Trump and the SEC: A New Agenda for Corporate Governance and - - PowerPoint PPT Presentation

Trump and the SEC: A New Agenda for Corporate Governance and Enforcement

Thursday, June 22, 2017 12:00 – 1:00 p.m. EDT

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Introduction

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Margaret E. Hirce

Associate, New York

Member of the White Collar Defense and Corporate Investigations team

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Robert A. Weible

Partner, Cleveland

Leader of the Securities and Corporate Governance team

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Suzanne K. Hanselman

Partner, Cleveland

Member of the Securities and Corporate Governance team

shanselman@bakerlaw.com

Corporate Governance

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White House and Administrative Actions

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White House and Administrative Actions

Deregulation Initiatives

• Pay Ratio

– Acting SEC Chairman Piwowar requested comments in February 2017 on whether to delay or reconsider the pay ratio rule – Reversing it would require a full SEC rule-making process, and effectively would require repeal of the Dodd- Frank statutory provision requiring the rule

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White House and Administrative Actions

• Conflict Minerals Disclosure

– Following a recent court ruling based

• n first amendment concerns, SEC

Acting Chairman Piwowar issued a statement on April 7, 2017 to the effect that filing only the disclosure form, and not the related report if otherwise required, would not likely draw SEC enforcement – Commissioner Kara Stein blasted the statement as “defacto” rulemaking

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White House and Administrative Actions

• Resource Extraction Disclosure

– President Trump signed a resolution on February 14, 2017 (under the Congressional Review Act) rescinding the SEC’s rule requiring public company disclosure of payments to foreign governments for oil and natural gas extraction and mining – Congressional Democrats have called for reinstatement of the rule, noting that the Dodd- Frank Act required the SEC to enact one – The articulated rationale for the recent actions

• n the conflict minerals and resource

extraction rules is that using the securities laws to promote a foreign political outcome is inappropriate

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White House and Administrative Actions

• The Department of Labor’s Fiduciary Rule

– The rule

• Requires investment advisers to suggest products in the best

interests of retirement fund clients, as opposed to those that are merely suitable

• Creates a fiduciary, rather than arm’s-length, relationship

between the adviser and the customer

• Mandates that investment advisers disclose potential conflicts
• f interest

– A February 3, 2017 President Trump order delayed implementation of the rule from April 2017 to June 9, 2017, for an internal review – Full implementation of the rule is set for January 1, 2018, but DOL Chairman Alexander Acosta is seeking comment in the context of the regulatory review ordered by President Trump

• Acosta says the DOL will listen to concerns not heard by the

Obama administration

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White House and Administrative Actions

• The Department of Labor’s Fiduciary Rule

(cont’d)

– New SEC Chairman Clayton has called for public input

• n SEC action on the same subject, and vows to work

with the DOL as the SEC implements its standard

• Clayton calls for clarity, consistency and coordination between

the agencies

• The SEC will try to assess costs and benefits and has asked

for views on whether private remedies should be available for violations

– Some experts say the SEC/DOL coordinated review increases the likelihood that the DOL will push full implementation of its rule past January 1, 2018 – One commentator observed that it would have been best to have had the fiduciary rule for one day, to trigger more client-friendly business models but not produce lawsuits and major compliance costs

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White House and Administrative Actions

• Movement in the

Opposite Direction

– A House Financial Services Committee member has requested SEC Chair Clayton to continue efforts to improve corporate board diversity disclosure, to focus on racial, ethnic and gender composition – Ten Democratic senators have asked the SEC to reissue the resource extraction rule

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The Financial CHOICE Act

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The Financial CHOICE Act

• A revised version of the Financial CHOICE Act was passed by

the House on June 8, 2017, on pure party lines

• The CHOICE Act would:

– Substantially change the regulation of financial institutions through repeal and rollback of Dodd-Frank and related regulatory actions – Restructure and weaken the Consumer Financial Protection Bureau – Promote capital-raising by expanding registration exemptions – Ease financial reporting requirements for EGCs and small-cap issuers – Impact disclosure requirements and corporate governance in public companies

