Securities Regulation and Corporate Governance


SEC Corp Fin Staff Releases Guidance on CEO Pay Ratio Disclosure

On October 18, the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “Commission”) released five Compliance and Disclosure Interpretations (“C&DIs”) addressing new Item 402(u) of Regulation S-K regarding CEO pay ratio disclosure.

C&DIs 128C.01 through 128C.05 address five topics: (1) the identification of a “consistently applied compensation measure” to identify the median employee; (2) the use of hourly or annual rates of pay as a “consistently applied compensation measure;” (3) the time period(s) that may be used in applying a “consistently applied compensation measure;” (4) the treatment of furloughed employees; and (5) the circumstances under which a worker’s compensation will be deemed determined by an unaffiliated third party.  In summary, the takeaways from the Staff’s new C&DIs are as follows: 

  • Under the final pay ratio rule, companies are permitted to choose annual total compensation or any other compensation measure that is consistently applied to all employees to identify the median employee.  C&DI 128C.01 elaborates beyond what is in the adopting release on what measures can qualify as “consistently applied compensation measures.”  Specifically, under the Staff’s interpretation, a “consistently applied compensation measure” should "reasonably reflect[] the annual compensation of employees.”  The appropriateness of any measure as a “consistently applied compensation measure” will depend on the company’s particular facts and circumstances.  For example, total cash compensation could be an appropriate “consistently applied compensation measure” unless a company also distributed annual equity awards widely among employees, and Social Security taxes withheld would likely not be an appropriate “consistently applied compensation measure” unless all employees earned less than the Social Security wage base. 
  • Use of an hourly or annual pay rate alone is not an appropriate “consistently applied compensation measure” because use of rates without regard to whether an employee worked the entire year and/or full time will have the effect of a full-time adjustment, which is not permitted under Item 402(u). 
  • As set forth in the final pay ratio rule, to calculate the required pay ratio, a company must first select a date, which must be within three months o...Read More
SEC Eliminates Need for Affirmative “Tandy” Representations from Issuers

On October 5, 2016, the Staff in the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “SEC”) announced that it will no longer require companies to make so-called Tandy representations in their filing review correspondence. 

Tandy representations are affirmative acknowledgments that a company will not use comments issued or actions taken during an SEC filing review process as a defense in any subsequent Enforcement action.  Originally, the Staff required Tandy representations on a case-by-case basis whenever an Enforcement action was pending.  In 2004, however, the Staff began requiring Tandy representations from all companies under review as part of a policy change to publicly release all of the Staff’s filing review correspondence and to avoid inadvertently disclosing to the public those companies that were under investigation by Enforcement.

The Staff has made clear that this revised policy does not substantively change the relationship between the filing review process and any subsequent Enforcement action. Companies remain responsible for the content of their disclosures.  Actions taken or comments issued by the Staff will not serve as a defense. 

Going forward, instead of requiring companies to include Tandy representations in their response letters, the Staff will now include standardized language in their outgoing comment letters reminding companies that they remain responsible for the content of their disclosures, notwithstanding any action by the Staff.  This approach will have the same effect as a request for an affirmative Tandy representation, but will eliminate the need for the inclusion of unnecessary boilerplate in companies’ reply correspondence with the Staff. 

The Staff’s new policy is effective immediately.  Thus, even if a company has recently received a Tandy comment, there is no need to include Tandy representations in response letters going forward. The Staff’s announcement can be found here.

Special thanks to Matt Haskell for the summary.

Recent SEC Comment Letters Addressing Non-GAAP Financial Disclosures

Since the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “Commission”) released updated guidance addressing the use of non-GAAP financial measures on May 17, 2016, the Staff has made public over 200 comment letters sent to companies relating to non-GAAP disclosures.  The below chart summarizes the major topics addressed in those comment letters and the frequency with which each topic appears. 

The Staff’s comment letters relate to non-GAAP disclosures contained in earnings releases, Exchange Act reports, registration statements, proxy statements and even investor presentation slide decks that were never furnished to or filed with the Commission.  A majority of the comment letters address multiple non-GAAP disclosure issues.  Because the comments are not limited to a single topic and because non-GAAP disclosures often implicate multiple overlapping topics, this chart is best understood as a general guide to the topics the Staff finds important, rather than as a precise tabulation of all topics covered during the relevant period. 

The Staff is just now beginning to upload comment letters addressing filings made after the May 2016 guidance was published.  As such, in the coming weeks and months we expect to see many more comments addressing the Staff’s new interpretations.

