Governance & Compliance Insider

On December 22, 2017, the Securities and Exchange Commission announced publication of staff guidance for issuers, auditors, and others to ensure timely public disclosures of the accounting impacts of the Tax Cuts and Jobs Act (the “TCJA”), which was enacted on December 22, 2017. Specifically, the staff of the Office of the Chief Accountant and the Division of Corporation Finance issued the following interpretations: Staff Accounting Bulletin (SAB) No. 118 expresses views of the staff regarding application of U.S. GAAP when preparing an initial accounting of the income tax effects of the TCJA. Compliance and Disclosure Interpretation 110.02 expresses views of the staff regarding the applicability of Item 2.06 of Form 8-K with respect to reporting the impact of a change in tax rate or tax laws pursuant to the TCJA. SAB 118 The staff issued SAB 118 to address certain fact patterns where the accounting for changes in tax laws or tax rates under ASC Topic 740 is incomplete upon issuance of an issuer’s financial statements for the reporting period in which the TCJA is enacted. As detailed in SAB 118, in the financial reporting period during which the TCJA is enacted, companies must first reflect the income tax effects of the TCJA in which the accounting under ASC Topic 740 is complete. These completed amounts would not be provisional amounts. The income tax effects of the TCJA for which the accounting under ASC Topic 740 is incomplete, but for which a reasonable estimate is determinable, would be reported as provisional amounts, which would be subject to adjustment during a "measurement period" until the accounting under ASC 740 is complete. For any specific income tax effects of the Act for which a reasonable estimate cannot be determined, provisional amounts would not be reported, and companies would continue to apply ASC Topic 740 based on the provisions of the tax laws that were in effect immediately prior to the TCJA being enacted. For those income tax effects for which companies were not able to determine a reasonable estimate (such that no related provisional amount was reported for the reporting period in which the Act was enacted), companies would report provisional amounts in the first reporting period in which a reasonable estimate can be determined. The measurement period begins in the reporting period that includes the TCJA’s enactment date and ends when an issuer has obtained, prepared, and analyzed the information that was needed in order to complete the accounting requirements under ASC 740. During the measurement period, the staff expects that issuers will be acting in good faith to complete the accounting under ASC 740. The staff notes that in no circumstances should the measurement period extend beyond one year from the enactment date. During the measurement period, an issuer may need to reflect adjustments to its provisional amounts or report additional tax effects upon obtaining, preparing, or analyzing additional information about facts and circumstances that existed as of the enactment date. Any income tax effects of events unrelated to the TCJA should not be reported as measurement period adjustments. SAB 118 also describes supplemental disclosures that should accompany the provisional amounts, including the reasons for the incomplete accounting, the additional information or analysis that is needed, and other information relevant to why the issuer was not able to complete the accounting required under ASC 740 in a timely manner. C&DI 110.02 In C&DI 110.02 the staff clarifies that the re-measurement of a deferred tax asset (“DTA”) to incorporate the effects of newly enacted tax rates or other provisions of the TCJA does not trigger an obligation to file under Item 2.06 of Form 8-K. The re-measurement of a DTA to reflect the impact of a change in tax rate or tax laws is not an impairment under ASC 740. Issuers employing the “measurement period” approach as contemplated by SAB 118 that conclude that an impairment has occurred due to changes resulting from the enactment of the TCJA may rely on the Instruction to Item 2.06 of Form 8-K and disclose the impairment, or a provisional amount with respect to that possible impairment, in its next periodic report.

Human nature being what it is, the law, in its wisdom, does not presume that directors will be competent judges of the fair treatment of their company where fairness must be at their own personal expense.[1] According to the Delaware Supreme Court in In re Investors Bancorp, Inc. Stockholder Litigation, when equity awards are granted to directors under a stockholder-approved equity incentive plan that gives directors discretion to determine the size of the awards, the awards are subject to the “entire fairness” standard of review. This decision may expand stockholder litigation in the area of director compensation. When reading the recent opinion issued by the Delaware Supreme Court in In re Investors Bancorp, Inc. Stockholder Litigation, it is tempting to regard the dispute as a perfect example of “pigs get fat, hogs get slaughtered” and minimize the issues raised by the case. After all, on the heels of stockholder approval of an equity compensation plan, the 12-person Bancorp Board awarded themselves over $51 million in equity grants from plan; the non-employee directors each received grants valued at approximately $2 million (as compared to average awards of approximately $176,000 for non-employee directors at peer companies). Your company’s board, you tell yourself confidently, would never act in such a manner. However, even the most prudent of Boards needs to consider the implications from the In re Investors Bancorp decision. But first, let’s step back and look at a bit of background in the case: In June 2015, stockholders approved Bancorp’s Equity Incentive Plan (the “EIP”), which reserved 30,881,296 common shares for various types of equity grants for the Company’s 1,800 officers, employees, non-employee directors, and service providers, of which up to 30% were available to be granted to non-employee directors. Two weeks following stockholder approval of the EIP, the Board approved the grants noted above. Disclosure of the equity grants resulted in three stockholder complaints being filed in the Court of Chancery alleging breach of fiduciary duties by the directors for awarding themselves excessive compensation. The Court of Chancery dismissed the complaint because the EIP contained “meaningful, specific limits on awards to all director beneficiaries.” In other words, because stockholders approved the EIP, which the Court of Chancery noted contained meaningful limits, the ratification defense came into play, which allowed the Board’s actions to be reviewed under the business judgement standard. In December, the Delaware Supreme Court reversed the Court of Chancery’s decision and determined that the “entire fairness” standard applied. The Delaware Supreme Court noted that because director compensation determinations are inherently self-interested, those decisions will be reviewed under the business judgment rule only where fully-informed stockholders approve (i) specific compensation decisions or (ii) self-executing plans (plans with fixed criteria). However, if a stockholder-approved equity incentive plan gives directors discretion within general parameters when compensating themselves, then the “entire fairness” standard is appropriate. As the Supreme Court noted: We think, however, when it comes to the discretion directors exercise following stockholder approval of an equity incentive plan, ratification cannot be used to foreclose the Court of Chancery from reviewing those further discretionary actions when a breach of fiduciary duty claim has been properly alleged. As the Court of Chancery emphasized in Sample, using an expression coined many years ago, director action is “twice-tested,” first for legal authorization, and second by equity. When stockholders approve the general parameters of an equity compensation plan and allow directors to exercise their “broad legal authority” under the plan, they do so “precisely because they know that that authority must be exercised consistently with equitable principles of fiduciary duty.” The stockholders have granted the directors the legal authority to make awards. But, the directors’ exercise of that authority must be done consistent with their fiduciary duties. Given that the actual awards are self-interested decisions not approved by the stockholders, if the directors acted inequitably when making the awards, their “inequitable action does not become permissible simply because it is legally possible” under the general authority granted by the stockholders. So, what does this mean for Boards and Compensation Committees? If designing a new equity incentive plan, or amending an existing plan, consider whether self-executing awards to non-employee directors are appropriate or desired. If self-executing awards are not desired, determine if the plan contains significant and meaningful limitations on awards, as this might assist with the defense against a claim that the Board violated its fiduciary duties. If equity awards to directors are unusual in size compared to prior awards, consider making the awards subject to stockholder ratification at the next stockholders’ meeting. Have the Board and Compensation Committee pay close attention to compensation at peer companies and its own historical pay practices. Significant deviations from either may be more likely to trigger stockholder litigation under the new standards.   [1] Footnote 2 to Investors Bancorp opinion, citing Gottlieb v. Heyden Chem. Corp., 90 A.2d 660, 663 (1952)

