Securities Regulation and Corporate Governance


Last week, proxy advisory firm Institutional Shareholder Services Inc. (“ISS”) released information about the updated version of its corporate governance benchmarking tool, ISS Governance QuickScore 3.0 (“QuickScore 3.0”), which will launch on November 24, 2014.  Companies should take certain actions now and in early November to prepare for the launch of new QuickScore 3.0, as discussed below.  

QuickScore 3.0 includes both new data points and updates to existing data points for U.S. companies.  ISS is expected to release the details of these changes later this week, but below is a summary of the changes we have been able to determine based on the preliminary information released by ISS.

New Factors

QuickScore 3.0 will add several new data points for U.S. companies:

  • Board Action Reducing Shareholder Rights:  whether, based on ISS’s review, the board “recently took action that materially reduces shareholder rights;”  

  • Annual Board Performance Evaluation:  whether the company discloses a policy requiring an annual performance evaluation of the board;

  • Sunset Provision on Unequal Voting Structure:  whether, for companies with unequal voting rights, there is a sunset provision on the company’s unequal voting structure; and
  • Controlling Shareholder:  whether a company has a controlling shareholder.

Updated Factors

In addition, QuickScore 3.0 includes updates to several existing data points for U.S. companies, as described below.

  • Gender Diversity:  While the existing data point in the Board Structure category  on the number and percentage of women on the board carries no weight, it now will be a weighted factor that will impact a company’s QuickS...Read More
SEC Approves PCAOB’s New And Amended Standards On Related Party Transactions And Significant Unusual Transactions

Earlier this week the SEC approved, without amendment, the PCAOB’s new auditing standards that expand audit procedures required to be performed with respect to three important areas:  (1) related party transactions; (2) significant unusual transactions; and (3) a company’s financial relationships and transactions with its executive officers (including executive compensation).  The standards also expand the required communications that an auditor must make to the audit committee related to these three areas and amend the standard governing management representations that the auditor is required to periodically obtain.  See SEC Release No. 34-73396, Order Granting Approval of PCAOB’s Proposed Rules on Auditing Standard No. 18, Related Parties, Amendments to Certain PCAOB Auditing Standards Regarding Significant Unusual Transactions (October 21, 2014), available at     

Notably, the SEC retained the PCAOB’s proposed effective date, and as a result, the new and amended standards will become effective for audits of financial statements for fiscal years beginning on and after December 15, 2014.    

As noted in our blog about the PCAOB’s adoption of the new standard, available here, there are several steps companies should consider taking in light of the new standards, including:

  • In view of the expansion of procedures auditors must perform on related party transactions, companies should focus on ensuring that appropriate authorizations and approvals are in place and documented for these transactions.
  • Audit committees should be briefed about the expanded set of communications they can anticipate receiving from the auditor concerning related party transactions and significant unusual transactions.  In this regard, we anticipate that auditors will communicate with audit committees about compensation arrangements.  Companies will want to consider whether the compensation committee (or its chair) also should be part of those discussions.
  • Companies should review related party transaction policies to evaluate whether any changes should be made in light of the new standard, including whether the responsibility for overseeing such policy should be shifted to the audit committee if not already the case.
  • Companies should be prepared to address the expanded set of required management representations about related party transactions and significant unusual transactions.

Read More

ISS Provides Additional Information on New Proxy Voting “Scorecard” Approach for Evaluating Equity Compensation Plan Proposals at 2015 Shareholder Meetings

Today, proxy advisory firm Institutional Shareholder Services Inc. (“ISS”) provided additional information on its plans to implement a new “scorecard” approach to evaluating equity compensation plan proposals at U.S. shareholder meetings and requested comments on its proposed policy change.  This is one of two significant proposals ISS announced today that would impact U.S. companies for the 2015 proxy season, with the other proposed policy change relating to voting recommendations on independent chair proposals (which we discuss here).  Companies considering seeking shareholder approval of equity plans at shareholder meetings in 2015 should consider these proposed changes now to the extent they want ISS to recommend votes “For” the equity plan.

Current ISS Approach to Equity Plan Proposals

ISS’s current approach uses a series of “pass/fail” tests.  Specifically, ISS will recommend votes “Against” an equity plan if the total cost of the company’s equity plans including the proposed new plan is “unreasonable,” if the company’s three-year burn-rate exceeds the applicable burn rate cap determined by ISS, if the company has a pay-for-performance “misalignment” or if the plan includes certain disfavored features (e.g., if the plan permits repricing or includes a liberal change of control definition). 

