Posts

Let Your Voice Be Heard

With little fanfare or media coverage, the U.S. Securities and Exchange Commission last week said that for the next 60 days it is seeking public comment on disclosure requirements relating to a host of management, security holders and corporate governance matters.

SEC Chair Mary Jo White is leading a charge to address outdated and redundant disclosure requirements for the benefit of the nearly half of all Americans, who in some form, own stock in publicly traded companies—from direct ownership of individual securities, to ownership through 401-K and pension plans, IRAs, mutual funds and ETFs.

As part of the SEC’s “Disclosure Effectiveness Initiative”, the Commission wants to be certain that information disclosed by public companies and relied upon by investors to buy, sell, or hold, is as clear, accurate and comprehensible as possible, conveyed in a manner that is timely, and delivered making best use of today’s technology.

Amendments being considered address outdated and redundant disclosure requirements, and providing investors with what they need to make informed decisions.

Granted, for most Americans, revamping public company disclosure practices may not be one of the most important issues facing the world today. But if you are reading this blogpost, you likely are reasonably close to the heart of this matter, so let your voice be heard. You have until the end of October to do so.

Roger Pondel, rpondel@pondel.com

SEC Enforces Insider Transaction Rules As Boards Authorize Buybacks at Brisk Pace

 

1903 stock certificate of the Baltimore and Ohio Railroad (Photo credit: Wikipedia)

1903 stock certificate of the Baltimore and Ohio Railroad (Photo credit: Wikipedia

Insider buying or selling of shares is one of the most emotional and telltale communications messages a public company can send.

Last week, the SEhanded out charges against 28 officers, directors and major shareholders for violating federal securities laws requiring the prompt reporting of information about transactions in company stock.  In addition, six publicly traded companies were charged for contributing to filing failures by insiders or failing to report their insiders’ filing delinquencies.
 
Curiously, the SEC did not say whether or not those transactions were on the buy or sell side. But this is important stuff and a subject that many investors hold sacrosanct.
 
Some funds immediately sell if they see insiders are selling for anything other than “personal” reasons, such as sending a child to college. And other investors immediately buy when they see insiders buy, believing those insiders must know something positive about the future. The same usually holds true when companies initiate buyback programs.
 
A news release issued by the SEC September 10 said information about insider buying and selling gives investors an “opportunity to evaluate whether the holdings and transactions of company insiders could be indicative of the company’s future prospects.”
 
Granted, it is important to look at much more than insider transactions when evaluating a stock’s viability. But as Peter Lynch, who is still regarded as one of the greatest and smartest investors of all time, has said on numerous occasions: “Insiders may sell their shares for any number of reasons, but they buy for only one—they think the price will rise.”
 
So while it is not necessary in this blog to name names of those violators, as the SEC’s press release did (in case you want to know), 33 of the 34 individuals and companies cited agreed to settle the charges and pay financial penalties totaling $2.6 million.
 
“Using quantitative analytics, we identified individuals and companies with especially high rates of filing deficiencies, and we are bringing these actions together to send a clear message about the importance of these filing provisions,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement, in the news release.
 
There are usually no such communications issues when public company boards authorize buyback programs. Making a public announcement, usually via news release, is often one of the key reasons such programs are launched—to make a statement that one’s stock is undervalued and we’re not going to take it anymore.
 
In fact, according to an analysis by Barclays PLC as reported in the Wall Street Journal September 16, companies are buying back their own shares these days at the fastest pace since the financial meltdown, and companies with the largest buyback programs have outperformed the broader market by 20 percent.
 
Barclays’ head of U.S. equities strategy, Jonathan Glionna, as reported in the same article, said that among the reasons why companies do stock buybacks, “one is that it seems to work; it makes stocks go up.”

– Roger Pondel, rpondel@pondel.com

 

What Public Company Directors Should Know in 2014

Being a public company director today is exponentially different than it was just a decade ago.  Rules and regulation changes and increasing investor activism make navigating corporate governance duties more challenging and time consuming.
 