On Tuesday, December 12, Dorsey will present our annual review of developments and disclosure requirements for the upcoming proxy season, including practical advice on how to prepare your proxy statement and annual report in 2018. Click here for more information or to register to attend in-person or via webinar: https://sites-dorsey.vuture.net/76/665/november-2017/12-12-preparing-for-the-2018-proxy-season(2).asp.

Tax reform efforts by Congress are ongoing, and the substance of the tax bills remains fluid. However, for foreign corporations with U.S. operations, there are some specific potential risks to consider, such as additional limitations on the deductibility of interest, the migration from a “worldwide” system of taxation to a territorial system, and the use of certain border adjustments. Foreign corporations with U.S. operations may want to consider including a risk factor in their periodic reports or offering documents regarding the potential impact of U.S. tax reform. A sample risk factor (based on the current iteration of the tax bills) is below. As the tax bills are amended during the legislative process, the language of the risk factor may need to be edited prior to use. Possible U.S. federal income tax reform could adversely affect us. The new U.S. administration and certain members of the U.S. House of Representatives have stated that one of their top legislative priorities is significant reform of the Internal Revenue Code. Proposals by members of Congress have included, among other things, changes to U.S. federal tax rates, imposing significant additional limitations on the deductibility of interest, allowing for the expensing of capital expenditures, the migration from a “worldwide” system of taxation to a territorial system, and the use of certain border adjustments. There is substantial uncertainty regarding both the timing and the details of any such tax reform. The impact of any potential tax reform on our business and on holders of our common shares is uncertain and could be adverse. [Prospective investors should consult their own tax advisors regarding potential changes in U.S. tax laws.]

There are a couple of recent developments that we would like to remind issuers to keep in mind for their upcoming annual reports. Foreign private issuers who prepare their financial statements in accordance with the International Financial Reporting Standards (“IFRS”) will be required to file their annual audited financial statements in XBRL format in respect of any period ending after December 15, 2017 (i.e., for a December 31 company, beginning with any Form 20-F or Form 40-F for the fiscal year ending December 31, 2017). The following is a link to a Dorsey blog posting about this topic from earlier this year: https://www.governancecomplianceinsider.com/compliance-with-xbrl-for-foreign-private-issuers-that-prepare-their-financial-statements-in-accordance-with-ifrs-required-beginning-with-annual-reports-for-fiscal-periods-ending-on-or-after-december-1/. Foreign private issuers who file their financial statements in accordance with IFRS should reach out to their EDGAR agents now to start the process as it takes a significant amount of time to prepare the template for an issuer’s first XBRL filing. While there is a 30-day grace period for first time filers that would permit an issuer to file the XBRL exhibit by amendment, issuers that wait until the last minute to start the process may miss the grace period deadline. In addition, foreign private issuers who file their Annual Reports on Form 20-F should also remember that they are required to include hyperlinks in the exhibit index to the underlying document. The links may be included in the exhibit list prior to the signature page. In those circumstances, issuers are no longer required to include an exhibit index after the signature page. The following is a link to a Dorsey article prepared on this topic from earlier this year: www.dorsey.com/newsresources/publications/client-alerts/2017/03/sec-adopts-use-of-exhibit-hyperlinks-in-filings.

At last Friday's ABA annual meeting, Bill Hinman (with the standard disclaimer that he is speaking for himself and not on behalf of the SEC) confirmed that the SEC will not be delaying implementation of the CEO pay ratio rule, which will require most public companies to report the pay ratio in their 2018 proxy statements, for the first fiscal year beginning on or after Jan. 1, 2017.  (Foreign private issuers, MJDS filers, emerging growth companies and smaller reporting companies are exempt from the rule.)  Bill Hinman is the Director of the SEC's Division of Corporation Finance. Director Hinman also mentioned that the Division will be issuing additional guidance on the CEO pay ratio rule in the near future.  This earlier blog entry includes a summary of the SEC's previous guidance on implementing the CEO pay ratio rule. In a recent Compensation Standards survey, Liz Dunshee reported on trending practices in pay ratio preparation.

Insider trading allegations have surfaced at Equifax, a credit rating agency that last week announced a data breach that could potentially affect 143 million consumers in the United States, nearly half of the country’s population. SEC filings show that three Equifax executives sold nearly $2 million in shares of the company’s common stock days after the cyberattack was discovered but before the news was publicly announced. It was unclear whether their share sales had anything to do with the breach. None of the SEC filings list the sales as being conducted as part of pre-established 10b5-1 trading plans. Equifax said in a statement that the three executives sold a “small percentage” of their shares on August 1 and August 2, adding they “had no knowledge that an intrusion had occurred at the time they sold their shares.” Following the company’s announcement of the data breach on September 9, Equifax shares traded down by almost 14 percent. The SEC has not commented on the share sales. The developing circumstances at Equifax serve as a reminder for public companies to consider several important provisions when implementing or revising an insider trading policy. Read more in our eUpdate here: www.dorsey.com/newsresources/publications/client-alerts/2017/09/equifax-data-breach.

On September 5, 2017, the U.S. House of Representatives overwhelmingly passed (by a vote of 403-3) the Improving Access to Capital Act. The Act directs the SEC to amend Regulation A+ to allow SEC reporting issuers to use Regulation A+ when raising capital, and to deem their SEC periodic reports to satisfy the periodic and current reporting requirements of Tier 2 of Regulation A+. The Act is now being considered by the Senate. If the Act becomes law, it will increase the alternatives available to SEC reporting companies in seeking additional capital. Smaller public companies that are not listed on Nasdaq or the NYSE, and are therefore subject to state securities regulation in respect of their capital raising activities, may find Regulation A+ especially attractive, because an offering under Tier 2 of Regulation A+ is preempted from state securities regulation other than the potential requirement to make a notice filing, consent to service of process, and pay a filing fee.