Special thanks to Mike Titera and Matt Haskell for compiling the summary below.




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ISS Releases Survey for 2017 Policy Updates

Institutional Shareholder Services (“ISS”) today launched its annual global policy survey.  Each year, ISS solicits comments in connection with the review of its proxy voting policies.  At the end of this process, in November 2016, ISS will announce its updated proxy voting policies applicable to 2017 shareholders’ meetings. ISS will publish the results from the policy survey and use them to inform its voting policy review. 

The survey includes questions on several governance and compensation matters relevant to U.S. companies, as follows:      

  • Pay-for-performance analysis.  ISS applies a quantitative screen as the first step in evaluating say-on-pay proposals.  Currently, this screen is based on TSR (total shareholder return), relative to a peer group over a three-year period, and on an absolute basis over a five-year period.  The survey asks whether ISS should incorporate additional financial metrics into the quantitative screen as a better way of assessing the alignment between pay and performance, and what metrics to include, such as measures tied to revenue, earnings, return (such as return on assets or return on equity), cash flow, economic profit or other benchmarks.


  • Board refreshment.  The survey asks about factors involving director tenure that may be viewed as raising concerns about a board’s refreshment and nominating process, including the absence of new directors who were appointed in recent years, “lengthy” tenure (which the survey describes as average tenure of more than ten or 15 years, a “high proportion” of directors with long tenure (which the survey describes as three-quarters of the board with service of ten years or more).  ISS has previously solicited comment on whether it should revise its voting policies on director elections to take into account director tenure, but has not yet done so.


  • “Overboarding” of executive chairs.  The survey asks whether executive chairs—that is, separate chairs who are not independent, but are not the company CEO—should be subject to the same limit on outside board service as public company CEOs or the higher limit applicable to other directors.  Under current ISS policies, public company CEOs (and other executives) are subject to a lower limit than other directors: two outside boards in addition to their own.  Other directors are subject to a total...Read More
Schedule 13G “Passive” Investor Status – When Being A Little Active Is Still Passive!
On Thursday, July 14, 2016, the Staff in the Division of Corporation Finance posted a new C&DI on Section 13(d) that provides stockholders (and issuers) with some helpful insights, and perhaps greater clarity, on when significant stockholders can engage in a dialogue with management and still remain on Schedule 13G.  As many practitioners know, Schedule 13G (the “short form” for reporting beneficial ownership of equity positions of 5% or more) often requires an affirmative certification from the reporting person(s) that the securities were not acquired, and are not held, with the purpose or effect of changing or influencing control of the issuer.   This is commonly referred to as the “passive” investor certification which is set forth at the end of Schedule 13G, directly above the signature line. 


In short, to report beneficial ownership on Schedule 13G the reporting person(s) must be “passive” (i.e., not active) with respect to any intent or attempt to exercise control over the issuer.  The only exception to this passive investor certification is for security holders who are either “grandfathered” or have acquired their securities gradually (i.e., those that acquired securities before the class of equity was registered with the SEC or have accumulated their stake slowly over time – less than 2% in any twelve-month period).  See Rule 13d-1(d) and Section 13(d)(6)(B) of the Exchange Act.  Of course, the certification (when required in order to report on 13G) begs the question of whether certain activities, such as submitting a 14a-8 shareholder proposal to management, lobbying for improved corporate governance measures or even pushing for increased share buybacks or dividends would (by itself) trigger a 13G amendment obligation and thus cause the reporting person(s) to have to report their ownership on Schedule 13D (the longer, more onerous, disclosure form and reporting regime) going forward.  

The new guidance posted on Thursday makes clear that certain limited activities, such as engaging management or the board in discussions regarding specified corporate governance topics including removal of a staggered board, majority voting standards for the election of directors, and/or elimination of poison pill rights plans, alone, would not cause the loss of 13G eligibility, so long as the purpose of the discussions is to improve corporate governance generally.  In a similar vein, discussions regarding executive compensation or matters of social or public inter...Read More

SEC Proposes Amendments to Update and Simplify Disclosure Requirements As Part of Overall Disclosure Effectiveness Review

At its July 13, 2016 open meeting, the Securities and Exchange Commission (the “Commission”) voted to propose amendments to certain disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded in light of subsequent changes to Commission disclosure requirements, U.S. Generally Accepted Accounting Principles (“GAAP”), International Financial Reporting Standards (“IFRS”), and technology.  The release approved by the Commission (the “Proposing Release”) is part of the disclosure effectiveness review being conducted by the Commission’s staff (the “Staff”).  It is also part of the Commission’s work to implement the Fixing America’s Surface Transportation (FAST) Act, which, among other things, requires the Commission to eliminate provisions of Regulation S-K that are duplicative, overlapping, outdated, or unnecessary.

