutional holders and asset managers are noisily promoting board diversity among their portfolio companies (see this PubCo post)—including, most recently, the NYC Comptroller and the NYC pension funds (see this PubCo post)—hedge fund activists (fka corporate raiders, now styling themselves as “activists”), seem to take quite a different tack.   Two recent studies have looked at the impact of hedge fund activism on diversity from different perspectives: one study showed that hedge fund activists have an adverse effect on board diversity at companies they attack and another study showed that female CEOs are significantly more likely than male CEOs to come under threat from hedge fund activists. 

Will board diversity be the new proxy access?

In 2014, NYC Comptroller Scott Stringer, who oversees the NYC pension funds, submitted proxy access proposals to 75 companies—and ignited the push for proxy access at public companies across the U.S. The form of proxy access proposed in this first phase of the Boardroom Accountability Project was very similar to the form of proxy access mandated under the SEC’s rules that were overturned in 2011, requiring an eligibility threshold of 3% ownership for three years, with shareholders having the right to nominate up to 25% of the board. (See this PubCo post and this PubCo post.) It has been reported that, of the 75 proposals submitted by the NYC comptroller in 2014, 63 went to a vote, with  average support of 56% and 41 receiving majority support.  In 2015, Stringer submitted more proxy access proposals. Notably, until Stringer’s initiative, private ordering for proxy access had not gathered much steam; only six companies had adopted proxy access.  Stringer’s office reports that, today, more than 425 companies, including over 60% of the S&P 500, have enacted proxy access bylaws. Now, the NYC Comptroller’s Office, leveraging the success of its proxy access campaign and the “powerful tool” it represents to “demand change,” has announced the Boardroom Accountability Project 2.0, which will focus on corporate board diversity, independence and climate expertise. Will Project 2.0 have an impact comparable to that of the drive for proxy access?

Do material weaknesses point to fraud risk?

It’s not just Dodd-Frank that has been roundly disparaged in some quarters, SOX 404(b)—the requirement to have an auditor attestation and report on management’s assessment of internal control over financial reporting—has also recently been much maligned. For example, at a recent House subcommittee hearing devoted to the reasons for the decline in the number of IPOs and public companies, a majority of the subcommittee members attributed the decline largely to regulatory overload, with a number of the witnesses training their sights directly on SOX 404(b). (See the SideBar below.) And then there are the legislative efforts to limit the application of SOX 404(b), such as the provision in the Financial Choice Act to allow certain time-lapsed EGCs another five-year exemption from the audit-attestation requirement. (See this PubCo post.) Whether you view these efforts as heavy-handed or not enough of a good thing, the notion that internal controls might diminish fraud risk remains controversial: some maintain that they are a strong deterrent, while others challenge that contention in light of management’s ability to override controls. A recent study by academics in Texas analyzed whether the strength of internal control significantly affects fraud risk. The result: the study found “a strong association between material weaknesses and future fraud revelation,” leading to the authors’ conclusion that “control opinions that do cite material weaknesses provide a meaningful signal of increased fraud risk.”

Why have institutional investors become so outspoken on corporate governance issues at their portfolio companies?

The substantial increase in activism on corporate governance issues by large institutional shareholders and asset managers qua investors has been hard to miss. Now, joining the ranks of these other enormous asset managers and passive institutional investors—such as BlackRock and State Street (see, e.g., this PubCo post, this PubCo post and this PubCo post)—Vanguard has recently announced, in its Investment Stewardship Report for 2017, that it too has been taking a more active role in advocating for effective corporate governance at its portfolio investments. But what has triggered this shift?  After all, it’s not as though these institutional investors are new to the sport—they’ve been shareholders for many, many years, but mostly of the low-key variety.  Why this noisy advocacy now?