Following the 2016 election, corporate governance circles have focused intently on what will happen in the nation’s capital with regard to a potential roll back of the current regulatory regime. While attention given to Congress and the SEC for the possible direction of corporate governance is not misplaced, future changes in this arena will most likely come from investors, and they have their own agenda which is very different from that of the Trump administration. Regardless of, or perhaps in response to, any changes in the U.S. governance regulatory framework, investors and groups of investors are likely to continue to push for actions and disclosures beyond what is mandated and will use the their voting power to effect change. Public companies should also anticipate increased demand for the use of metrics and related disclosures that facilitate comparison, including in non-traditional performance areas such as certain environmental, social and governance matters where investors see a strong tie to long-term value creation. Read the full article here, as posted on the Harvard Law School Forum on Corporate Governance and Financial Regulation.

On August 14, 2017, the SEC approved an NYSE rule change that requires listed companies to give notice to the NYSE at least 10 minutes before any public announcement of dividends or stock distributions, even if such announcements occur outside the hours of the Exchange’s current immediate release policy. The rule change was effective immediately. The Exchange’s immediate release policy (Sections 202.05 and 202.06 of the NYSE Listed Company Manual (the “Manual”)) already requires listed companies to provide notification to the Exchange at least 10 minutes prior to the public release of a dividend or stock distribution announcement during the hours between 7:00 a.m. Eastern Time and market close (usually 4:00 p.m. Eastern Time). During those hours, listed companies are required to call the Exchange’s Market Watch department at least 10 minutes before any material news announcement, including stock distributions and dividends. Additionally, Section 204.12 of the Manual already requires listed companies to give notice to the NYSE of any action related to dividends or stock distributions in relation to a listed stock. Such notice must be at least 10 days in advance of the record date for such events. Section 204.21 also requires 10 days advance notice of the fixing of a date for the taking of a record of shareholders for any purpose. The effect of the rule change is to amend Sections 204.12 and 204.21 of the Manual to specify that listed companies are to provide 10 minutes advance notice to the Exchange about any dividend or stock distribution announcement made at any time, not just those announcements made in the hours during which the Exchange’s immediate release policy is in effect.

As previously reported on this blog, Vanguard received a shareholder proposal requesting additional disclosure on its climate change voting record, and the proposal was scheduled to appear on the agenda for Vanguard's 2017 annual meeting.   Today, Vanguard announced that it had negotiated the proposal's withdrawal. Glenn Booraem, the Vanguard Funds’ Investment Stewardship Officer, commented: “Climate change represents an evolving set of risks and opportunities for companies in many sectors. Vanguard has prioritized climate risk on our engagement agenda, and we have discussed the topic with more companies over the past year than ever before. Our discussions have centered on advocating for disclosure of material risks to companies’ long-term business prospects and the value of their assets under a range of forward-looking scenarios. It is crucial to our fund investors that market participants have access to consistently comparable information to incorporate these risks and opportunities into market prices.

Companies who engage with their large institutional shareholders on environmental and social issues during the 2018 proxy season should keep in mind that these investors are facing pressure from other investors on their voting policies. Large institutional investors are receiving shareholder proposals from a coalition of smaller investors, urging them to take a more engaged approach to environmental and social proposals.  During the 2017 proxy season, investors  including Vanguard, BlackRock, Bank of New York Mellon, T.Rowe Price, JP Morgan Chase & Co. and Fidelity Investments received shareholder proposals from investors including Walden Asset Management, requesting that management issue reports on their proxy voting policies and practices related to climate change. Some of these proposals were withdrawn, based on vote changes, updated voting policies and greater disclosure, as reported by BNA Bloomberg.  However, Vanguard's November 15th annual meeting agenda will include Walden's proposal.  This is Vanguard's first shareholder meeting since 2009 (Vanguard is not required to hold a meeting unless there is a proposal for a shareholder vote).  In its preliminary proxy filing, Vanguard opposes Walden's proposal, for reasons including that the report requested is duplicative of information that's already publicly available, and that direct, ongoing engagement with companies is often more effective than votes for shareholder proposals. Vanguard and many other institutional investors have historically voted against climate change shareholder proposals, given the challenges of demonstrating a material business impact over a definitive time horizon.  However, their positions have evolved over recent proxy seasons.1  Earlier this year, Vanguard voted for shareholder proposals at Exxon Mobil and Occidental Petroleum Corp. requiring that the companies report on climate change.  Vanguard had voted against a similar proposal at Exxon Mobil in 2016.  These climate change proposals, and another one at PPL Corp., subsequently passed.  More broadly, during the 2017 proxy season, shareholders submitted 144 environmental proposals.  Of the 55 proposals voted on, support averaged 28.9% of votes cast, compared to 71 proposals that received 25.1% of votes cast in 2016. 1Vanguard's updated proxy voting guidelines state that Vanguard will consider environmental and social proposals on their merits, and that it may support those proposals where there is a link to long-term shareholder value.  According to Vanguard's proxy voting guidelines, some of the factors considered when evaluating these proposals include the materiality of the issue, the quality of current disclosures/business practices, and any progress by the company toward the adoption of best practices and/or industry norms. (See Liz Dunshee's blog for additional articulation of Vanguard's approach).  