At the meeting, the Commissioners and Staff focused on the principles used to approach the proposed amendments (the “Proposed Rules”), leaving discussion of the actual amendments for the Proposing Release, which is available here.  Below is a summary of the approaches taken by the Staff in the Proposing Release and examples of amendments that fall under those approaches.   

  • Redundant or Duplicative Requirements (Requirements that require substantially the same disclosures as GAAP, IFRS, or other Commission disclosure requirements). 
    • The Proposed Rules would delete these requirements in light of requirements elsewhere.
      • Examples:  The existing requirements proposed for deletion include provisions of Regulation S-X related to, among other things, foreign currency, consolidation, obligations, income tax disclosures, related parties, contingencies and earnings per share.  A complete table of the proposed amendments in this area begins on page 23 of the Proposing Release.
  • Overlapping RequirementsRead More
NASDAQ Proposes Disclosure of Third-Party Compensation for Directors and Nominees
NASDAQ has proposed changes to its listing standards to require disclosure of third-party compensation arrangements for directors and nominees.  After withdrawing an initial proposal on this subject, NASDAQ has revised the proposal, and it has been published in the Federal Register for public comment.  Comments are due on or before April 26, 2016.  The proposal is available here, and a redline showing proposed changes to the rule text begins on page 21 of the document.  

Under amendments NASDAQ is proposing to Rule 5250(b), NASDAQ companies would have to disclose all agreements and arrangements between any director, or director nominee, and any third party that provide for compensation or other payments in connection with the individual’s candidacy or service as a director.  The proposed rule would be construed broadly to apply to both compensation and other forms of payment, such as health insurance.  The disclosure requirement would not apply to reimbursement of expenses incurred in connection with serving as a nominee.  The proposal also addresses the following aspects of the proposed disclosure requirement:
  • Timing of disclosure.  The proposed rule would require disclosure of third-party compensation “either” on a company’s website or in the proxy statement for the next annual meeting.  Accordingly, where companies appoint directors during the year, it does not appear that waiting until the next proxy statement to disclose the compensation would comply with the rule.  Instead, companies could comply by including the material terms of a third-party compensation arrangement in the Form 8-K disclosure announcing the appointment.  Form 8-K requires disclosure of “any arrangement or understanding between [a] new director and any other persons, naming such persons, pursuant to which such director was selected as a director.”  If a company opts to make the initial disclosure on its website, the proposed rule is silent on the time frame for doing so.  After the initial disclosure, a third-party compensation arrangement “is subject to the continuous disclosure requirements of the proposed rule on an annual basis.”  The disclosure requirement ceases to apply upon the earlier of the director’s departure from the board or one year after termination of the ...Read More
When the Tail Wags the Unicorn: SEC Chair Voices Concerns About Pre-IPO Investments

On March 31, SEC Chair Mary Jo White gave a keynote address at Stanford University in which she discussed some of the SEC’s emerging priorities with respect to pre-IPO stage companies, private capital markets and fintech.  According to Chair White, the SEC is paying particular attention to the risks of fraud and investor confusion that can arise when companies choose to stay private longer. 

The federal securities laws historically have subjected private securities markets to reduced levels of regulation, so long as these markets are largely restricted to sophisticated investors—i.e., angel investors, venture capital firms and private equity firms—who are deemed to understand the risk that many of their investments may lose money, and quickly, along the way to a successful moonshot.  Chair White is concerned that this risk can be compounded by market pressures to show high valuations (particularly “unicorn” valuations of $1 billion), akin to the pressures faced by public companies to meet market expectations and projections.  In her view, the risk of loss from an overinflated valuation is ultimately borne not just by the sophisticated venture capital or sophisticated institutional investors, but also employees, retail investors and other deserving startups.  To mitigate the risk, Chair White suggested that large private companies consider, as appropriate, implementing enhanced governance structures and controls and adding to their boards outsiders with public company experience and regulatory, financial and industry expertise. 