Companies seeking shareholder approval of a new equity plan or an amendment to an existing plan can often independently determine compliance with each of these factors except for cost.  ISS evaluates the cost of a company’s plans using its proprietary shareholder value transfer (SVT) measure. ISS describes SVT as assessing “the amount of shareholders’ equity flowing out of the company to employees and directors.” ISS considers the SVT for a company’s plans to be reasonable if it falls below the company-specific allowable cap as determined by ISS using benchmark SVT levels for each industry.  Thus, companies often engage the consulting side of ISS to determine the SVT of their plans and the number of additional shares that ISS would support for the new or amended equity plan.

New ISS Approach to Equity Plan Proposals

ISS previously announced its intention to implement a new “scorecard” approach to evaluating equity plan proposals at U.S. shareholder meetings.  Today ISS provided more insights with the publication of its proposed new Equity Plans policy, which details ISS’s new Equity Plan Scorecard (“EPSC”...Read More

ISS Announces Proposed Changes to Proxy Voting Policy on Independent Chair Shareholder Proposals Voted on at 2015 Shareholder Meetings

Today, the proxy advisory firm Institutional Shareholder Services Inc. (“ISS”) announced proposed changes to its voting policy on independent chair shareholder proposals and opened the comment period until October 29, 2014, to solicit feedback on the changes.  This is one of two significant proposals ISS announced today that would impact U.S. companies for the 2015 proxy season. 

Currently, ISS generally recommends a vote “For” proposals requesting that the chair of a company’s board be independent unless the company satisfies specific criteria that include:  (1) having a designated lead director with certain duties specified by ISS; (2) not exhibiting “sustained poor total shareholder return (TSR) performance” over one- and three-year periods; and (3) not having any governance issues that ISS considers “problematic.”

ISS proposed two major changes to this policy:  (1) adding new governance, board leadership, and performance factors to the current list of criteria it considers in evaluating independent chair proposals; and (2) looking at all of the criteria “in a holistic manner” so that companies would no longer need to satisfy all of the criteria in the voting policy in order for ISS to recommend “Against” the shareholder proposal.  Specifically:

  • ISS is considering adding the following new criteria to its policy:  (1) the absence/presence of an executive chair; (2) recent board and executive leadership transitions at the company; (3) director/CEO tenure; and (4) evaluation of a longer, five-year TSR performance period rather than the one- and three-year periods that are currently used.  In announcing the proposed changes, ISS specifically mentioned the first one—presence of an executive chair—as cause for concern, citing a study that (according to ISS) found that retaining a former CEO in the role of executive chair “may prevent new CEOs from making performance gains by dampening their ability to make strategic changes at the company.”  ISS also expressed concern about whether a lead independent director can act as “an effective counterbalance to both a CEO and an executive chair.”  ISS did not address how the other factors it listed may affect its evaluation.  


  • ISS proposes to now review all of the criteria in the voting policy “in a more holistic manner.”  Under its current methodology, ISS will recommend votes “Against” an independent chair shareholder proposal only if a company satisfies all of ISS’s criteria.  Under the proposed approach, ISS indicated that any one factor that may previously have resulted in a “For” or “Against” recommendation could be mitigated, either positively or negatively, by other criteria.  While the proposed change appears to give ISS g...Read More
ISS Releases Survey for 2015 Policy Updates

Institutional Shareholder Services Inc. (“ISS”), the most influential proxy advisory firm, today launched its 10th annual global policy survey.  Each year, ISS solicits comments in connection with its review of its proxy voting policies. At the end of this process, in November 2014, ISS will announce its updated proxy voting policies applicable to 2015 shareholders’ meetings. 

Results from the policy survey that ISS posted on its website today will be used by ISS to inform its voting policy review.  The survey includes questions on a variety of topics involving Say-on-Pay and equity plan approvals, voting recommendations on directors and the selection of auditors, and other governance topics, including the following:

  • What relationship should exist between setting performance-based compensation goals and the value of performance-based compensation awards?
  • Is there is an absolute magnitude of CEO compensation that causes concern regardless of company performance, and if so, how should that pay magnitude be determined?
  • How should disclosures regarding changes made to a company’s current or future compensation program be considered in ISS’s pay-for-performance evaluation, which examines a company’s compensation program based on compensation paid in the prior fiscal year?
  • When is it appropriate for companies to use quantitative environmental and social performance goals, and what alternatives might be acceptable?
  • In the context of ISS’s stated intention to implement a “balanced scorecard” for evaluating equity plans, how should ISS weigh factors such as plan cost, plan features, and company practices?  What other factors should be considered?
  • How and under what circumstances should directors be held accountable for adopting bylaw amendments that restrict shareholder rights without obtaining shareholder approval of the amendments?
  • How do investors consider gender diversity when evaluating boards?
  • What factors should be considered when evaluating a board’s role in risk oversight?
  • Read More
House Financial Services Committee Approves Eight Bills Affecting Securities Regulation

Earlier this summer, on May 22, 2014, the Financial Services Committee of the House of Representatives approved eight bills relating to issuer disclosures, public and private capital raising, the liquidity of restricted securities and SEC regulations generally.  These bills, if enacted into law, would incrementally ease the many burdens imposed by the current securities regulatory regime.