On Tuesday, July 25, as many practitioners probably expected, the SEC issued a warning that offers and sales of digital assets (virtual coins or tokens) by organizations using blockchain or distributed ledger technology (often referred to, among other things, as Initial Coin Offerings (“ICOs”) or Token Sales) are subject to the requirements of the federal securities laws. Depending on the offering, investors may use an established currency (e.g., U.S. dollars) or virtual currency (e.g., Bitcoin or Ether) to buy the virtual coins or tokens being offered. After they are issued, the virtual coins or tokens may be resold to others in a secondary market on virtual currency exchanges or other platforms. A blockchain or distributed ledger is an electronic ledger, or list of entries, maintained by participants in a computer network who use cryptography to process and verify transactions on the ledger, providing comfort to users and potential users that entries are secure. Examples of blockchains are Bitcoin and Ethereum, which are used to create and track transactions in the tokens known as Bitcoin and Ether, respectively. ICOs have captured significant attention recently as several enterprises, often start-up or development stage businesses, have attracted substantial investments through internet-based offerings, in some cases generating proceeds in the tens and hundreds of millions of dollars. Promoters of ICOs may tell investors that their investments will fund development of a digital platform, software, or similar projects and that the virtual tokens or coins offered may be used to access the platform, use the software, or otherwise participate in the project. Additionally, promoters and issuers may lead potential investors to expect a return on their investment or to participate in a share of the profits expected from the project. The SEC warned that, depending on the facts and circumstances of each individual ICO, the virtual coins or tokens that are offered or sold may be securities under U.S. law. If so, the offer and sale of these virtual coins or tokens in an ICO are subject to U.S. federal securities laws. Furthermore, promoters and issuers participating in unregistered ICOs may be liable for securities law violations, and any exchange providing for trading in these virtual coins or tokens may need to register as a securities exchange with the SEC. The SEC's warning was made in a Report of Investigation stemming from an Enforcement Division inquiry into whether an organization known as “The DAO” violated federal securities laws with unregistered offers and sales of “DAO Tokens” in exchange for the Ether virtual currency. By the time the offering by The DAO closed, The DAO had raised Ether valued at approximately US$150 million. The DAO has been described as a “crowdfunding contract,” but it would not have met the requirements of the Regulation Crowdfunding exemption because, among other things, it was not a broker-dealer or a funding portal registered with the SEC and FINRA. In its report, the SEC concluded that the tokens offered and sold by The DAO were securities offered and sold in the United States and therefore subject to the U.S. federal securities laws. Under the circumstances, however, the SEC decided not to bring charges or make findings of violations, but rather to caution industry and market participants to be cognizant that U.S. federal securities laws apply to anyone who offers and sells securities in the United States, whether the issuer is a traditional company or a decentralized autonomous organization and regardless of whether purchases are made using U.S. dollars or virtual currencies. Moreover, the report confirms that the use of distributed ledger technology does not affect the determination whether virtual coins or tokens are securities. The SEC's Office of Investor Education and Advocacy also issued an investor bulletin to provide information to investors about ICOs. The bulletin explains that new technologies may be used to perpetrate investment schemes that don’t comply with federal securities laws and highlights several red flags of investment fraud.

In Henry v. Phixios Holdings, Inc., C.A. No. 12504-VCMR,the Delaware Court of Chancery held that pursuant to Section 202 of the General Corporation Law, in order for a stockholder to be bound by stock transfer restrictions that are not “noted conspicuously on the certificate or certificates representing the security,” he must have actual knowledge of the restrictions before he acquires the stock. If the stockholder does not have actual knowledge of the stock transfer restrictions at the time he acquires the stock, he can become bound by the stock transfer restrictions after the acquisition of the stock only if he affirmatively assents to the restrictions, either by voting to approve the restrictions or by agreeing to the restrictions. The Chancery Court concluded that the plaintiff did not have actual knowledge of the restrictions, though the restrictions were contained in the company's bylaws provided to the plaintiff prior to his purchase of the company's stock, and that as a result, the company could not rescind his shares pursuant to the restrictions contained in the bylaws. Since it can be challenging to prove "actual knowledge,"  issuers are reminded to place appropriate legends on their restricted securities prior to sale.  With regard to book-entry shares, versus certificated shares, issuers should provide notice of such restrictions pursuant to Section 151(f) of the General Corporation Law.  Issuers may also obtain an agreement, a vote or other evidence that purchasing securityholders accepted the applicable restrictions on transferability prior to sale. Under the Securities Act, issuers are required to take steps to prevent distribution to the public of securities that are neither registered nor exempt from registration.  Restrictions on transfer may also be required under an issuer's charter documents or in an agreement with a stockholder. Common types of legends include: a "'33 Act" legend that indicates that securities have not been registered under the Securities Act and may not be resold unless they are either registered or exempt from registration, an "affiliate" legend for control shares held by directors, executives or large stockholders, and a "lockup" legend that indicates that a contract prohibits the stockholder from selling the shares for a period of time.  

The SEC's semi-annual update of its rulemaking docket was released on July 20. Overall, the SEC has cut its rulemaking agenda by about half under the Trump administration. A number of long-anticipated Dodd-Frank rulemakings on executive compensation disclosure are missing from the docket: Pay Versus Performance Listing Standards for Recovery of Erroneously Awarded Compensation (Clawbacks) Disclosure of Hedging by Employees, Officers and Directors Incentive Compensation at Financial Institutions. Likewise, the Universal Proxy rulemaking was missing. Still on the docket of proposed rulemakings: Amendments to the XBRL Program Business and Financial Disclosures required by Regulation S-K Guide 3 Bank Holding Company Disclosure Reporting of Proxy Votes on Executive Compensation and Other Matters Concept Release on Possible Revisions to Audit Committee Disclosures Rulemaking to Simplify Regulation S-K Provisions Governing Non-Financial Disclosures

For U.S. and Canadian companies with annual meetings to be held between September 16, 2017, and January 31, 2018, the window for alerting Institutional Shareholder Services (ISS) about changes to self-selected peer groups used for executive compensation benchmarking closes this Friday, July 21st, at 8:00 pm EDT. Information on self-selected peer groups may influence ISS as it constructs the peer groups that it uses in its pay for performance analysis in its voting reports. According to the ISS press release, companies that have made no changes to their previous proxy-disclosed executive compensation benchmarking peers, or companies that do not wish to provide this information in advance, do not need to participate. For companies that do not submit changes, the proxy-disclosed peers from the company’s last proxy filing will automatically be factored into ISS’ peer group construction process. More information on ISS’ peer group selection process, including a link to the form for submitting peer group changes, is available here.

One of the more utilized provisions of the Jumpstart Our Business Startups Act (JOBS Act) has been the confidential submission of IPO registration statements by Emerging Growth Companies (EGCs) to the Securities and Exchange Commission. The nonpublic nature of the SEC review process has allowed EGCs to submit IPO registration statements and respond to SEC comments outside the public eye and without having to alert the market of their intention to go public. As of July 10, 2017, all issuers will now have the ability to submit draft registration statements to the SEC on a confidential basis. Read more in our recent eUpdate here: www.dorsey.com/newsresources/publications/client-alerts/2017/07/all-issuers-eligible-to-submit-draft-ipo.

