Financial CHOICE Act (aka Dodd-Frank Alternative) 2.0: Kick-Off!

As reported last week on Rants to Riches, and further to our previous Society Alert report concerning the Financial CHOICE Act capital markets-related provisions of particular interest to Society members, a House Financial Services Committee hearing on the updated version of the bill (aka, Financial CHOICE Act 2.0) is being held today. 

Witnesses include:

• Mr. Peter J. Wallison, Senior Fellow and Arthur F. Burn Fellow, Financial Policy Studies, American Enterprise Institute
• Dr. Norbert J. Michel, Senior Research Fellow, Financial Regulations and Monetary Policy, The Heritage Foundation
• The Honorable Michael S. Barr, Professor of Law, University of Michigan Law School
• Mr. Alex J. Pollock, Distinguished Senior Fellow, The R Street Institute
• Dr. Lisa D. Cook, Associate Professor, Economics and International Relations, Michigan State University
• Ms. Hester Peirce, Director, Financial Markets Working Group and Senior Research Fellow, Mercatus Center, George Mason University (also former Obama SEC Commissioner nominee)
• Mr. John Allison, Former President and Chief Executive Officer, Cato Institute

A mark-up of the bill is reportedly slated for May 2nd. 

SEC Chair Nominee Clayton Considers Division Chief Candidates

The WSJ floated names of potential candidates reportedly being considered by SEC Chair nominee Jay Clayton to lead certain of the Commission's divisions, including Corporation Finance, Enforcement, and Trading and Markets. The candidate pool is said to include Simpson Thacher Partner William Hinman for Corp Fin; Sullivan & Cromwell Partner Steven Peikin, Wilmer Cutler Partner Matthew Martens, and the current Acting Director Stephanie Avakian for Enforcement; and Investment Technology Group Managing Director Jamie Selway for Trading and Markets.

The report notes that a Clayton spokesperson declined comment on hiring efforts, indicating that Clayton "'remains focused on the Senate confirmation.'" The candidate search is purportedly being overseen by Clayton's law school classmate Willkie Farr & Gallagher Partner Robert Stebbins. 

As previously reported, Clayton's nomination cleared the Senate Banking Committee earlier this month, and is soon expected to go to the Senate floor for a full Senate vote.

New Executive Order Will Revisit Corporate Inversion Rules

Among the rules reportedly targeted by President Trump's new Executive Order on "Identifying and Reducing Tax Regulatory Burdens," issued on Friday, are those concerning corporate inversions. The new EO requires the Treasury Secretary to review and identify - and recommend specific actions to mitigate the burden imposed by - all significant tax regulations issued on or after January 1, 2016, that: 

(i)    impose an undue financial burden on United States taxpayers;
(ii)   add undue complexity to the Federal tax laws; or
(iii)  exceed the statutory authority of the Internal Revenue Service.

The EO directs the Secretary to take appropriate steps to delay, suspend, modify or rescind (in accordance with applicable laws) the regulations identified by the review. Numerous media sources in addition to MarketWatch (see, e.g., The Hill, LA Times, WSJ) have identified the controversial 2016 corporate inversion rules as among those Secretary Mnuchin will review and consider for changes under the new EO.

DOJ Signals Status Quo on FCPA Enforcement

In a speech this week, and two separate speeches last week (here and here), DOJ Attorney General Jeff Sessions and Criminal Division Acting Principal Deputy Assistant Attorney General Trevor McFadden quashed unsubstantiated murmurings about potentially diminished FCPA enforcement associated with the change in administration - collectively emphasizing the DOJ's ongoing commitment to FCPA enforcement, albeit with perhaps a greater emphasis on incentivizing voluntary compliance with the laws. Both Sessions and McFadden reiterated the DOJ's emphasis on individual accountability for corporate misconduct and its consideration of voluntary self-disclosure, cooperation, and remedial efforts in charging decisions, with McFadden also noting the Department's efforts and expectations to significantly expedite corporate investigations.

AICPA Proposes New Standard for ERISA Plan Audits

Purportedly prompted by DOL criticisms of audit quality, last week, the AICPA issued an Exposure Draft of this proposed new standard: "Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA" for ERISA employee benefit plan audits, which would be effective for audits of financial statements for periods ending on or after December 15, 2018. Accounting Today notes that the proposed standard addresses the auditor's responsibilities in forming an opinion and reporting on the financial statements and the form and content of reporting - including instances of management-imposed audit scope limitations. Upon adoption, the new standard would be codified as AU-C Section 703 in AICPA Professional Standards.