As the New Year approaches, law firm Akin Gump provides a list of 10 topics that will be important for directors in 2014.  For current directors, or those seeking board positions, and for corporate officers who directly interact with the board, it’s a good summary of what to be prepared for.  Below are a few of the more noteworthy topics:
 

  • Address Cyber Security.  Akin Gump cites a recent study by the Ponemon Institute, which found that “in the past year the number of successful cyber attacks on companies surveyed jumped 42 percent compared to the prior year.”  According to CFO Magazine, companies need to better understand the risks posed by cyber attacks including potential lawsuits, reputation damage and customer losses, as well as growing regulatory scrutiny over the adequacy of data-security measures.  Actions have been brought against more than 40 companies by the FTC for data breaches (saying that “failures to prevent unauthorized access to consumers’ information constitute unfair or deceptive acts.”)
  •  

  •  Set Appropriate Executive Compensation.  While some think say-on-pay will remain a hot button issue, others, like CNBC senior editor, John Carney, believe that say-on-pay failed with 97 percent of U.S. companies receiving shareholder votes supporting their executive pay packages through the first half of 2013, according to Equilar.  Even so, it’s apparent that shareholders and proxy advisory firms are continuing to focus on pay-for-performance, while investor activists are targeting disparity between pay for executives and other employees.  In fact, the SEC recently proposed a new rule that would require publicly traded companies to disclose the ratio of its CEO’s pay to the median compensation of its employees.
  •  

  • Determine Whether the CEO and Board Chair Positions Should be Separated.  CFO Magazine reports that during the 2013 proxy season, requests for an independent board chair were the second-most-frequent shareholder proposals submitted to companies.  According to the 2013 Spencer Stuart Board Index, 45 percent of S&P 500 companies split the CEO and chairman roles, up from 23 percent 10 years ago.
  •  

  • Cultivate Shareholder Relations.  Activist investors are here to stay.  Akin Gump says that proxy fight announcements are now at their highest level in four years. Even large pension funds are getting in the act. By knowing and actively engaging shareholders, directors can develop stronger relationships and management credibility, both of which come in handy when facing a potential proxy battle.  Equally important, and the main tenet of any good investor relations program, is keeping your message consistent.  Whether speaking with an activist, a friendly long-term investor or a mom and pop shareholder, the message should be the same.  It’s also important to determine how involved directors should be in the shareholder communications process. This is a company-by-company decision with current viewpoints varying widely.

 
The public company director position can be very rewarding by helping shape a business’s future, but it’s definitely not an easy task.  Regulatory bodies, proxy advisory firms and the investment community are keeping a sharp eye on what’s happening in the boardroom, so these directors must stay on top of the issues that matter most to shareholders. 
 
– Laurie Berman, lberman@pondel.com
 
 

Rudyard Kipling and the SEC

Rudyard Kipling.jpg

Logging on to the Securities and Exchange Commission’s website this week to check on a client’s filing, I took a brief detour to peruse other parts of the site. 
 
You wouldn’t know by looking at the home page or by clicking on the news section that the market was gyrating and  people were panicked.  In fact, it seemed like business as usual.  And maybe that’s a good thing.
 
I looked at the bios of the five commissioners, including chair Mary Schapiro. They all have impressive backgrounds, but interestingly enough, none ever worked in a publicly traded company.  Hmmm.
 
Last Friday, the day investors were recovering from the previous day’s  512-point stock market drop, the SEC issued a press release announcing that Commissioner Kathleen L. Casey was stepping down, having completed her five-year term.  No mention of the market’s volatility. Other SEC news that day included the Commission’s insider trading charge against a public company board member and his son. Baseball great Doug DeCinces got the same kind of charge the day before.  That was really a bad day for Doug.
 
Again this  week, with unprecedented market gyrations, four unrelated SEC news releases have been issued:  an announcement of a meeting in China regarding audit oversight cooperation; broker fraud involving the sale of investments to a school district in the mid-west; insider trading prior to a Disney deal; and today’s announcement of a new whistleblowerprogram.
 
By the way, press releases aside, there’s other interesting information on the SEC’s website, from special studies, interesting complaints and even job postings.
 