This week, during his opening remarks at the 2017 National Conference of the Society for Corporate Governance, SEC Commissioner Michael Piwowar remarked on prospects for repealing or delaying the CEO pay ratio rule. Under the rule, most public companies must disclose the median of the annual total compensation of all employees (including non-U.S., part-time, temporary and seasonal workers), except for the CEO; the annual total compensation of the CEO; and the ratio of the two amounts, as calculated under proxy rules. The disclosure must be prepared for fiscal years beginning on or after January 1, 2017, which would be disclosed in 2018 proxy statements. Emerging growth companies, smaller reporting companies and foreign issuers are not subject to the rule. Commissioner Piwowar expressed his support for repealing the rule, which would require Congressional action. In terms of delaying effectiveness of the rule, he stated that public commentary would determine whether that alternative is feasible in light of the associated costs and benefits of implementing the rule. Though the latest comment period on the rule has ended, he urged interested parties to continue to submit comment letters describing specific reasons why the rule is burdensome, as well as proposed fixes. During the latest comment period, the SEC received approximately 180 unique comments, with 150 of those comments in favor of the rule. Given the approaching 2018 proxy season, we advise companies not to count on a repeal or delay of the rule. Companies should continue preparing for the CEO pay ratio disclosure, and keep in mind that there is significant latitude for how the ratio may be calculated, in accordance with Item 402(u) of Regulation S-K and related guidance in C&DIs 128C.01-128C.05. In particular: The median employee, which must be identified once every three years absent a significant change, may be identified from a survey of the entire employee population, a statistical sample or other reasonable method. A de minimis exemption allows companies to exclude non-U.S. employees who account for 5% or less of their employees, including employees whose inclusion would result in a violation of foreign privacy data laws. If certain employees are excluded, then all employees from that jurisdiction must be excluded. Companies may use a consistently applied compensation measure (“CACM”) other than annual total compensation to identify the median employee, as long as the CACM reasonably reflects the annual compensation of employees. For example, total cash compensation could be a CACM unless the company also distributed annual equity awards widely among its employees. Companies may select a determination date within three months prior to the end of their fiscal year, in order to determine employee population from which to identify the median. In applying the CACM to identify the median employee, companies are not required to use a compensation period that includes the determination date. Nor are they required to use a full annual period. As an example, the SEC states that a company may use annual total compensation from its prior fiscal year so long as there has not been a change in the registrant’s employee population or employee compensation arrangements that would result in a significant change of its pay distribution to its workforce. Workers whose compensation is determined by an unaffiliated third party may be excluded from the pay ratio calculation. This population may include leased workers, independent contractors who determine their own compensation, and even workers whose minimum level of compensation is set by the company. Companies should consider testing alternative methodologies in order to assess the quality and consistency of results. While there is considerable latitude to design a pay ratio methodology, companies should let reason be their guide and be prepared to explain the decisions that they make. Companies are required to describe in their proxy statements the methodology used, as well as any material assumptions, adjustments and estimates. Not surprisingly, CEO pay ratios have varied significantly depending on the companies surveyed and the methodology. The AFL-CIO’s annual report on CEO pay calculated a CEO-to-worker-pay ratio of 347-to-1 for 2016, based on the average total compensation package for 400 of the S&P 500 CEOs of $13.1 million last year, and the average annual cash income only (excluding fringe benefits) for America’s 100,525,000 rank-and-file workers of $37,632. In contrast, a 2016 Mercer study found the ratio among respondents to be less than 200-to-1.

As the 2017 proxy season winds down, one clear take-away is that shareholder proposals attempting to modify the terms of previously adopted mainstream proxy access bylaws did not fare well. Many of these proposals focused solely on the aggregation limit, seeking to increase the number of shareholders (usually 20) that are required to meet the minimum ownership threshold (usually 3% of outstanding shares) in order to nominate a director using the company’s proxy statement. Other proposals tried to amend multiple terms of the proxy access bylaw in order to make the provisions more shareholder-friendly. To date, none of these so-called “fix-it” amendments to mainstream proxy access provisions has received majority support, and the average support for all such proposals has been less than 30%. In addition, some companies were able to exclude proposals to amend the aggregation limits from their proxy statements by making a case under the SEC no-action process that the proposal had been “substantially implemented” where the company could provide specific information to support the view that it already had a meaningful proxy access right in place. Other companies facing fix-it amendments to multiple provisions were successful in excluding the proposal as “substantially implemented” where the company acted to adopt one or more of the amendments. See our prior memo here: Recent Developments in Proxy Access. Meanwhile, the trend of adopting mainstream proxy access provisions continues apace. Approximately 175 additional companies have adopted proxy access provisions since the end of the 2016 proxy season, and virtually all shareholder proposals seeking the adoption of proxy access bylaws have received majority support this year. More than 60% of companies in the S&P 500 now have some form of proxy access provision. The mainstream model adopted by a broad range of these companies allows shareholders owning 3% of shares outstanding for at least 3 years to nominate up to 20% of the board (or at least two members) with an aggregation limit of 20 shareholders to reach the ownership threshold. The ability of the mainstream model to withstand fix-it shareholder proposals this proxy season bodes well for this approach and may discourage fix-it proposals in future years.

The House passed the Financial CHOICE Act on Thursday as part of the new administration’s bid to overhaul Dodd-Frank. It is not expected to get through the Senate in its current form, but it does provide an interesting read. While current disclosure requirements have become too lengthy and cumbersome in many respects, the proposed change to Say-on-Pay voting frequency requires a materiality determination that may prove difficult for companies to implement. Currently, public companies are required to provide their shareholders with an advisory vote on executive compensation no less than once every three years. Most companies hold the vote annually. The Financial CHOICE Act would modify this requirement so that the vote is held “[e]ach year in which there has been a material change to the compensation of executives of an issuer from the previous year.” So, each year the issuer would have to determine if there has been a material change to executive compensation when deciding what proposals are put before shareholders at the annual meeting. I expect many issuers would continue to hold an annual vote to seek feedback from their shareholders even if there was no material change in compensation. However, given the high profile nature of a negative say-on-pay result, would issuers shy away from the advisory vote in a year of poor company performance (absent an obviously material change to executive compensation)? Will an issuer’s determination not to include the advisory vote bring on another wave of proxy disclosure litigation? Could an issuer determine not to hold a say-on-pay vote for multiple years in a row? Fewer say-on-pay advisory votes may not be problematic for issuers with strong corporate governance and shareholder engagement. However, for other issuers, say-on-pay advisory votes provided shareholders with a powerful (albeit imprecise) means of communicating their displeasure to the Board of Directors.