• The Trump administration says it supports the CHOICE Act,

but the Chair of the Senate Banking, Housing and Urban Affairs Committee has signaled he would prefer to pursue bipartisan bank regulatory reform in early 2018

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The Financial CHOICE Act

Repeal of Many Dodd-Frank Act Disclosure Provisions

For public companies, CHOICE would eliminate several Dodd-Frank disclosure requirements:

• pay ratio (median employee v. CEO)
• employee and director hedging policies
• whether same or different persons serve

as chairman and CEO and why

• conflict minerals disclosure
• coal or other mine safety
• foreign payments by resource extraction

issuers

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The Financial CHOICE Act

• Say-on-Pay – currently not less than once every 3

years

– advisory vote on executive compensation would be required only “each year in which there has been a material change to the compensation of executives

• f an issuer from the previous year”

– would eliminate the Say-on-Pay Frequency vote

• Clawback Policies

– Dodd-Frank rules are not yet effective, but proposed rule provides for the recovery of incentive compensation following a financial restatement regardless of fault – Under CHOICE, recovery of incentive compensation would be limited to executive

• fficers who “had control or authority over the

financial reporting that resulted in the accounting restatement”

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Modifications Of Dodd-Frank Provisions

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The Financial CHOICE Act

Rule 14a-8 Shareholder Proposals CHOICE would raise the bar for shareholders eligible to submit a shareholder proposal and would require stronger shareholder support for proposals to be re-submitted

• Eligibility - currently, the lesser of shares with $2,000 in

market value or 1% of outstanding shares, and a 1 year holding period

• CHOICE would eliminate the dollar amount and fix the

minimum threshold at 1% of outstanding shares, and increase holding period from 1 to 3 years

• CHOICE would increase the re-submission thresholds

to require more shareholder support before a rejected proposal could be resubmitted in the future

• CHOICE would prohibit inclusion of shareholder

proposals submitted by a shareholder’s proxy, agent or representative

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The Financial CHOICE Act

• In October 2016, the SEC proposed amendments to the proxy

rules to require parties in a contested election to use universal proxy cards that would include the names of all board of director nominees, to provide shareholders the ability to vote for a combination of nominees from both the management slate and the opposition slate

• CHOICE would prohibit the SEC from requiring the use of a

universal proxy. It states “The Commission may not require that a solicitation of a proxy, consent, or authorization to vote a security of an issuer in an election of members of the board

• f directors of the issuer be made using a single ballot or card

that lists both individuals nominated by (or on behalf of) the issuer and individuals nominated by (or on behalf of) other proponents”

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Prohibit SEC from Adopting Universal Ballot

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The Financial CHOICE Act

Registration and Regulation of Proxy Advisory Firms

• Proxy advisory firms would be required to submit a

registration application that includes:

– certification of adequate financial and managerial resources to consistently provide proxy advice based on accurate information – disclosure of procedures and methodologies that the applicant uses in developing proxy voting recommendations – disclosure of whether the applicant has in effect a code of ethics – disclosure of any potential or actual conflict of interest relating to the ownership structure of the applicant or the provision of proxy advisory services by the applicant, and the policies and procedures in place to manage such conflicts of interest

• Applications would be granted or denied by the SEC

and all information provided in applications would be publicly available

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The Financial CHOICE Act

Registration and Regulation of Proxy Advisory Firms (cont’d)

• Proxy advisory firms would be required to:

– establish policies and procedures to manage conflicts of interest, and potential conflicts would require disclosure – have sufficient staff to produce recommendations that are based on accurate and current information – establish procedures to provide companies reasonable time to receive and respond meaningfully to draft recommendations – establish process for receiving, responding to and resolving complaints about accuracy of voting information used in making recommendations – submit an annual certification that confirms application information continues to be materially accurate or disclose any material change in such information

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The Financial CHOICE Act

Registration and Regulation of Proxy Advisory Firms (cont’d)

• A proxy advisory firm’s ongoing reporting requirements would

include:

– financial statements and other information concerning its financial condition – an annual report on the number of shareholder proposals the firm reviewed and the number of recommendations it made, the number