The SEC has been around since 1934, formed during the peak years of the Great Depression, just after passage of the Securities Act of 1933 and the Securities Exchange Act of 1934–both of which were designed to restore investor confidence in our capital markets by providing investors and the markets with more reliable information and “clear rules of honest dealing.”
 
The Commission’s stated mission is “to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation.”
 
The website states that “As more and more first-time investors turn to the markets to help secure their futures, pay for homes and send their children to college, our investor protection mission is more compelling than ever.”
 
The SEC’s steady, business-as-usual approach to news is refreshing and symbolic of Rudyard Kipling’s famous poem, “If,” which reminds us all to keep our heads while others are losing theirs.

 

– Roger Pondel, rpondel@pondel.com
 
 

SEC Shut-Down: Impact on Capital Markets Transactions and Public Companies

Photo Credit: (wikipedia.com)

The Securities and Exchange Commission announced yesterday that its operations will be sharply curtailed in the event of a shut-down (at 12:01 a.m. EDT Saturday April 9, 2011) caused by the current budget impasse.
 
Latham & Watkins, along with several other law firms, has prepared questions and answers to key issues related to the shut-down for capital markets transactions and public companies. Click here to view the Q&A.

 

PondelWilkinson, investor@pondel.com
 
 

Is There a (Spin) Doctor in the House?

When the Securities and Exchange Commission recently charged three former senior executives of IndyMac Bancorp with securities fraud for “misleading investors,” two fundamental questions immediately arose in investor relations and strategic public relations circles:  Did they have professional IR/PR counsel when communicating with investors?
 
Contrary to popular and misguided belief, the professional practice of investor and strategic public relations isn’t about painting rosy pictures, making things appear better than they really are, or coloring fact.  Rather, best-practice counsel condones transparency, clarity, and timely, factual representation of corporate news–good or bad.
 
The corporate executives at IndyMac are accused of making false and misleading disclosures about their company at a time when its financial condition was rapidly deteriorating.  Perhaps in time, we’ll learn if they were counseled by IR/PR pros or not.
 
As Lorin L. Reisner, deputy director of the SEC’s Division of Enforcement, said in a statement, “Truthful and accurate disclosure to investors is particularly critical during a time of crisis, and the federal securities laws do not become optional when the news is negative.”
 
We and our fellow professional communications brethren couldn’t agree more with Reisner.  These IndyMac Bancorp officers now need legal representation.
 
Ironically, communications counsel is crucial more than ever, since the fight will continue in the court of public opinion, as the executives look to prove their innocence and reestablish their careers.
 
To many outsiders, this could sound like a job for a (spin) doctor.  The truth is that IR and PR pros, many of whom– yours truly included–began their careers as journalists, abhor the notion of spin, including the word itself.    There is no cure-all medicine for managing a crisis.  Only solid thinking and communications skills will win the day; certainly not a job for a doctor of spin.

 

Roger Pondel, rpondel@pondel.com
 
 

Board Diversity in the News

Last week, SEC Commissioner Luis Aguilar said that women and minorities remain “woefully underrepresented” on corporate boards, despite numerous studies that show “diversity in the boardroom results in real value for both companies and shareholders.”
 
Despite the best of corporate intentions over many years, the SEC adopted a new rule, which began applying to proxy solicitations on February 28, requiring a company to disclose:
 

  • whether diversity is a factor in considering candidates for nomination to the board of directors;

  • how diversity is considered in that process; and
  • how the company assesses the effectiveness of its policy for considering diversity.

 
Recently, the SEC completed a review of the filings it received and found a broad spectrum of compliance with the rule.  Some companies have done a very good job, others have room for improvement, and still others provided only a brief statement indicating that diversity was something considered as part of an informal policy.
 
The SEC has now begun to act on the continuing lack of board diversity, and Commissioner Aguilar suggests that companies prepare disclosure with an eye toward it being useful to investors – especially since the rule was originally adopted at investors’ requests.  Specifically, he recommends that the disclosure indicate whether the company has a policy of:
 

  • interviewing one or more candidates who are a minority and/or a woman;

  • retaining a search firm that has been specifically instructed to seek candidates who are minorities and/or women; and/or
  • soliciting recommendations from organizations that have a reputation for identifying candidates with diverse backgrounds.