The Disclosure Modernization and Simplification Act and the Small Business Investment Company Advisers Relief Act were both unanimously approved, while the other bills were generally approved by fairly narrow margins.

No corresponding bills are currently scheduled to be taken up in the Senate Banking Committee.


The Disclosure Modernization and Simplification Act (H.R. 4569) would require the SEC to:

  • permit issuers to include a summary page in their annual reports on Form 10-K;
  • revise Regulation S-K to further scale back or eliminate disclosure requirements for smaller issuers, including emerging growth companies, accelerated filers and smaller reporting companies; and
  • eliminate duplicative, overlapping, outdated and unnecessary requirements. 

In addition, the bill would require the SEC to conduct another study of Regulation S-K, to issue a report of its findings and recommendations to Congress and to propose rules to implement its recommendations.  The study would be required to determine how to modernize and simplify Regulation S-K to reduce the costs and burdens of compliance on issuers, eliminate boilerplate language and static requirements, evaluate methods of information delivery and presentation, and explore methods to discourage repetition and the disclosure of immaterial information. 

H.R. 4569 directs the SEC to ensure that all material information continues to be provided to investors, and to preserve the completeness and comparability of information across registrants.  The Committee approved the bill by a vote of 56-0.

Advisers to Small Business Investment Companies

The Small Business Investment Company (SBIC) Advisers Relief Act (H.R. 4200) would ensure that an investment adviser that relies on either the venture capital fund adviser exemption or the private fund adviser exemption from registration under Section 203A of the Investment Adviser’s Act of 1940 will not be required to register if it also acts as an investment adviser to one or more SBICs.  The bill would also preempt any state registration require...Read More

PCAOB Adopts Auditing Standards Governing Related Parties, Significant Unusual Transactions And Financial Relationships With Executive Officers

The Public Company Accounting Oversight Board (“PCAOB”) yesterday adopted new and amended auditing standards that expand audit procedures required to be performed with respect to three important areas:  (1) related party transactions; (2) significant unusual transactions; and (3) a company’s financial relationships and transactions with its executive officers.  The standards also expand the required communications that an auditor must make to the audit committee related to these three areas.  They also amend the standard governing representations that the auditor is required to periodically obtain from management.

  • Related party transactions.  The new standard for related parties, Auditing Standard No. 18, supersedes AU sec. 334, Related Parties, which had not been substantively updated since it was issued in 1983.  While AU sec. 334 included limited direction for obtaining an understanding of the company’s relationships and transactions with its related parties, the new standard requires the auditor to perform specific procedures to obtain an understanding of the nature of the relationships and of the terms and business purposes (or the lack thereof) of related party transactions identified by management.  For example, the auditor should inquire of management and other company personnel regarding: (1) background information on the related parties; (2) the business purpose for entering into a transaction with a related party; and (3) if a transaction was not approved in accordance with the company’s established policies or procedures, the reasons for granting the exception.  The auditor also must undertake additional procedures to evaluate whether the company has properly identified all of its related parties and transactions with such parties, and in cases where an undisclosed transaction is identified further steps are required.  While the prior standard focused on the adequacy of disclosure of identified related party transactions, the PCAOB says the goal of the new standard is to focus the auditor not only on the disclosure aspects of related party transactions, but also the appropriate accounting for such transactions.  In view of this expansion of procedures, companies should focus on ensuring that appropriate authorizations and approvals are in place and documented for related party transactions.
  • Significant unusual transactions.  The PCAOB amended AU sec. 316, Consideration of Fraud in a Financial Statement Audit, to require the auditor to perform specific procedures to identify and evaluate significant unusual transactions.  It indicated that, particularly when such transactions are entered into on or around period ends, their purpose in some instances is to engage in fraudulent financial reporting rather than legitimate business purposes.  The amended standard states that, f...Read More
SEC Issues Guidance on the Use of Social Media and the Intrastate Offering Exemption

Solicitations using Social Media

During a webcast earlier this year, our partner Jim Moloney, who formerly worked in the SEC’s Office of Mergers & Acquisitions (“OM&A”), spoke with the current Chief of OM&A, Michele Anderson.  On that webcast, Ms. Anderson acknowledged that “social media is here to stay,” noting that the Commission was “trying to find a way to make it work.”  Following the webcast, the SEC’s Division of Corporation Finance (“Corp Fin”) posted a new round of Securities Act Compliance and Disclosure Interpretations (“C&DIs”) that approved hyperlinking to legends or required statements in satisfaction of the requirements of Rules 134, 165 and 433 in certain situations.  Under three new interpretations, Corp Fin clarified that an electronic communication containing a hyperlink to a legend (or a required statement in the Rule 134 context) would be acceptable so long as: 

(1)  the electronic communication is spread using a platform that limits the number of characters allowed in the communication (such as Twitter);

(2)  including the entire legend (or required statement in the Rule 134 context) would result in a communication that exceeds the platform’s character limit (such as Twitter’s 140 character limit); and

(3)  the electronic communication contains a working hyperlink to the legend (or required statement in the Rule 134 context) along with language explaining that important or required information resides at the other end of the hyperlink.

