Article Archives

Insider Trading: Five Reminders From the SEC Division of Enforcement

A recent litigation release from the SEC Division of Enforcement, though seemingly unremarkable, highlights five basic principles that sometimes slip off a company’s insider trading compliance radar. The SEC’s complaints. According to the SEC’s complaints against two former employees and the spouse of a former employee of Ariad Pharmaceuticals, Inc., which develops and markets drugs to treat cancer: The husband of an Ariad employee traded Ariad stock before company announcements about the safety profile and FDA approval status of Ariad’s only FDA-approved drug and after his wife learned of material non-public information related to Ariad’s dealings with the FDA. The husband also advised a friend to trade Ariad stock on the basis of non-public information learned from his wife, enabling the friend to obtain profits of $4,188.00. Ariad’s former Senior Director of Pharmacovigilance and Risk Management sold Ariad stock after she had attended meetings with the FDA and had learned of a forthcoming FDA decision to require Ariad to include a safety warning on its product label, thereby avoiding $9,420.00 in losses. Ariad’s former Associate Director of Pharmacovigilance and Risk Management alerted certain of her relatives one day before Ariad publicly announced a pause in all clinical trials for its FDA-approved drug. By selling in advance of Ariad’s announcement, her relatives avoided $2,888.10 in losses. The SEC’s complaints charged each defendant with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and sought various injunctions, disgorgements with interest, and civil penalties. The five reminders. First: The SEC remains vigilant against insider trading of all shapes and sizes. For example, consider that: Ariad was relatively...  Read More

What’s Happening with Pay Ratio Disclosures?

Well, we’re more than half-way through the year, Independence Day has come and gone, the 2018 proxy season is closer than it used to be, and we still don’t know whether pay ratio disclosures will go away. A brief background. Dodd-Frank Act Section 953(b) requires that the SEC amend Item 402 of Regulation S-K to mandate pay ratio disclosures. In 2015, the SEC dutifully adopted the mandated rules, which state that all companies required to provide executive compensation disclosure under Item 402(c) of Regulation S-K must provide new executive compensation disclosure regarding: the median of annual total compensation of all employees, the annual total compensation of the CEO, and the ratio of those two amounts. The new rules, which are complex and involve much time-consuming preparation, require companies to report the pay ratio disclosure for their first fiscal year beginning on or after January 1, 2017. This means that, for calendar-year companies, the new disclosures are required in 2018 proxy statements. Companies generally reacted with an initial howl of outrage over the perceived arbitrary uselessness of these disclosures, observed that the implementation date was nearly three years away, and then studiously ignored the issue, hoping that in the meantime Section 953(b) would be modified or repealed. Yet, as 2017 rounded into view, the Division of Corporation Finance issued guidance regarding some of the rule’s vaguer points, seemingly in part to remind companies that the rule was still out there and that much work was required to comply with its provisions. But just as companies reluctantly began to gear up (or to think about gearing up) to collect the necessary compensation...  Read More

What Lawyers Should Know About the New Auditor’s Report Revisions

After more than six years of deliberations, it looks like the revised auditor’s report is about to become reality. On June 1, the PCAOB adopted a new auditing standard that substantially modifies the long-familiar content of that venerable report. Now the SEC must consider and act on the PCAOB’s recommendation, a process that typically involves another public comment period. What’s changing? CAM disclosure. The biggest change will be communication in the report by the auditors of “critical audit matters” applicable to the current period covered by the report. CAMs are defined as: “any matter … that was communicated or required to be communicated to the audit committee and that relates to accounts or disclosures that are material to the financial statements and involved especially challenging, subjective, or complex auditor judgments.” The new standard notes that the determination of a CAM is principles-based, though it also provides a non-exclusive list of factors for the auditor to consider in its determination. The PCAOB emphasizes that this disclosure should be client-specific and should not be boilerplate. CAMs will be described in a separate section of the auditor’s report. The auditor must identify the CAM, describe the principal considerations that led the auditor to determine it was a CAM, describe how the CAM was addressed in the audit and reference the accounts or disclosures related to the CAM. In the unlikely event that a report contains no CAMs, it must affirmatively so state. Emerging growth companies and employee stock purchase, savings and similar plans are excluded from the CAM disclosure requirements. Additional changes. The modified auditor’s report also must: State the year the...  Read More