• f staff who reviewed and made recommendations on such

proposals, and the number of recommendations made when the proponent of the recommendation was a client of or received services from the proxy advisory firm – the firm’s methodology for the formulation of proxy voting policies and voting recommendations, which the proxy advisory firm must also make publicly available

• SEC would be required to issue rules to prohibit certain

practices relating to the offering of proxy advisory services that it deems unfair or coercive

• SEC would have power to censure a firm or suspend or

revoke its registration

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Private Ordering & Internal Governance

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Private Ordering & Internal Governance

• Private ordering involves private

parties agreeing on how to

• versee corporate activities or

reporting instead of relying on government regulation

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Private Ordering & Internal Governance

Articulated Basis

• Investors may be moved to advocate

increased private action by concerns about:

– The CHOICE Act and other legislative efforts to repeal Dodd-Frank shareholder protections and governance provisions and regulate proxy advisory firms (which could increase their operating costs) – Perceived backsliding on environmental regulation and climate change commitments

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Private Ordering & Internal Governance

Proxy Access

• Proxy Access is a recent example of how

private ordering works

• The SEC adopted a proxy access rule in

2010 that would have provided that shareholders or groups of shareholders holding at least 3% of a company’s

• utstanding shares for at least three years

would have the ability to nominate candidates for 25% of the board seats and have those candidates appear in the company proxy statement alongside the board’s nominees

• The SEC rules were the subject of litigation

and were vacated

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Private Ordering & Internal Governance

Proxy Access (cont’d)

• The response from institutional investors

and corporate governance organizations was swift, and several companies were soon dealing with proxy access shareholder proposals

• The New York City comptroller’s

“Boardroom Accountability Project” played a key role in pushing proxy access, and submitted 75 proxy access shareholder proposals for the 2015 proxy season with support of key institutional holders such as BlackRock and State Street

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Private Ordering & Internal Governance

Proxy Access (cont’d)

• Initial targets were companies with perceived

issues relating to executive compensation, board diversity or climate change

• The proposals were fine-tuned and adoption of

proxy access provisions grew quickly; currently more than 425 companies have proxy access provisions, including more than 60% of S&P 500

• Although part of the concept of private ordering is

that “one-size-fits-all” regulation is not always best, and there is some variation among companies, most companies have adopted what is known as the 3-3-20 model that allows shareholders, or groups of up to 20 shareholders,

• wning 3% or more of the company’s outstanding

shares for a period of 3 years, to nominate up to 20% of the board

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Private Ordering & Internal Governance

Other Investor-driven Initiatives in Play

• Board composition

– Recent Ernst &Young survey

• 70% of investors say board composition

and assessments should remain a priority in 2017, with a focus on diversity of talent, thought and tenure

• Rationale (rarely articulated): diversity of

thought diminishes group thinking

• Investors are increasing scrutiny of skill

sets, diversity and tenure

• Board skills matrices are appearing more

frequently in proxy statements

• Women hold 19% of U.S. board seats,

compared to 30% in Europe

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Private Ordering & Internal Governance

Other Investor-driven Initiatives in Play

• Board composition (cont’d)
• Gender diversity is increasing, but slowly: State Street

is promoting it strongly, and other investors have submitted a rule-making petition to the SEC to require companies to disclose the gender, race and ethnicity of board members

• Many investors see board diversity as a tone at the top

issue

• Bandwidth issues:
• SEC Chief Accountant’s speech on March 24, 2017 noted

that:

• Only 57% of audit committee members say their

workload is manageable – in the banking and capital markets sector, only 34%

• Audit committees’ core responsibilities have not

diminished even though their incremental responsibilities have continued to expand

• ISS and Glass Lewis recommend votes against directors who

sit on more than five public company boards (down from six previously)

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Private Ordering & Internal Governance

Other Investor-driven Initiatives in Play

• Executive Compensation Shareholder Proposals

– Report on gender pay gap – Policy against accelerated vesting of equity awards upon a change in control – Adopt or amend executive compensation clawback policy (2017 Verizon and Caterpillar proposals both failed by large margins) – Executive officer and/or director stock retention/holding requirement

