Corp Fin issues interpretive guidance on the calculation of pay-ratio disclosure
Yesterday, Corp Fin issued new Guidance on Calculation of Pay Ratio Disclosure regarding the use of statistical sampling in connection with the pay-ratio disclosure requirement, which mandates public company disclosure of specified pay-ratio information, beginning with the upcoming 2018 proxy season. The new guidance provides a fairly expansive reading of the use of reasonable estimates, statistical sampling and other reasonable methods. But prepare yourself, it also uses terms such as “multimodal,” “gamma distribution” and, my favorite, “lognormal,” surely all firsts for this PubCo blog. (Wikipedia defines a “lognormal”distribution as “a continuous probability distribution of a random variable whose logarithm is normally distributed.” Does that help?) Whether or not you are mystified by some of the terminology (as am I), it is clear that the leitmotif (take that, statisticians) of the new guidance is that you can use or combine any number of different methodologies and estimates so long as they are all reasonable and appropriate under your particular facts and circumstances.
SEC issues guidance in connection with pay-ratio disclosure (updated)
This afternoon, the SEC announced that it had adopted interpretive guidance in connection with the pay-ratio disclosure requirement, which mandates public company disclosure of specified pay-ratio information, beginning with the upcoming 2018 proxy season. Generally, the guidance provides a more expansive reading of three topics: company reliance on reasonable estimates, the use of existing internal records to determine the median employee and non-U.S. employees, and the use of other recognized tests and criteria (such as published IRS guidance) to determine employee/independent contractor status. At the same time, Corp Fin issued separate guidance regarding the use of statistical sampling (to be addressed in a subsequent post) and updated CDIs on topics related to the new SEC guidance. For a more complete discussion of the pay-ratio rule, see our Cooley Alert, SEC Adopts Final Pay-Ratio Rule.
SEC hack provides occasion for Chair Clayton to revitalize 2011 Corp Fin disclosure guidance on cybersecurity risks and incidents
As you probably read in the papers (see, e.g., this article from the WSJ), SEC Chair Jay Clayton announced yesterday that, in 2016, the SEC’s EDGAR system was hacked and, in August 2017, the staff determined that the hack may have led to insider trading. The hackers took advantage of “a software vulnerability in the test filing component of our EDGAR system, which was patched promptly after discovery….” The SEC believes “the intrusion did not result in unauthorized access to personally identifiable information, jeopardize the operations of the Commission, or result in systemic risk. Our investigation of this matter is ongoing, however, and we are coordinating with appropriate authorities.” As part of his lengthy statement, Clayton addressed the cybersecurity considerations that the staff applies in the context of its review of public company disclosures.
A few new CDIs on Rules 147, 503 and 504, as well as Reg A
Today, Corp Fin posted a number of new CDIs that reflect updates for the amendments to Rule 147 (intrastate offers and sales) and Reg D Rules 503 and 504, and withdrew some CDIs in light of the repeal of Rule 505. There are also a number of changes throughout the CDIs interpreting Rule 147 and Reg D that Corp Fin describes as non-substantive based on current rules, such as changes to correct outdated references. The CDIs with these non-substantive changes are identified in the CDIs only by an asterisk and have not been updated to reflect a September 2017 date. Corp Fin has also removed the Reg D CDIs “that do not directly relate to the Commission’s current rules.” The CDIs identified as having substantive changes are summarized below, along with three new CDIs related to Reg A that were posted last week.
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.”
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