According to a report issued in May 2015 by the DOL Employee Benefits Security Administration (EBSA), 39% of employee benefit plan audits reviewed by the EBSA for the 2011 filing year contained major deficiencies of one or more GAAS requirements that would lead to rejection of a Form 5500 filing (the form used to file an employee benefit plan's annual information return with the DOL).

Comments on the Exposure Draft are due August 21st.

Non-GAAP Financial Measures: SEC Comment Letter Update

Sullivan & Cromwell's "Non-GAAP Financial Measures" summarizes the results of its analysis of the nearly 300 non-GAAP-related comment letters SEC staff has released publicly through April 14, 2017, since Corp Fin's issuance of the new and updated C&DIs in May 2016. Top areas of staff focus - five of which were addressed in those C&DIs - are succinctly discussed, and are ranked in descending order of comment letter frequency, as noted here: 

• Failure to present GAAP measure with equal or greater prominence (C&DI 102.10)
• Inadequate explanation of usefulness of non-GAAP measure
• Misleading adjustments, such as exclusion of normal, recurring cash expenses (C&DI 100.01)
• Inadequate presentation of income tax effects of non-GAAP measure (C&DI 102.11)
• Individually tailored revenue recognition or measurement methods (C&DI 100.04)
• Misleading title or description of non-GAAP measure
• Use of per share liquidity measures (C&DI 102.05) 

Benchmarking Your Revenue Recognition Standard Adoption & Implementation

Deloitte's "Adopting the new revenue standard - Where do companies stand?" provides updated data on adoption and implementation of the new revenue recognition standard based on a November/December 2016 survey of more than 200 cross-industry corporates, with a majority of responses from the Tech, Life Sciences, Media, and Telecommunications industries.

Noteworthy insights include:  

• 46% expressed either that they were going to use, or had a preliminary leaning toward using, the modified retrospective transition method - compared to 21% planning to use or leaning toward the full retrospective transition method.
• Nearly 80% said they don't plan to early-adopt.
• 23% indicated that they expect the new standard to have a material impact on their financial statements; 24% said "maybe"; and 28% don't expect the new standard to have a material impact.
• Of the approximately 34% whose companies had established an implementation budget, 16% expected the costs to be material.
• 53% said they expect their company to hire additional resources to assist with implementation - either internal resources (3%), external (18%), or both (32%). 32% said "No, not yet," meaning that they may hire additional resources, but were not preparing to do so as of the survey date, and 15% said that hiring of additional resources won't be necessary.

Fortune 100: New Director Class Reveals Broadening Candidate Pool

As promised, EY's new report: "Independent directors: new class of 2016" reveals the results of its analysis of the attributes and roles of the directors newly elected in 2016 to Fortune 100 boards ("Fortune 100 class"), with comparisons in certain cases to the newly-elected Russell 3000 director group ("Russell 3000 class").

Noteworthy key findings include:

• 58% of the Fortune 100 added at least one director in 2016, compared to 43% of the Russell 3000.
• 39% of the Fortune 100 class are women, compared to 24% of Fortune 100 incumbents, and 26% of the Russell 3000 class.
• 49% of the Fortune 100 class have non-CEO backgrounds as corporate executives or have non-corporate backgrounds (e.g., scientists, academics and former government officials), and 10% worked at an institutional investor.
• 17% of the Fortune 100 class appear to be joining a public company board for the first time.
• 40% of the Fortune 100 class joined the Audit Committee during their first year on the board, following by Nom/Gov (34%), and Compensation (26%) - compared to 38%, 26%, and 26%, respectively, for the Russell 3000 class.

NAIC Corporate Governance Reporting: Overview & Compliance Tips

CPA Practice Advisor's "Are Your Clients Ready for a Corporate Governance Review?" provides a succinct overview of the Corporate Governance Annual Disclosure Model Act and companion Model Regulation adopted by the National Association of Insurance Commissioners in 2014 (subject to subsequent adoption by individual states), together with recommended action steps for insurers to ensure compliance with the new confidential reporting requirements. 

Among the sound recommendations, particularly for those organizations that are not otherwise subject to comparable regulatory requirements such as those imposed by the '34 Act, are to educate senior management and the board on corporate goverance best practices via, e.g., associations specializing in corporate governance. Society to the rescue! 