 
The SEC also recommends that the company indicate how many candidates were interviewed who were women and/or minorities and highlight the diversity of the existing board of directors.
 
Board diversity is an issue that has stimulated much discussion, but with not enough results.  Given its importance, it’s time for businesses to make board diversity a priority.

 

PondelWilkinson, investor@pondel.com
 
 

Dodd-Frank Act Defined for Public Companies

With more than a month since the Dodd-Frank Act was approved and signed in to law by President Obama, the interpretative dust is beginning to settle.
 
According to Skadden Arps, The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 affects almost every aspect of the U.S. financial services industry.  Its goal is to restore public confidence in the financial system and prevent another financial meltdown.  Put simply, it significantly increases regulation.
 
But, from a practical standpoint, what does it really mean?
 
Among other things, regulators will have the authority to take control of and liquidate troubled financial firms if their failure would “pose a significant risk to the financial stability of the United States.”  The Federal Reserve will have the authority to extend credit in “unusual and exigent circumstances.”
 
Most important from a public company standpoint, the SEC’s enforcement program will be enhanced, disclosure of executive compensation will become mandatory, and shareholders will have the right to a “say-on-pay” vote on executive compensation.
 
SEC Enforcement
 
New SEC enforcement programs will effectively “increase the flow of enforcement tips from potentially knowledgeable insiders.”  Skadden Arps recommends “robust compliance and self-evaluative programs for all entities that are subject to SEC regulation.”  The Act also expands the SEC’s authority to bring enforcement actions against those who aid and abet violations of the securities laws.
 
Corporate Governance
 
One likely outcome of the Dodd-Frank Act is increased contesting of annual director elections.  Activist investors will have more leverage to pressure companies to take short-term-focused actions rather than allow boards to focus on the long term.  Skadden Arps notes that this could keep qualified directors from continuing to serve on public company boards.  In keeping with PondelWilkinson’sview of investor communications, public companies should work to increase engagement with shareholders now, to develop and maintain long-term, mutually beneficial relationships.
 
Cravath, Swaine & Moore notes that public companies will also need to disclose in their annual proxy statements the reasons why the positions of chief executive officer and chairman are filled by the same person or by different people (although the SEC has already adopted rules requiring this disclosure).  In a follow on to last year’s New York Stock Exchange ruling, which eliminated broker discretionary voting with regard to director elections, the Act also prohibits broker discretionary voting with regard to shareholder votes on executive compensation matters.
 
Executive Compensation (Say on Pay)
 
During a recent speech, SEC Chairman Mary L. Schapiro said that investors’ “concerns must be addressed to fully modernize our system and ensure that our markets continue to foster capital formation and serve as an efficient engine for turning savings into jobs and economic growth.  And, I believe that the recently-enacted regulatory modernization legislation goes a long way to addressing them.”

 

Laurie Berman, lberman@pondel.com
 
 

Curbing Enthusiasm on Short Sales

On Wednesday, February 24, 2010, the SEC narrowly approved curbs on short selling, addressing what some consider to be one of the major contributing factors of the 2008 financial crisis.  The new rule is a modification of the “Uptick Rule,” which was designed to be a preventative measure against downward spiraling stock valuations in turbulent markets.  However, the rule was eliminated in 2007 because of its lack of efficacy.
 
The new rule will operate much like a circuit breaker, taking effect once the price of a stock has declined by 10 percent in a given day. Once triggered, short sales will no longer be permitted at or below the National Best Bid or Offer for the remainder of the day and the following trading day.
 
The modified uptick rule will take effect in approximately 60 days, but stock exchanges have up to six months after that time period to implement the new rule.
 
Highly debated since the 2008 financial crisis, short sales have been one of the most controversial issues facing the SEC.  Opponents of such regulation have pointed out that financial stock valuations tumbled even after regulators imposed a short-term ban on short selling late in 2008.  Others have voiced strong disappointment that the modified uptick rule did not go far enough to protect investors.  One thing is for sure – this is not the last we’ll hear on short sales.

 

PondelWilkinson, investor@pondel.com