Sustainability Reporting After the Paris Climate Accord

It’s fair to say that President Trump’s June 1 announcement that the U.S. will withdraw from the Paris climate accord has been widely reported. It’s also fair to say that the announcement triggered a host of passionate reactions, positive and negative, around the world. Within corporate America, a number of high-profile corporations (for example, Apple, Disney, Facebook, General Electric, Google, Salesforce, Tesla and Twitter) pledged to continue their efforts to cut greenhouse gas emissions and adhere to the spirit of the accord. This leads one to wonder whether withdrawal from the Paris climate accord might, per the law of unintended consequences, actually increase investor emphasis on corporate social responsibility (CSR) and the number of companies that voluntarily report their sustainability initiatives. It’s an intriguing possibility. Momentum for sustainability reporting has been building for years. In fact, the vast majority of S&P 500 companies now publish some type of sustainability or CSR report, and disclosures have begun to appear in SEC filings, particularly proxy statements. Mid-size and smaller companies, lacking the resources of their larger brethren, have been slower to do so, though some have begun and others are giving it serious consideration. Increased pressure from institutional investors, employees and other stakeholders, now coupled with widespread concern over withdrawal from the accord, could tip the reporting balance, especially for companies in sustainability-sensitive industries or companies that otherwise want to send a certain message. One challenge for all companies is to make sense out of the CSR reporting landscape. First of all, the terminology itself—sustainability, CSR, environmental, social and governance (ESG), and triple bottom line, to name a few—is confusingly ambiguous...  Read More

Introducing a Fresh Perspective on Governance, Risk and Compliance

With the fifth anniversary of Doug’s Note fast approaching (and more than 250 posts and 250,000 reads in the rearview mirror), it seemed like a good time to consider where to go from here. Where, as it turns out, was to create a companion blog devoted to governance, risk and compliance, which are among the hottest issues in corporate America these days. Parker Poe’s GRC Blog reflects the joint contributions of our GRC team, co-led by Jane Lewis-Raymond, former chief compliance officer and general counsel of a large public company, and by me. Together, we provide more than 50 years of experience counseling public and private companies of all shapes and sizes on compliance program design, risk assessment, enterprise risk management, crisis management, remediation and training. Essential to the blog’s success are the contributions of our larger GRC team, which consists of attorneys whose practices focus on such key areas of corporate compliance as: Anti-Bribery & Anti-Corruption Antitrust & Consumer Protection Criminal & Regulatory White Collar Compliance Crisis Management Cybersecurity & Data Privacy Employment Environmental Government Contracting & False Claims Act Compliance Immigration SEC Reporting & Compliance Tax Trade Compliance Our GRC Blog includes insights on such matters as creating a compliance culture, ensuring compliance with the Federal Sentencing Guidelines and the DOJ’s program evaluation guidance, the interplay of compliance professionals, executive management and boards of directors, balancing GRC goals against the realities of budget and personnel constraints, and a whole lot more. Recent posts include, for example: Take-aways from the recent global ransomware attack (click here), The board of directors’ role in compliance programs (click here) , Where...  Read More

Brexit’s Impact on the U.S. Capital Markets

You may have heard by now that the U.K. plans to leave the European Union at some point in the next few years. Since the British voted back on June 23, 2016, there has been no shortage of learned analysis/rank speculation about Brexit’s future impact on the U.K. and EU economies and financial markets. Opinions range from dire to blasé, with reality likely to fall (as it is wont) somewhere in the middle. One surprising consequence, however, may be Brexit’s impact on U.S. capital markets. In a recent Heard on the Street column in The Wall Street Journal, Paul J. Davies theorizes from London that post-Brexit EU companies may have no choice but to tap the U.S. capital markets to make up for less convenient access to U.K. investors. It’s an intriguing, and believable, hypothesis. Mr. Davies notes that much of the capital used to fund business expansion comes from savings, mostly in the form of pension funds, insurance companies and investment funds. He cites statistics provided by the Financial Stability Board, Investment Company Institute, European Central Bank and OECD showing that eurozone savings total less than 150% of its total GDP, as compared to more than 250% of GDP in the U.K. and 240% of GDP in the U.S. He notes further that there currently is no single set of capital markets laws and standards within the EU, making it hard to raise capital simultaneously in several eurozone countries. Therefore, frequent or large eurozone issuers often turn to the U.K.’s massive capital markets. Post-Brexit, that may not be feasible. As a result, Mr. Davies says, EU companies may...  Read More

Thwarting Shareholder Activism Through Engagement

As the 2017 proxy season draws to a close for most companies, it is obvious that shareholder activism remains alive and well, though the actual number of public activist campaigns appears to have tapered off slightly as compared to recent years. Activism takes many forms, ranging from takeover proxy battles to proxy access proposals to single-issue social welfare proposals. Particularly noteworthy is an apparent trend among institutional investors to target small and mid-size companies, perhaps believing (perhaps correctly) that these companies are ill-prepared to resist their forays. Companies have a wide array of defensive techniques at their disposal, depending on the nature of the activist’s approach, one of which is effective shareholder engagement. The good news is that more and more institutions are welcoming, and even encouraging, engagement with their portfolio companies. And while small and mid-size companies still sometimes struggle to get the attention of major institutions, this has become less problematic now that shareholder engagement is standard practice in corporate America. Although many of the governance benefits of shareholder engagement are widely known, often overlooked is its ability to thwart shareholder activism. Better communication between the company and its major shareholders reduces misunderstandings about management’s strategy or the reasons behind its latest moves. Misunderstandings, in turn, may lead to activism, or a willingness to side with activists. Strong relationships with traditionally non-activist institutional shareholders (by far the larger percentage) have the ability to actually deter activist behavior before it even happens, or to nip it before it gains too much momentum. For example, many activist shareholders own a relatively small percentage of the target company, particularly as compared...  Read More