As noted in the earlier post, the House passed the Financial CHOICE Act yesterday. While the headline-grabbing aspects of the Financial CHOICE Act relate to a repeal of the Volcker Rule and reducing the authority of the Consumer Financial Protection Bureau, there are some other interesting tidbits relating to public company disclosure, including two that would provide significant relief for smaller issuers. However, the Financial CHOICE Act is unlikely to be adopted by the Senate, which is expected to draft its own measure to modify the Dodd-Frank Act. Hopefully these provisions will be considered for the Senate's bill. Voluntary XBRL. Smaller issuers with total annual gross revenues of less than $250 million as well as emerging growth companies would be exempt from the requirement to use XBRL for their financial statements or other periodic reporting. They could, however, elect to use XBRL voluntarily. Expanded Exemption from Internal Control Attestation. Section 404(b) of Sarbanes-Oxley requires an issuer to file an attestation report from its independent registered public accounting firm on the issuer’s internal control over financial reporting. The current requirement only applies to accelerated filers or large accelerated filers. The Financial CHOICE Act amends and expands the exemption to include any issuer that has total market capitalization of less than $500 million and any issuer that qualifies for the new low-revenue issuer exemption. The low-revenue issuer exemption is a temporary exemption which applies to an issuer that: ceased to be an emerging growth company on the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement under the Securities Act of 1933; had average annual gross revenues of less than $50 million as of its most recently completed fiscal year; and is not a large accelerated filer. These amendments are a dramatic expansion of the exemption and would provide significant relief to smaller issuers. They also stand in stark contrast to the position taken by the SEC back in 2011, when the SEC examined the impact of 404(b) on smaller issuers with a market capitalization between $75 and $250 million. Back in 2011, the SEC recommended against expanding the existing exemption.

Companies frequently wrestle with perks in their proxy executive compensation disclosure. Whether an item constitutes a perk often requires judgment based on the facts and circumstances,¹ and disclosure may elicit intense, public scrutiny over what amounts to a relatively small percentage of an executive’s total compensation package.² From time to time, the SEC issues a cautionary tale that perks need to be accounted for and reported with care. The SEC recently announced that Miles Nadal, the former CEO of marketing company MDC Partners, has agreed to pay $5.5 million to settle charges that his perks were not properly disclosed to shareholders. While MDC Partners disclosed certain perks received by Mr. Nadal, including an annual allowance of $500,000, it failed to disclose payments for personal use of private airplanes, charitable donations in Mr. Nadal’s name, yacht and sports car expenses, cosmetic surgery, and a wide range of other perks totaling an additional $11.285 million from 2009 through 2014. The SEC order notes that MDC Partners, which agreed to a $1.5 million settlement of the matter earlier this year, understated Mr. Nadal’s perks by an average of almost 300% each year. While MDC Partners’ example is an egregious one, companies should verify that they have implemented internal controls that are capturing the full range of perks and potential perks, particularly where there is temptation to omit or mischaracterize these items, and that they have implemented disclosure controls that ensure the accurate reporting of these items. 1  In its adopting release for the “Executive Compensation and Related Person Disclosure,” Release Nos. 33-8732A, 34-54302A, File No. S7-03-06 (Aug. 29, 2006), the SEC established a two-step analysis for whether an item constitutes a perk: An item is not a perquisite if it is “integrally and directly related” to the performance of the executive’s duties, even if there is an element of personal benefit, so no disclosure would be required. If an item is not integrally and directly related to the performance of the executive’s duties, and it confers a direct or indirect benefit that has a personal aspect, then the item is a perquisite, unless it is generally available on a non-discriminatory basis to all employees. It does not matter whether the item may be provided for some business reason or for the convenience of the company. 2  Under Item 402(c)(2)(ix) of Regulation S-K, perquisites or other personal benefits paid to the named executive officers in the proxy statement must be disclosed in the summary compensation table, unless their total value is less than $10,000. Each perquisite or personal benefit must be identified by type, and each one that exceeds the greater of $25,000 or 10% of the total amount of perquisites and personal benefits must be quantified and disclosed in a footnote. Perquisites and other personal benefits are to be valued based on their aggregate incremental cost to the company.  

While passage in the House seems likely, the Financial Choice Act may undergo significant changes before it may pass in the Senate. Here is a summary of certain governance and executive compensation provisions that are included in the discussion draft: Prohibit Universal Proxy Ballots. Currently, companies are not required to use a universal proxy ballot in the event of a proxy contest, so shareholders receive one ballot listing candidates nominated by the board of directors and separate ballot(s) listing candidates nominated by the shareholder proponents. The Financial CHOICE Act would prohibit the SEC from requiring that companies use a universal proxy ballot. Modernize Shareholder Proposal Thresholds. The Financial CHOICE Act would increase share ownership thresholds for submitting shareholder proposals, from ownership of 1% of outstanding shares or $2,000 for one year, to 1% of outstanding shares for three years; increase resubmission thresholds; and prohibit proposals by a proxy other than the shareholders. Amend Frequency of Say-on-Pay Votes. Currently, under the Dodd-Frank Act, non-binding shareholder votes approving executive compensation must occur at least once every three years. The Financial CHOICE Act would amend the frequency to “each year in which there has been a material change to the compensation..." Require proxy advisory firms to register with the SEC and to provide companies with an opportunity to review and provide meaningful comment on draft recommendations. The registration application would include a certification that the firm has the financial and managerial resources to consistently provide proxy advice based on accurate information. The firm would be required to disclose the procedures and methodologies used in developing proxy voting recommendations, its organizational structure, whether or not it has a code of ethics, any potential or actual conflict of interest, and its policies and procedures to manage conflicts of interest. The registration would be updated as there are material changes, and at least on an annual basis. Repeal CEO Pay Ratio Disclosure. The Financial CHOICE Act would repeal the section of the Dodd-Frank Act which requires companies to disclose the ratio of pay between CEOs and the median employees. Acting SEC Chairman Michael S. Piwowar’s has requested an expedited review of unanticipated challenges to implementing the CEO pay ratio disclosure rule. Repeal Incentive-Based Compensation Disclosure by Covered Financial Institutions. The Financial CHOICE Act would repeal the Dodd-Frank provision which requires enhanced disclosure and reporting of incentive-based compensation by covered financial institutions. This Dodd-Frank Act provision targets excessive compensation and compensation that could lead to material financial loss. More broadly, President Trump has issued an executive order mandating that the Department of the Treasury review financial regulations, including the Dodd-Frank Act. Repeal Disclosure of Hedging Policies. The Financial CHOICE Act would repeal the Dodd-Frank requirement that companies disclose whether employees or directors may engage in hedging transactions in the company’s equity securities. Limit Clawbacks. Under the Dodd-Frank Act, companies that haven’t developed and implemented compensation clawback polices cannot be listed on national securities exchanges and associations. The Financial CHOICE Act would limit the scope of the clawback rule to current and former executives who had “control or authority over the financial reporting that resulted in the accounting restatement.” Pay vs. Performance Disclosure. The future of the pay versus performance provision is uncertain because it isn’t addressed by the Financial CHOICE Act or Hensarling’s memo. Section 953(a) of Dodd-Frank requires companies to disclose the relationship between executive compensation actually paid and the financial performance of the company.

