In his first public speech since being confirmed as Chairman of the U.S. Securities and Exchange Commission (“SEC” or “the Commission”), Jay Clayton addressed the Economic Club of New York on July 12, 2017. In his remarks, available here, Chairman Clayton discussed his vision of the principles that should guide the Commission and opportunities to apply those principles in practice.
Topic: Corporate Governance
SEC Economist Comments on New Technologies Used by the Commission to Identify Risk, Detect Fraud and Enforce the Securities Laws
Last week Scott Bauguess, Acting Director and Acting Chief Economist of the Securities and Exchange Commission’s (SEC) Division of Economic Risk and Analysis, shared insights about how the SEC is leveraging artificial intelligence and machine learning to track, and perhaps predict, emerging risks in the marketplace.[1] In the latest in a series of speeches,[2] Bauguess also described how the SEC is using big data, harnessed with the appropriate processing power and partnered with human intuition, to focus investigative and enforcement resources. While Bauguess and others at the SEC see a bright future for data analytics at the SEC, particularly in identifying emerging trends, Bauguess stressed the human element is ever important in assessing risk, combatting fraud and bringing or recommending enforcement actions.
Changes Coming to Governance Provisions of New York Nonprofit Law
Amendments to New York’s Not-For-Profit Corporation Law are set to take effect on May 27. The amendments impact several provisions of The New York Nonprofit Revitalization Act (“NRA”), which imposed substantial governance requirements on nonprofits when it took effect in 2014. The amendments build greater flexibility into aspects of the NRA that were viewed as overly broad or prescriptive. Key elements of the amendments are summarized below. A redline showing the changes to the statutory language is available here. Nonprofits incorporated in New York, and other nonprofits that may be subject to the Not-For-Profit Corporation Law due to their activities, should take note of the amendments and consider whether changes to their governance practices and documents are appropriate. 1. Related party transactions. The NRA provides for enhanced board oversight of related party transactions. The amendments explicitly permit an authorized committee of the board to review and approve related party transactions, as an alternative to full board approval. They also codify exceptions to the definition of “related party transaction” that are based on guidance previously issued by the Charities Bureau of the New York Attorney General’s office (available here). These exceptions mean that immaterial or ordinary course transactions are no longer subject to the board/committee approval procedures under the NRA. Specifically, the exceptions cover: (a) transactions that are themselves “de minimis” or where the related party’s financial interest is de minimis, with the judgment of what is de minimis to be left to individual nonprofits based on factors such as size and budget; (b) transactions that “would not customarily be reviewed” by the board at “similar organizations in the ordinary course of business” and that are available to others on the same or similar terms; and (c) transactions where a related party receives a benefit as a result of being a member of a class that benefits from the nonprofit’s work, where the benefit is available to all similarly situated members of the class on the same terms. The amendments also create a defense to actions brought by the New York Attorney General challenging related party transactions. The defense allows nonprofits to take steps to ratify transactions that were not approved in accordance with the procedures in the NRA, and to enhance their mechanisms for complying with these procedures in the future, in order to limit the possibility of adverse actions against nonprofits for inadvertent or insignificant violations of the related party provisions. 2. Audit committee independence requirements. The amendments modify the definition of “independent director,” which applies to directors serving on the audit committee, by amending the standard on business relationships between a nonprofit and entities where directors (or their relatives) have relationships. Currently, this standard prohibits a director from being independent if the director is an employee of, or has a substantial financial interest in, an entity that does business with the nonprofit, if the amount of business exceeded the lesser of $25K or 2% of the other entity’s consolidated gross revenues in any of the last three fiscal years. The amendments provide tiered thresholds that are tied to the revenues of the other entity, as follows:
SEC Adopts Amendment Shortening Trade Settlement Cycle From T+3 to T+2 (potential implications)
The SEC has adopted an amendment to Rule 15c6-1(a) of the Exchange Act (the Settlement Cycle Rule) shortening the standard settlement cycle for most broker-dealer transactions from three business days after the trade date (“T+3”) to two business days after the trade date (“T+2”). The compliance date for the amendment is September 5, 2017. The new requirement will prohibit broker-dealers from effecting or entering into a contract for the purchase or sale of a security (other than exempted securities, government securities, municipal securities, commercial paper, bankers’ acceptances, and commercial bills) that provides for payment of funds and delivery of securities later than the second business day after the date of the contract, unless otherwise expressly agreed to by the parties at the time of the transaction.
Non-Voting Shares Make Their Public Debut and Generate Some Governance Concerns, but How Will Courts View the Structure When First Presented?