(Question 110.01; Question 164.02; Question 232.15)  The new guidance also makes clear that an issuer hyperlinking in satisfaction of the requirements under Rules 134 and 433 would not be liable for any re-transmission by a third party of the original electronic communication containing the hyperlink, so long as the third party is not participating in the offering or acting on the issuer’s behalf.  (Question 110.02; Question 232.16)  The new guidance, however, does not address uses of social media in other contexts such as earning...Read More

PCAOB Public Meeting on Proposed Changes to the Auditor’s Reporting Model

Last week, the Public Company Accounting Oversight Board (the “PCAOB”) convened a series of ten panels as part of a two-day public meeting regarding proposed changes to the auditor’s reporting model.  The proposed changes have elicited a range of opinions from various stakeholders and commentators, a majority of which have been critical of the proposals.  Individuals invited to appear as panelists at last week’s meeting, however, were generally supportive of the proposed changes and offered various recommendations for ways in which the PCAOB could modify its proposals in order to move forward. 

The proposed changes to the auditor’s reporting model are included in two proposals:


  • The Auditor’s Report on an Audit of Financial Statements would expand the auditor’s report to include additional disclosures relating both to the auditor and the audit itself, including the disclosure of critical audit matters (“CAM”), defined as those audit-specific matters that involved the most difficult, subjective, and complex auditor judgments; posed the most difficulty to the auditor in obtaining audit evidence; or posed the most difficulty to the auditor in forming an opinion regarding the financial statements.


  • The Auditor’s Responsibilities Regarding Other Information in Certain Documents Containing Audited Financial Statements and the Related Auditor’s Report would require the auditor to read and evaluate “other information” included in the annual report, including the MD&A, exhibits and other information incorporated by reference, in order to determine whether the other information contains a material misstatement of fact or a material inconsistency with the audited financial statements included in the annual report, with the auditor’s conclusion reflected in the audit report.

More information on the proposed changes is available at

International Convergence

Interestingly, the meeting showed a heavy focus on international reporting with three panels dedicated to this perspective.  Board members often referenced seemingly positive results in the UK and the EU when addressing panelists, particularly panelists who warned about potential negative consequences of the proposals, such as the increased use of boilerplate or greater investor confusion.  Some Board members also expressed concern about potential risks to the United States capital markets if disclosure standards for audi...Read More

SEC Issues Second Set of FAQs on Conflict Minerals Rules

On April 7, 2014 the SEC’s Division of Corporation Finance issued a second set of Frequently Asked Questions (“FAQs”) on its conflict minerals rules (Exchange Act Section 13(p), Rule 13p-1 and Item 1.01 of Form SD).  The full set of FAQs, including the nine new FAQs and the 12 FAQs issued in May 2013, is available at  For more information about the conflict minerals rules, please see our client alert available at, and for a discussion of the first set of FAQs, please see our client alert available at   

The nine new FAQs focus primarily on the requirement under the conflict minerals rules to obtain an independent private sector audit (“IPSA”) of the conflict minerals report.  While many interpretive questions under the rules are still outstanding, the FAQs provide helpful guidance to companies as they seek to comply with the rules and prepare their first annual disclosures covering the 2013 calendar year, which are due on Monday, June 2, 2014.  Set forth below are several highlights from the new FAQs:

  • IPSA Trigger During Temporary Phase-In Period.  FAQ #14 clarifies that if any of a company’s products are “DRC conflict undeterminable,” an IPSA of the company’s conflict minerals is not required during a two-year transition period (or a four-year transition period for smaller reporting companies).  If, for example, a company’s conflict minerals report covers products that qualify as “DRC conflict undeterminable” under the rules as well as products believed to be “DRC conflict free,” no IPSA of the report is required.  However, FAQ #15 states that, in this case, the company’s conflict minerals report may not describe as “DRC conflict free” any otherwise qualifying products because a company may use this designation only after conducting due diligence, which the rules define as including an IPSA.
  • Scope of IPSA Requirement.  FAQ #17 confirms that the scope of the IPSA is limited to the IPSA objective set forth in the conflict minerals rules and does not include any other matters, su...Read More
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