Companies that permit the grant of early exercise incentive stock options (“ISOs”) do so primarily to limit the impact of the alternative minimum tax (“AMT”). However, due to fairly counterintuitive tax regulations, structuring options in this fashion can expose optionees to negative tax consequences in the event of a disqualifying disposition. Read more about the tax effects of early exercise ISOs and how the tax results compare to alternate structures in our recent eUpdate here: www.dorsey.com/newsresources/publications/client-alerts/2017/04/unexpected-risks-of-early-exercise-isos

On April 10, 2017, the SEC’s Division of Enforcement brought enforcement actions against 27 individuals and entities behind various alleged stock promotion schemes. These actions arose when public companies, through promoters or communications firms, hired newsletter writers to generate publicity for their securities without publicly disclosing that the writers were being paid. While it is not illegal to hire newsletter writers, Section 17(b) of the Securities Act of 1933 (Securities Act) requires that newsletter writers fully disclose both the amount and the nature of the compensation received, including the dollar amount of a cash payment, the number of shares issued, or any other compensation. Additionally, newsletter writers and persons who adopt, approve or authorize the content of a publication may be liable for untrue statements of material facts or omissions for misleading investors. The Internet provides a ready means for fraudulent promotion of securities though social media, newsletters, chat rooms, emails, online blogs, press releases, and other media. The SEC’s Division of Enforcement is focusing attention on companies using stock promotion schemes that lead investors to believe that they were reading independent, unbiased analyses in newsletters, social media, stock forums, or other media when writers are secretly compensated for promoting a company’s securities. The SEC can bring charges against companies and promoters for these types of violations under various provisions of the Securities Act and Securities Exchange Act of 1934 (Exchange Act), including: Securities Act Section 17(a)/ Exchange Act Section 10(b) and Rule 10b-5: For, directly or indirectly, using interstate commerce to offer or sale any securities by: - employing any device, scheme or artifice to defraud; or - obtaining money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or - engaging in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser. Section 17(b) of the Securities Act: For, directly or indirectly, using interstate commerce to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof. Exchange Act Section 20(b):  For aiding and abetting violations of Section 17(a) and Section 17(b) of the Securities Act and Section 10(b) and Rule 10b-5 of the Exchange Act. In addition, violations of securities laws may result in criminal prosecution. Allegations of securities law violations or association with firms that are charged with securities law violations may cause liability and embarrassment to a company and its officers, directors and employees. These violations may result in penalties, fines, imprisonment, or sanctions, including barring persons from serving as an officer or director of a public company or participating in certain securities offerings. Companies may be ultimately responsible for the investor relations work performed by investor relations, communication, social media, marketing, and other firms. Companies can take steps to avoid securities law violations by: Completing due diligence and selecting only reputable investor relations, communication, social media, marketing, and other firms to engage in investor relations activities. Limiting the use of paid newsletter writers and making sure that any compensation paid is properly disclosed. Adopting public communications policies that require authorization of company communications prior to dissemination. Carefully reviewing all materials for accuracy to ensure that the disclosure does not contain untrue statements of a material fact or omissions. Making sure that all content is consistent with the company’s public disclosures filed with regulatory agencies. Including forward looking statement and other disclaimers in all materials that are promotional in nature. Involving legal counsel, auditors and other professionals in the review of investor relations materials.

Beginning April 2017, companies with 250 or more employees in England, Wales and Scotland on April 5th should be aware of a requirement to begin publishing annually on their own website and on a government website the following four figures: Gender pay gap (mean and median averages) Gender bonus gap (mean and median averages) Proportion of men and women receiving bonuses Proportion of men and women in each quartile of the organization’s pay structure Please note that the term “employee” is very broadly defined for this reporting purpose.  For guidance on managing the calculation and reporting requirements, the Government Equalities Office and Acas prepared guidance available here: http://www.acas.org.uk/index.aspx?articleid=5768

On March 31, 2017, the Securities and Exchange Commission (SEC) issued final rules regarding inflation adjustments and other technical amendments under Title I and III of the Jumpstart Our Business Startups (JOBS) Act. Under the inflation adjustments, the SEC adjusted the gross revenue threshold for an issuer to lose its status as an Emerging Growth Company (EGC) from $1.0 billion to $1.07 billion, a $70 million dollar increase. Further, the SEC adjusted the Regulation Crowdfunding thresholds, increasing among other thresholds the maximum amount an issuer can raise under Regulation Crowdfunding from $1 million to $1.07 million. In relation to the various exemptions and scaled disclosure permitted to EGCs under the JOBS Act, the SEC also adopted technical amendments to certain rules and to certain forms, adding check boxes to the cover pages for companies to indicate if they are an EGC and whether they have elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the Exchange Act). Forms and rules amended include Forms C, S-1, S-3, S-4, S-8, S-11, F-1, F-3 and F-4 under the Securities Act of 1933; Rule 12b-2, Rule 14a-21 and Forms 10, 8-K, 10-Q, 10-K, 20-F and 40-F under the Exchange Act; Rule 2-02 and Rule 3-02 of Regulation S-X; Rule 100 and Rule 201 of Regulation Crowdfunding; and Items 301, 303, 308, 402 and 1101 of Regulation S-K to reflect these reporting accommodations. The new rules and changes in the forms will take effect upon publication in the Federal Register, which is currently scheduled to take place on April 12, 2017. Issuers should take note of these changes in the form cover pages in preparing their next periodic reports to the SEC.