• According to one report, one-third of investors say

executive pay (including clawback policies and complexity of pay plans and the magnitude of payouts) should be a 2017 board priority

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Private Ordering & Internal Governance

Other Investor-driven Initiatives in Play

• Climate Change and Other Environmental Issues

– Some reports say investors increasingly link management of environmental and social risks to long-term financial risks – According to one report, one-third of investors say climate change should be a board priority – 2016 shareholder proposals to require disclosure of how energy company holdings would be affected in the long term by measures limiting the long-term global temperature increase to 2 degrees Celsius (as called for in the 2015 Paris accord) received

• 38% support at Exxon Mobil
• 40.8% at Chevron
• Almost 50% at Occidental Petroleum

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Private Ordering & Internal Governance

Other Investor-driven Initiatives in Play

• Climate Change and Other Environmental

Issues (cont’d)

– At Occidental’s May 12, 2017 shareholders’ meeting, a similar proposal garnered more than 50% of the votes, including BlackRock, Inc.’s 7.8% stake, over the board’s recommendation against the proposal. – At Exxon Mobil’s May 31, 2017 shareholders’ meeting, a climate change disclosure proposal was approved by 62.1% of the votes cast. – One commentator estimated that more than 200 environmental and climate change proposals would be submitted during the 2017 proxy season

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Private Ordering & Internal Governance

Other Investor-driven Initiatives in Play Conflict Minerals Revisited

• Apple, Intel and Tiffany & Co. have said they will

maintain their commitments to source conflict minerals responsibly regardless of the fate of the conflict minerals rule

• Private parties may devise theories to sue regarding

conflict minerals reporting, notwithstanding the SEC’s enforcement position

• NGOs may seek to pressure or embarrass companies

that do not report fully on conflict mineral sourcing

• Advocates for continued reporting include businesses

set up to provide services in connection with the extensive due diligence necessary for full reporting

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Private Ordering & Internal Governance

Other Investor-driven Initiatives in Play

• Dual or Multiple Classes of Stock

– Debate has developed on whether the NYSE and NASDAQ should be permitted to list companies with classes of stock having varying levels of voting power – Academics and investor organizations versus tech and growth companies (along with many well-established traditional companies) – Short versus long-term orientation issues – Governance issues – the shareholder-centric model of today versus the more traditional director-centric view and the emerging company-centric model

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Private Ordering & Internal Governance

• The Heightened Importance of

Internal Control

– Unrelenting investor and media eagerness, in this era of high dudgeon, to flail companies that

• Run afoul of legal or regulatory

constraints, or

• Otherwise behave badly

– Exacting focus may be heightened in a perceived vacuum of effective regulation

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Private Ordering & Internal Governance

The Heightened Importance of Internal Control (cont’d)

• Uber as a recent example of

control deficiencies

– Reports create the appearance of an executive suite out of control – Recent board member resignation

• ver cavalier sexist remark made

during discussion of ongoing internal sexism and gender diversity issues

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Private Ordering & Internal Governance

The Heightened Importance of Internal Control (cont’d)

• Wells Fargo as another case study

– Board-commissioned investigation revealed inappropriate emphasis on sales generation, with cover from

• Decentralized management and reporting structure
• CEO who was slow to acknowledge gathering signs of

inappropriate practices and management insularity

– Investigation concluded that reports to the board were understated and in some cases falsified, and that

• The board failed to look below the surface to the extent

necessary

• When red flags appeared, the board failed to act with sufficient

urgency

– Wells Fargo’s 2017 board election showed very weak support for much of the board, with 3 of the 15 members getting less than 60% approval – Resulting litigation - at least 10 fiduciary duty lawsuits, 13 securities lawsuits, and 10 customer class actions – Wells Fargo fined $185 million

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CLE Code #1

1BH2017

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John J. Carney

Partner, New York

Co-leader of the White Collar Defense and Corporate Investigations team

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Jimmy Fokas

Partner, New York

Member of the White Collar Defense and Corporate Investigations team

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Enforcement

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SEC Pre-Trump

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FCPA Enforcement Pullback?