On March 1, 2017, Snap Inc. (“Snap” or the “Company”) – owner of the popular social media platform Snapchat – priced its highly anticipated initial public offering (“IPO”). With 200 million shares sold at $17 per share, the IPO raised approximately $3.4 billion for the Company. On their first trading day, Snap shares opened at $22.41 per share and peaked as high as $28.84 the following day. As of March 10, shares closed at $22.07, above its initial offering price, but below its opening trading price. As the largest IPO of any U.S.-based company since Facebook’s public offering in 2012, many investors’ primary focus here has been on the complete lack of voting privileges associated with the shares sold in the IPO.
Acting SEC Chair Piwowar Directs Staff to Reconsider Conflict Minerals Rule
On January 31, 2017, the SEC’s Acting Chairman, Michael Piwowar, issued a public statement (available here) that he has directed the Commission’s Staff to reconsider whether the Staff’s prior guidance on conflict minerals disclosures (previously published in April 2014 and available here) is still appropriate and evaluate whether additional relief may be appropriate.
SEC Staff Grants No-Action Request Concurring with Exclusion of Shareholder Proposal On Virtual-Only Annual Meetings
In recent years, an increasing number of companies have opted to hold annual shareholder meetings exclusively online. These annual meetings are commonly referred to as “virtual-only annual meetings”. In a decision critical for companies that currently hold or are contemplating switching to virtual-only annual meetings, the staff of the Securities and Exchange Commission (the “SEC Staff”) recently issued a no-action letter permitting a company to exclude a shareholder proposal that objected to virtual-only annual meetings. Specifically, the shareholder proposal requested that the company’s board adopt a policy to initiate or restore in-person annual meetings. The SEC Staff concurred that the proposal could be excluded under Rule 14a-8(i)(7) on the grounds that the decision whether to hold in-person annual meetings is related to the company’s ordinary business operations because the proposal “relates to the determination of whether to hold annual meetings in person.” The SEC Staff’s decision is not yet available on the SEC’s website.
First-Come, First-Served: Enrollment Opens for Glass Lewis 2017 Issuer Data Report Program
On November 17, Glass Lewis announced that it has opened enrollment for its 2017 Issuer Data Report (IDR) program. The IDR program enables public companies to access (for free!) a data-only version of the Glass Lewis Proxy Paper report prior to Glass Lewis completing its analysis and recommendations relating to public company annual shareholders meetings. Glass Lewis does not provide drafts of its voting recommendations report to issuers it reviews, so the IDR is the only way for issuers to confirm the accuracy of the data before Glass Lewis’ voting recommendations are distributed to its clients. Moreover, unlike Institutional Shareholder Services (ISS), Glass Lewis does not provide each issuer with complimentary access to the final voting recommendations for its annual shareholders meeting. IDRs feature key data points used in Glass Lewis’ corporate governance analysis, such as information on directors, auditors and their fees, summary compensation data and equity plans, among others. The IDR is not a preview of the final Glass Lewis analysis as no voting recommendations are included. Each participating public company receives its IDR approximately three weeks prior to its annual shareholders meeting and generally has 48 hours to review the IDR for accuracy and provide corrections, including supporting public documents, to Glass Lewis. Participation is limited to a specified number of companies, and enrollment is on a first-come, first-served basis. Enrollment closes on January 6, 2017, or as soon as the annual limit is reached. To learn more about the IDR program and sign up to receive a copy of the 2017 IDR for your company, go to https://www.meetyl.com/issuer_data_report.
Shareholder Nominates First Proxy Access Nominee
In what appears to be the first use of a company’s proxy access bylaw, GAMCO Asset Management filed today a Schedule 13D/A (available here ) and a Schedule 14N (available here ) announcing that it has used the proxy access bylaw at National Fuel Gas (NFG) to nominate a director candidate for election at NFG’s 2017 Annual Meeting. According to the 13D/A, GAMCO and its affiliates beneficially own in the aggregate approximately 7.81% of NFG’s Common Stock and yesterday delivered a letter to NFG nominating Lance A. Bakrow to the Board of Directors. NFG described itself in its most recent Form 10-K as “a diversified energy company engaged principally in the production, gathering, transportation, distribution and marketing of natural gas.” According to the Schedule 13D/A, Mr. Bakrow is the “co-founder and a director of Greenwich Energy Solutions, a private company that provides independent energy solutions in the northeastern United States.” NFG’s Proxy Access Bylaw
New SEC Staff C&DI Permits Website Posting of Annual Reports in Lieu of Filing Hard Copies with SEC
A new Compliance and Disclosure Interpretation (C&DI) affords companies relief from the requirement to file seven hard copies of the annual report to shareholders with the Securities and Exchange Commission (SEC). Under the C&DI, which was issued yesterday, companies may now satisfy this requirement by posting the annual report on their corporate websites, as long as it remains available on the site for one year. The C&DI is available here and excerpted below.