The staff of the Securities and Exchange Commission (SEC) continues to encourage companies to provide useful disclosure to investors with regard to the new revenue recognition standard that will apply for reporting periods beginning after December 15, 2017. The new standard not only changes the method for measuring revenue and the timing of revenue recognition, but also requires expanded disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This will mean considerably more disclosures in the first quarter of 2018, or sooner for companies that choose to adopt early. Of more immediate concern, companies should be reviewing their Form 10-Q disclosures this quarter and for the balance of the year to make sure that they have addressed the SEC staff’s transitional disclosure requirements set forth in Staff Accounting Bulletin No. 74 regarding the expected impact of the new revenue recognition rules. If a company does not know, or cannot reasonably estimate, the expected financial statement impact of the new rules, that fact should be disclosed. In that case, however, as noted in a recent speech by the SEC’s Chief Accountant, Wesley Bricker, the SEC staff expects a qualitative description of the effect of the new accounting standard, and a comparison to the company’s current accounting, to aid investors in understanding the anticipated impact. Mr. Bricker said that companies “should also disclose the status of its implementation process and significant implementation matters yet to be addressed.” Based on a preliminary look at disclosures in SEC filings to date, Mr. Bricker reported that a number of companies have enhanced their transition disclosures, while for others “there is still more work to do.” Mr. Bricker also advised caution for companies that conclude in their transitional disclosures that the impact of the new revenue recognition standard is not expected to be material. Because the new standard includes comprehensive new disclosures about contracts with customers and related judgments made by companies, he warned that “the basis of any statement that the impact of the new standard is immaterial should reflect consideration of the full scope of the new standard, which covers recognition, measurement, presentation and disclosure for revenue transactions.”

We get asked from time-to-time whether it is advisable for issuers to pay fees to unregistered “finders” for introducing potential investors in the United States to the issuer in connection with securities offerings. The short answer is “no.” Most finders are engaged by issuers under finder’s, advisory, or other arrangements, which typically require payment of “success fees” upon completion of a financing transaction. While these arrangements are sometimes structured to try to hide or disguise the true intent of the arrangement, payment of transaction-based compensation is treated by U.S. securities regulators as a nearly-conclusive indication that a person is engaged in the securities business and should be registered as a broker-dealer. The relevant U.S. federal broker-dealer laws that should be of concern to an issuer using an unregistered finder include: Section 15(a)(1) of the Securities Exchange Act of 1934 (Exchange Act), which makes it unlawful for a person to “effect a transaction in securities” or “attempt to induce the purchase or sale of, any security” unless they are registered as a broker or dealer under the rules and regulations of the Financial Industry Regulatory Authority, Inc. (FINRA). FINRA is the regulatory organization designated by the Securities and Exchange Commission (SEC) to license and regulate broker-dealers. Section 29(b) of the Exchange Act, which provides that every contract made in violation of any provision of the broker-dealer registration requirements “shall be void” as to rights of persons who made or engaged in the performance of such contract. It results in the underlying purchase of securities becoming a voidable transaction that gives the investor a right of rescission, effectively granting a put right to the investor or purchaser. Section 20(e) of the Exchange Act, under which the SEC may impose aiding-and-abetting liability on any person that knowingly or recklessly provides substantial assistance in a violation of the Exchange Act. The theory behind broker-dealer registration is to provide a gatekeeper to protect investors in the marketplace. FINRA members are required to “observe high standards of commercial honor and just and equitable principles of trade” in the conduct of its business, including determining if an investment is "suitable" for its customer. Finders assisting in transactions rarely make such determinations and view themselves simply as middlemen in making introductions to potential investors. Because unregistered broker-dealers may not adhere to these high commercial standards, the SEC broadly construes the broker-dealer laws and narrowly construes the few permitted exceptions. Under SEC guidance derived from no-action letters, the SEC requires all intermediaries effecting transactions in securities to be licensed, subject to a few limited exceptions. Effecting a securities transaction may include, among other factors, receiving transaction-based compensation, recommending a company or the purchase of its securities, negotiating terms of a securities offering or purchase, attending meetings or presentations where the merits of the investment are discussed, performing or accommodating due diligence efforts, providing valuations or estimates of value, and other activities that facilitate a securities transaction. The consequences of engaging an unlicensed finder can be troublesome: Finder Risks:  Any unlicensed person engaging in activities designed to effect a transaction in securities may violate broker-dealer laws. The SEC or state securities regulators may seek to enjoin the unlawful activities or seek monetary penalties or criminal sanctions. Issuer Risks:  Retaining and permitting an unlicensed intermediary to effect a securities transaction may be a violation of federal and many state laws, and may subject the issuer to possible civil and criminal penalties. Any person that knowingly or recklessly provides substantial assistance in a violation of the Exchange Act may be subject to aiding-and-abetting liability. Rescission Risks:  A violation of broker-dealer laws creates a right of rescission under federal and/or state securities law. The SEC or state securities regulators may require the issuer to offer investors rescission rights, and the issuer may be required to return the investment. State Securities Violations:  Many states have begun reviewing state notice filings on Form D (which report transactions exempt from registration under Regulation D) and actively monitoring finder’s fees paid in connection with securities transactions. Some states have required issuers to provide additional information related to unlicensed broker-dealers and, in some cases, to certify that finder’s fees or commissions have only been paid in compliance with broker-dealer laws. Accounting Liability Risk:  Auditors may raise accounting issues resulting from paying finder’s fees to unregistered broker-dealers and may require an issuer to account for potential liability arising from rescission rights. Bad Actor Consequences:  An issuer or finder that is convicted of any felony or misdemeanor, is subject to any order, judgment, or decree of any court, or is subject to any order of certain regulators may be ineligible to participate in certain types of securities offerings, including Rule 506 of Regulation D offerings and Regulation A offerings. Using an unlicensed finder can result in broker-dealer law violations. Many times the issue arises in the context of state notice filings and direct inquiries from state securities regulators where finder’s fees or commissions are paid in connection with an offering. Other times, they arise from a failed investment where the investor may assert claims related to broker-dealer law violations to establish a right of rescission. Issuers should use caution in determining whether to engage a finder to assist in financing transactions.

On March 22, 2017, the Securities and Exchange Commission adopted an amendment to Rule 15c6-1(a) to shorten by one business day the standard settlement cycle for most broker-dealer securities transactions.  Currently, the standard settlement cycle for these transactions is three business days, known as T+3.  The amended rule shortens the settlement cycle to two business days, T+2. The amended rule will take effect on September 5, 2017. The SEC stated that the amended rule is “designed to enhance efficiency, reduce risk, and ensure a coordinated and expeditious transition by market participants to a shortened standard settlement cycle.” To assist in the preparation for the implementation of the new, shortened settlement cycle, the SEC has established an e-mail address – T2settlement@sec.gov – for the submission of inquiries to SEC staff.  Issuers will want to consider and be prepared for the impact of the shortened settlement cycle in relation to closing and settlement of public securities offerings.