According to the NAIC, 14 states had adopted the Model Act, and six had adopted the Model Regulation, as of March 2017.

Business Roundtable: CEOs Tout Sustainability Commitment

The Business Roundtable's (BRT) just-released 10th annual sustainability report - "Create, Grow, Sustain: Delivering Shared Success" - features narratives from 155 member company CEOs on  their commitment to sustainability and, more specifically, how their companies have contributed to sustainable economic growth in the US and around the world. The report illustrates how the companies are pursuing innovative strategies to create jobs, grow the US economy, and sustain and enhance the quality of life via effective environmental and sustainable business practices. See also the BRT's release.

Financial Services Companies: Chief Internal Audit Reporting Structure

A recent Society Quick Survey of financial services company members revealed that the vast majority of companies adhere to best practices as relates to their chief internal auditor reporting structure - with over 96% of audit chiefs reporting functionally to the audit committee or the board of directors, and more than 90% reporting administratively to management. Of those reporting administratively to management, over 39% report to the CEO or President; nearly 37% report to the CFO, VP of Finance or similar; and nearly 24% report to other executives or legal counsel. 

Cyber Risk Ranks #1 in Board Focus

According to the recently-released 2016 Board Practices Report, a collaborative board practices benchmarking effort between the Society and Deloitte LLP's Center for Board Effectiveness, cyber is the number one risk respondents' boards are focused on. Watch for an upcoming Rants to Riches post detailing this iconic survey's cyber practices-related findings.

Board Cybersecurity Oversight Considerations

Among other noteworthy guidance, Protiviti's new "Board Oversight of Cyber Risk" recommends that these types of matters be reported to the board in furtherance of its cybersecurity oversight responsibilities:

• A clear articulation of the current cyber risks facing all aspects of the business (not just IT);
• A summary of recent cyber incidents, how they were handled, and lessons learned;
• Short- and long-term road maps outlining how the company will continue to evolve its cyber capabilities to address new and expanded threats, including the related accountabilities in place to ensure progress; and
• Meaningful metrics that provide supporting key performance and risk indicators of successful management of top-priority cyber risks that are being managed today.

According to the memo, examples of such metrics might include: security program assessment results reflecting current and target maturity; percent of third parties assessed; percent of high-risk business processes reviewed for segregation of duties conflicts; severe vulnerabilities identified and addressed (e.g., number of data leakages with costs to fix); number of high-risk incidents per month; average incident remediation time; status of remediation of identified high-risk audit and regulatory issues (e.g., number of issues closed, open and past established aging thresholds); and percent of employees passing phishing tests.

The memo also includes suggested questions for boards to help self-assess the adequacy of their cyber-risk oversight.

Cybersecurity Due Diligence Guidance: M&A Targets

Against the backdrop of a 2016 survey revealing the increased (and increasing) importance of M&A target cybsersecurity, Skadden's "The Emerging Need for Cybersecurity Diligence in M&A" identifies and discusses in a user-friendly manner a handful of key noteworthy cybersecurity due diligence considerations, including the target's compliance with relevant industry standards, its network security (and how to evaluate that), deal terms (e.g., reps & warranties, indemnities), and cyber insurance.

Cyber Risk Self-Assessment & Enhancement: Here's How

Deloitte's new "Assessing cyber risk: Critical questions for the board and the C-suite" is designed to help boards and C-suite management self-assess the company's state of cyber maturity taking into account three key dimensions: security, vigilance (i.e., comprehensive monitoring of the extensive threat landscape), and resiliency (i.e., ability to respond to and recover from attacks). Directors and management can determine where they stand on the maturity scale based on the absence or presence of a series of enumerated practices and attributes associated with each of 10 key questions, including leadership and organizational talent, alignment with industry standards and peer organizations, and protection against third-party cyber risks. The enumerated practices and attributes associated with each of the ten questions also serve as guidance for enhancing the company's cyber risk posture in the likely event that the results of the self-assessment call for improvements.

Responding to Anti-Virtual-Only Meeting Campaigns: Here's How

Further to our recent prior reports, a number of institutional investors and investor advocates have coalesced to campaign against virtual-only shareholder meetings, including the NYC Comptroller's Office (which we reported on here), the Interfaith Center on Corporate Responsibility (which we reported on here), Walden Asset Management (see below), CalSTRS (see sample letter here), and CII (see sample letter here).