As pre-IPO companies have stayed private longer, both primary and secondary markets for equity securities of pre-IPO companies have expanded significantly.  Chair White noted that the SEC is monitoring these markets for, among other things, disclosure and transparency issues, liquidity issues, unregistered broker-dealer activity, undisclosed compensation, conflict of interest issues, and fraudulent offers of pooled investment vehicles purporting to hold pre-IPO stock.  Chair White also voiced concerns regarding the use of derivative structures, which can be used to transfer the economic interest in a pre-IPO company without transacting in its stock.  Among other things, the SEC is concerned that use of these derivative structures may amplify any valuation errors.  Chair White stated that the SEC is relying on financial advisers to serve as gatekeepers with respect to the private securities markets. 

Chair White also reported that the SEC is monitoring the new methods of capital-raising created under the JOBS Act including:  Rule 506(c) (permitting general solicitation in Regulation D private placements), Regulation A+ (permitting offerings of up to $50 million in 12 ...Read More

FASB Modifies Accounting Rules for Stock-Based Compensation

On March 30, 2016, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) 2016-09, which amends ASC Topic 718, Compensation-Stock Compensation, to require changes to several areas of employee share-based payment accounting.  

In an effort to simplify share-based reporting, among other things, the update revises requirements in the following areas: 

  • Minimum Statutory Withholding: The new standard permits share-based withholding up to the maximum statutory tax rates, whereas currently an employer may only withhold up to the minimum statutory tax rate without causing the award to be classified as a liability.
  • Accounting for Income Taxes – The revised standard will require recording the tax effects of share-based payments at settlement or expiration on the income statement, whereas ASC 718 previously provided for tax benefits in excess of compensation cost and tax deficiencies to be reported in equity to the extent of any previous excess benefits, and then to the income statement.  Under the new rule excess tax benefits are also to be classified with other operating income tax cash flows as an operating activity.
  • Forfeitures – Whereas accruals of compensation cost are currently based on the number of awards that are expected to vest, the revised standard allows an entity to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur.
  • Intrinsic Value Accounting for Private Entities:  Under the update, nonpublic entities will be permitted to make a one-time accounting policy election to switch from measuring all liability-classified awards at fair value to intrinsic value.

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SEC Files Fraud Charges Against Public Biotechnology Company and its Officers for Alleged Materially Misleading FDA-Related Disclosures

On March 29, 2016, the SEC announced that it had filed fraud charges in U.S. federal court against AVEO Pharmaceuticals, Inc. (“AVEO”), a Massachusetts-based biotechnology company, and three of its former executives. The complaint alleges that AVEO and its former Chief Executive Officer, Chief Financial Officer and Chief Medical Officer violated the antifraud provisions of the federal securities laws by misleading investors about the company’s communications with the FDA during the approval process for tivozanib, AVEO’s leading product candidate being developed as a treatment for kidney cancer.

According to the complaint, the FDA raised concerns to AVEO in a May 2012 pre-NDA, or New Drug Application, meeting related to the survival rates of patients receiving tivozanib during AVEO’s first clinical trial of tivozanib relative to patients receiving the other compound, sorafenib, being used as a comparator in the trial. An NDA is the formal process by which a company seeks FDA approval of a new pharmaceutical for commercialization. In the pre-NDA meeting, FDA staff recommended that AVEO conduct a second clinical trial. The SEC alleged in its complaint that, for more than eleven months following the FDA’s recommendation of a second clinical trial, AVEO and the officers named in the complaint concealed from investors the extent of the FDA’s concerns about tivozanib and its recommendation that the company conduct a second clinical trial. Among other charges, the SEC alleged that: 

  • AVEO raised approximately $53 million in a public stock offering following the filing of the NDA, but failed to disclose in its offering materials the extent of the FDA’s concerns about tivozanib and its recommendation that the company conduct a second clinical trial.  
  • AVEO’s CEO and CFO knowingly approved and certified a press release and public filings that omitted information regarding the FDA’s recommendation of a second clinical trial, and suggested that data from “additional analyses” would satisfy the FDA’s concerns about survival rates among patients receiving tivozanib in the first clinical trial.  
  • AVEO’s CFO made statements at investor conferences suggesting that the FDA had only requested an explanation of the patient survival results from the first clinical trial, and omitted information about the FDA’s recommendation of a second clinical trial.  
  • AVEO filed a number of Exchange Act filings with the SEC which noted the FDA’s concerns about patient survival rates,...Read More
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