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In 2012, President Donald Trump stated: The FCPA is a “horrible law and it should be changed.” The FCPA puts U.S. business at “a huge disadvantage.” “This country is absolutely crazy” to prosecute violations in Mexico and China. In 2011 Clayton co-wrote a paper on the FCPA and Is Impact on International Business Transactions criticizing the FCPA and “the continued unilateral and zealous enforcement

• f the FCPA by the United States.”

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Jay Clayton: SEC Chair Nomination Hearing

In his nomination hearing on March 23, 2017, Jay Clayton stated that there is “zero room for bad actors in our capital markets.” When asked about how he would advise a corporation considering going into business with a politically connected family, Clayton stated that the company should “think long and hard” about the “potential exposure to not … just the FCPA but … thankfully now … similar oversight and enforcement from other OECD countries.”

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Continued DOJ Focus Could Impact SEC Enforcement

Prosecuting FCPA violations is “necessary to combat global corruption that stifles economic growth, creates an uneven playing field for businesses and corporations, and threatens the national security of the United States and

• ther civilized nations … The Criminal

Division remains committed to doing its part by vigorously investigating and prosecuting international crime when it violates U.S. law.”

• Kenneth Blanco, Acting Assistant

Attorney General for the Criminal Division, March 10, 2017

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Former Prosecutor to Co-Lead Division of Enforcement

Statement by Jay Clayton appointing co-directors of the Division of Enforcement: “There is no place for bad actors in our capital markets, particularly those that prey on investors and undermine confidence in our economy. Stephanie [Avakian] and Steve [Peikin] will aggressively police

• ur capital markets and enforce our nation’s

securities laws as Co-Directors of the Division of

• Enforcement. They have each demonstrated market

knowledge, impeccable character, and commitment to public service, and I am confident their combined talents and experience will enable them to effectively lead the Division going forward.” (June 8, 2017)

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Co-Directors’ Priorities

• According to a former federal prosecutor

colleague: Peikin “is a staunch believer in vigorous enforcement of the securities laws. “I’d be really surprised if he got into office and turned into a light-touch regulator or a captive

• f industry.”
• “The greatest threat to our markets right now is

the cyber threat.” – Peikin

• According to Republicans who have spoken

with Clayton, “the enforcement program is going to change substantially” and he “intends to zero in on intentional wrongdoing rather than unintentional regulatory violations.”

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New Administration: Focus on Individuals

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Regarding large corporate penalties, Clayton stated: “Shareholders do bear those costs and we have to keep that in mind. I firmly believe that individual accountability drives behavior more than corporate accountability.”

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Mirrors DOJ Focus on Individuals

“The department continues to prioritize prosecutions

• f individuals who have willfully and corruptly

violated the FCPA – Attorney General Sessions has noted the importance of individual accountability for corporate misconduct. … We are also making a concerted effort to move corporate investigations expeditiously, and we will expect cooperating companies to do so as well. This will maximize our ability to bring cases against responsible individuals, before applicable statutes of limitations have run or evidence is lost.”

• Trevor McFadden, Acting Principal Deputy Assistant Attorney

General for the DOJ’s Criminal Division, April 18, 2017

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Prosecution of Individuals (FCPA)

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Slowing Down or Speeding Up

• Commissioner Piwowar issues a directive

restricting power to authorize formal orders, requiring approval of division directors.

• Unanimous Supreme Court Kokesh v. SEC

decision curbs penalty powers.

• 10th Circuit finds ALJs to be “inferior
• fficers” and unconstitutional; SEC stays

10th Circuit proceedings. D.C. Circuit and Second Circuit also consider the issue.

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Takeaways

• Lower corporate fines / possible

emphasis on compliance enhancements

• Greater civil penalties for

individuals

• Increased speed of enforcement

actions to meet 5-year deadline

• Continued emphasis of FCPA

enforcement

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CLE Code #2

2BH2017

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Q&A

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Trump and the SEC: A New Agenda for Corporate Governance and Enforcement