Compliance Program Oversight—The Board’s Overlooked Role

It’s long been axiomatic that an effective compliance program cannot exist without a strong ethics and compliance culture, which in turn requires the proper “tone from the top.” Yet, when most companies think “top,” they think C-suite. After all, tone starts with the CEO, right? And the C-suite is where you find many CCOs, or the executive to whom the CCO directly reports. Also, that’s where decisions are made about staffing the compliance function, allocating funds to implement the program and the host of other operational matters that determine whether the program is robust, minimalistic or non-existent. Often overlooked, however, is the crucial role of the board of directors. Most directors have a general understanding that their fiduciary duties include compliance oversight. After all, it’s been more than 20 years since the Delaware Court of Chancery held in its famous Caremark decision that directors could, in certain circumstances, be determined to have breached their fiduciary duty and, therefore, be liable for company losses due to compliance program failures. Later, the Delaware Supreme Court in Stone v. Ritter held that a director’s failure to implement and oversee aspects of a compliance program could constitute an unindemnifiable breach of the duty of loyalty. But how well do boards really understand their compliance program obligations? And to what extent do many boards devote time and effort to ensuring that their performance would pass muster under the microscope of hindsight when (not if) a compliance breach occurs? Is it enough for them to know that someone in the company has been given the title of CCO? Is it enough to allocate 30 minutes...  Read More

A Compliance Calendar Tip: Update for T+2

A few weeks ago, the SEC finalized rules to shorten the standard settlement period for securities transactions from three business days (T+3) to two business days (T+2). Amended Exchange Act Rule 15c6-1(a) will prohibit a broker-dealer from entering into a contract for the purchase or sale of a security (subject to certain exceptions) that provides for payment of funds and delivery of securities later than two business days after the trade date (known as “T”), unless otherwise expressly agreed to by the parties at the time of the transaction. (See this Doug’s Note.) The shift from T+3 to T+2 will be effective on September 5, 2017 to give everyone sufficient time to plan for, implement and test changes to the various systems, policies and procedures necessary for an orderly transition. Most of this preparation burden will, of course, fall on the direct participants in the securities trading industry. However, any company that pays regular cash dividends may need to adjust its annual compliance calendar to accommodate the new rule. Most companies that pay regular cash dividends include these relevant dates in their annual compliance calendars: The date on which the dividend is expected to be declared by the board of directors, The dividend payment date, and The ex-dividend date (the date set by the stock exchanges on which the security’s purchase price no longer reflects the dividend because the trade will settle after the record date). NYSE and NASDAQ rules currently state that shares will trade ex-dividend two business days prior to the dividend record date, which makes sense under the current T+3 timeline. However, the exchanges have now...  Read More

Jay Clayton Confirmed as SEC Chairman

A new era at the SEC officially began last week when Jay Clayton was sworn in as the 32nd Chairman of the SEC. The Senate’s confirmation of Mr. Clayton on May 2nd by a 61 to 37 vote continued the Trump Administration’s practice of tapping well-known Wall Street professionals to serve in key government positions. In this case, Mr. Clayton was a partner in the New York office of Sullivan & Cromwell, where according to the SEC’s news release he advised companies on “securities offerings, mergers and acquisitions, corporate governance and regulatory and enforcement proceedings.” These companies notably included Goldman Sachs, which has been a recurring theme with President Trump’s appointees. While his former ties will, no doubt, prevent Mr. Clayton from participating in SEC matters directly related to Goldman Sachs, his Wall Street background could well influence his perspective regarding the SEC’s future regulatory agenda. That agenda is expected to shift toward re-analyzing the regulations implemented as a result of Dodd-Frank while Congress seeks to roll back many of that act’s statutory imperatives. For example, a bill currently making its way through the House, known as the Financial Choice Act, would among other things and according to its executive summary: Provide an “off-ramp” from the post-Dodd-Frank supervisory regime and Basel III capital and liquidity standards for banking organizations that maintain high levels of capital, including easing restrictions on their ability to pay dividends and the maintenance of leverage ratios, Repeal the designation of firms as “systematically important financial institutions” and modify the bankruptcy code to accommodate the failure of large, complex financial institutions, thereby eliminating Dodd-Frank’s “orderly liquidation...  Read More