For those companies on the receiving end of this expanding "me-too" investor campaign, see this thoughtful response from one of our members to an investor's letter of concern over the company's decision to hold a virtual-only meeting - methodically outlining the several factors the company considered in its decision-making process as to annual meeting format, which ultimately prompted its virtual-only format decision. While each company's facts and circumstances differ, this letter illustrates the typically well-considered nature of these decisions based on factors that likely are not apparent to or contemplated by  investors, many of whom tend to assume - without foundation - that virtual-only meetings are simply an avoidance tactic on the part of the board/management. In that regard, articulating the bases for the board's decision to hold a virtual-only meeting - whether via a  responsive letter (if warranted), or, at a minimum, a record of discussion in the meeting wherein that decision-making takes place - makes sense.

Walden Asset Management Targets ESG, Virtual-Only Meetings

In addition to its shareholder proposal campaign aimed at investment managers such as Vanguard and BlackRock (see "Investor Developments" below), Walden Asset Management's latest Research & Engagement Brief provides an overview of its other 2017 proxy season engagement and voting campaigns. Among its initiatives: virtual-only meetings, climate change risk mitigation, sustainability reporting, and EEO disclosure.   

Proxy Monitor Previews 2017 Shareholder Proposal Landscape

The Manhattan Institute's "Proxy Season Preview: Shareholder Activism en Marche" recaps 2016 shareholder proposal activity, including proponent and proposal types and voting results; provides data on the 79 shareholder proposals already voted upon or slated to come to a vote this season at the 72 Fortune 250 companies holding meetings by April 30th; and identifies upcoming meetings to watch based on shareholder proposals of interest. Notably, as of the 28 Fortune 250 meetings held as of March 31, none of the 34 shareholder proposals garnered majority (or even 40%) shareholder support, and the average support for SoP was just under 92% (compared to a 90% average for all of 2016).

Vanguard Clarifies Environmental & Social Proxy Voting Guidelines

As reported earlier this week on Rants to Riches - and seemingly prompted by a shareholder proposal from Walden Asset Management to Vanguard targeting the congruency of its proxy voting and statements about the impacts of climate change on long-term shareholder value - Vanguard recently updated its proxy voting guidelines on environmental and social issues. 

In this post, Society member Davis Polk counsel Ning Chiu discusses the updated guidelines, which reiterate board responsibility for risk oversight (inclusive of environmental and social issues) but - according to Vanguard Investment Stewardship Officer Glenn Booraem - aim to "better articulate" the types of environmental and social proposals it will consider supporting. Going forward, Vanguard will either vote 'for' or 'against' each of these types of proposals based on its updated guidelines rather than relying on abstentions, which - in most cases historically were, in effect, used to signify its view that oversight and associated judgments on these sorts of issues generally remained within the purview of the board.  

The updated guidelines provide:

V. Environmental and social proposals

Proposals in this category, initiated primarily by shareholders, typically request that a company enhance its disclosure or amend certain business practices. The funds will evaluate these resolutions in the context of our view that a company's board has ultimate responsibility for providing effective ongoing oversight of relevant sector- and company-specific risks, including those related to environmental and social matters. The funds will evaluate each proposal on its merits and may support those where we believe there is a logically demonstrable linkage between the specific proposal and long-term shareholder value of the company. 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. 

Booraem notes: '"In instances where the proposal doesn’t clear our hurdle for support, we will still engage directly with the company if we believe the broader topic has the potential for impact on long-term value.”' 

As previously reported in the Society Alert and Directors' Cut ("Leading Asset Managers Prefer Engagement First on ESG") sourced from this Bloomberg brief, Vanguard, BlackRock and other leading asset managers have continued to express a preference for engagement first with their portfolio companies to effect change on ESG issues like climate risk, rather than simply voting contrary to the board's recommendations on shareholder proposals - notwithstanding voting pressures imposed by certain other smaller investors.

Investors Say Risk Mitigation is Key Driver in ESG Strategy

State Street Global Advisors' recent global (15% US) survey of 475 institutional investors comprised of private and public pension funds, endowments, foundations, and official institutions, revealed a continuing uptick in investors' integration of ESG factors in their investment approach, subject to certain perceived impediments that may temper further integration, such as inadequate portfolio, manager and other relevant performance benchmarking tools. 

Among the key findings: Although 80% of survey respondents have ESG exposure in their portfolios, overall ESG exposure remains low - with approximately one-third, on average, of investor portfolios incorporating ESG factors. In the US specifically, 27% of respondent investors incorporate ESG factors in at least half of their investments. Respondents overall cited client demand, risk mitigation, and the belief that ESG factors play a key role in broader financial performance as among the top drivers of their interest in ESG.

A Great Line-Up of Keynote Speakers at 2017 National Conference

Check out this list of diverse and interesting speakers scheduled to speak at this year's National Conference: Preet Bharara, high profile prosecutor; Dambisa Moyo, corporate director and global economist; Michael Piwowar, SEC Commissioner; Bryan Stevenson, human rights activist; and John Thornton, Executive Chair, Barrick Gold. 

For the detailed conference agenda, including our ethics workshops, investor forum, plenary sessions and robust variety of breakout sessions geared toward your company type or skills development, click here.

Inside the Huddle

This week's highlighted question from the Huddle is:

It would be helpful to learn whether other companies have a regular communication cadence regarding type/frequency of communication during the timeframe in between Board meetings.  

This question generated a lot of activity and many excellent answers (too many to note here) including:

Here's a list of what we do and I hope that it is helpful:

• Analysts’ reports from our IR department
• A quarterly CEO newsletter that highlights current financial, operational, business, and other developments since the most recent board meeting
• An e-mail about a week before each regular meeting asking directors if there are any specific topics or questions that they would like the CEO to address at the meeting (this is a good way to have a thoughtful response ready at the meeting) 
• A mid-year letter to directors confirming their attendance records to date and telling them how many board and committee meetings they must attend in the second half of the year to keep their attendance at 75% or better 
• Media articles of particular interest to the directors on corporate governance, our industry’s business environment, or legislative or regulatory developments
• An on-line survey sent to the directors right after the strategic planning meeting asking their opinion about how effective the meeting was and how it could be improved for next year. There is a presentation to the board the following January explaining how the survey results will be taken into account in planning for that year’s strategic planning meeting 
• A total compensation statement for directors, similar to the one provided to employees

Check out the Society Huddle.

• Mining Giants Race to Fill Board Leadership Gaps, Reuters, April 26, 2017
• Wells Fargo Board Gets Black Eye in Shareholder Vote, Reuters, April 25, 2017
• Citigroup Holders Back Executive Pay Plan, WSJ, April 25, 2017
• Arconic CEO leaves Door Open to Permanent Role As Proxy Fight Continues, WSJ, April 25, 2017
• U.S. Supreme Court May Limit Where Companies Can be Sued, Reuters, April 25, 2017
• Past Presidents Required More than 100 Days to Bag Big Legislative Wins, Forbes, April 25, 2017
• A Plan to Give Community Banks Relief from Dodd-Frank, WSJ, April 23, 2017
• Trump Eyeing Second Supreme Court Seat, The Hill, April 23, 2017
• SEC Should Write Fiduciary Rule, Acting Chairman Says, WSJ, April 23, 2017
• United Says CEO Won't Take Chairmanship, Plans Changes to Executive Compensation, WSJ, April 21, 2017
• Trump Puts Two Dodd-Frank Powers on Hold in Symbolic Move, WSJ, April 21, 2017
• Piwowar Says Its Time for SEC to "Reassert Its Role" on Investment Advice Standards, Investment News, April 21, 2017
• Corporate Inversion Rules Under Trump Microscope in Move to Lighten Tax Burden, MarketWatch, April 21, 2017
• Kleinfeld's Departure From Arconic Shows Investors Like Everyone to Play Nice, WSJ, April 20, 2017
• Munchin Promises "Significant Changes" in Regulatory Review, WSJ, April 20, 2017
• Trump Plans to Issue Three Executive Actions on Taxes, Regulation, WSJ, April 20, 2017
• Activist Investor Seeks to Replace CEO, Director at Taubman Centers, WSJ, April 19, 2017
• Bank Regulator Rips Its Own Supervision of Wells Fargo Sales Practices, WSJ, April 19, 2017
• Brussels Starts to Freeze Britain Out of EU Contracts, Financial Times, April 19, 2017
• SEC Investor Advisory Committee Airs Concerns Over Multi-Tiered Offerings Following Snap's IPO, National Review, April 19, 2017
• Another Supreme Court Vacancy Likely This Summer, The Hill, April 19, 2017
• Gibson Dunn Disqualification Over Privileged Email Could Be Headache for California Lawyers, Reuters, April 19, 2017

See other recently posted Articles of Interest.