This Week's Alert Sponsored by

Trump Reportedly Selects Successor SEC Chair Candidate

As reported earlier today on Rants to Riches, Bloomberg  and other sources (see, e.g., here and here) report that President-elect Trump will nominate Sullivan & Cromwell partner Jay Clayton to succeed SEC Chair White, who previously announced her departure as of January 20th in connection with the change in administration (reported on here). See also these articles from MarketWatch, the WSJ and Reuters

DOL Issues New Proxy Voting & Shareholder Engagement Guidance

Last week, the DOL issued updated guidance effective immediately for ERISA employee benefit plan fiduciaries on: (i) proxy voting, (ii) maintenance of and adherence to proxy voting guidelines that may include coverage of, e.g., ESG-related factors, and (iii) shareholder engagement with their publicly-traded portfolio companies. Notably, the guidance - which withdraws Interpretive Bulletin (IB) 2008-2 and replaces it with IB 2016-1, which reinstates and tweaks earlier guidance IB 94-2 - aims to reinforce and clarify ERISA standards concerning the exercise of shareholder rights and responsibilities, including:

• Voting proxies as part of the process of managing the plan’s investment in company stock unless the plan fiduciary determines that the associated time and costs relating to certain types of proposals or issuers may not be in the plan’s best interest
• Investment manager authority and responsibilities where the authority has been delegated
• Due consideration as a component of a broader investment management or proxy voting policy of economically targeted investments, incorporation of ESG factors or integration of ESG-related tools, metrics and analyses to evaluate investment risk/return or to choose among equivalent investments
• Engaging in activities intended to "monitor or influence" company management (e.g., in-person engagement, written correspondence, proxy voting) where the fiduciary concludes that there is a reasonable expectation (e.g., long-term investments) that such activities - by the plan alone or together with other shareholders - are likely to enhance the value of the plan’s investment in the company after consideration of the costs involved

Examples cited of shareholder engagement-appropriate issues are a broad array of governance structures and practices including board composition, executive compensation, corporate decision-making transparency and accountability, responsiveness to shareholders, the company's M&A policy, debt financing/capitalization, long-term business plans including climate change preparedness and sustainability, governance and compliance policies and practices, workforce practices (e.g., investment in training to develop the company's work force, diversity, equal employment opportunity), policies and practices to address environmental or social factors that have an impact on shareholder value, and other financial and non-financial measures of corporate performance.

See the DOL's release, this Bloomberg article, these posts from Jim Hamilton's World of Securities Regulation and the Forum for Sustainable and Responsible Investment, and numerous additional resources on our ESG and Institutional Investors topical pages.

SEC Charges Law Firm Hackers for Insider Trading

Last week, the SEC announced charges against three Chinese nationals for unlawful trading on inside M&A-related information obtained through hacking into the networks of two "prominent" (unidentified) NY-based law firms. The traders reportedly used information contained in stolen emails to purchase stock in at least three public companies in advance of their public merger announcements - yielding about $3 million in illegal profits. The US Attorney's Office for the Southern District of New York filed parallel criminal charges. See these articles from The New York Times, the WSJ: here, here and here, and Compliance Week.

Appeals Court Declares SEC ALJs Unconstitutional

Last week, in a noteworthy departure from the US Court of Appeals for the DC Circuit (Raymond J. Lucia Cos. v. SEC), the US Court of Appeals for the 10th Circuit decided in Bandimere v. US that the SEC's administrative law judges are "inferior officers" for purposes of the Constitution's Article II Section 2 Appointments Clause requiring appointment by the head of the Commission - rather then mere employees, who may be (and in fact are) hired by the SEC's Office of Administrative Law Judges. As such, the SEC's ALJ appointments were found unconstitutional. This Greenberg Traurig memo does a nice job of explaining the majority's basis for the inferior officer vs. employee distinction in reliance on Freytag v. Commissioner, and the potential implications of this decision - including Supreme Court review.

We have previously reported (see, e.g., here, here, here, here and here) on concerns expressed about the constitutionality and overall fairness of the SEC's ALJ proceedings vs. the federal courts, and similar divisiveness on this issue in the lower courts. See also these articles from The New York Times, WSJ, InvestmentNews, and Pensions&Investments.  

SEC Investor Advocate Reports on Policy Developments

Consistent with SEC Investor Advocate Rick Fleming's speech in November before the North American Securities Administrators Association concerning the SEC's Disclosure Effectiveness initiative (reported on here), the Office of the Investor Advocate's (OIA) recently posted Congressionally-mandated annual Report on Activities for fiscal 2016 identifies the OIA's intent to (among other things) conduct investor outreach as a means to elicit views from - and inform its advocacy on behalf of - retail investors in particular, whose views the OIA believes are generally under-represented in the typical rulemaking comment process. The report also covers the OIA's involvement in discrete corporate governance and financial reporting/auditing developments including proxy access, universal proxy, NYSE and Nasdaq standard-setting, the auditor's reporting model, scaled disclosure, and FASB's materiality proposals.

See also our earlier report on the OIA's mid-year report on its 2017 objectives.

PCAOB Board Member Hanson Resigns

The PCAOB announced on December 23rd that Board member Jay Hanson - who was appointed to the Board in January 2011 and reappointed for a second term ending October 2018 - resigned from the Board. As previously reported, in November, Hanson articulated a noteworthy dissent to the PCAOB's proposed 2017 budget, which was ultimately approved by the SEC in December on a 2-1 vote (Piwowar dissenting). The typically five members of the Board - including the Chair - are appointed to staggered five-year terms by the SEC after consultation with the Chair of the Board of Governors of the Federal Reserve and the Secretary of the Treasury. See also these articles from Accounting Today and Compliance Week.

NY Financial Regulator Issues Revised Cyber Requirements Effective March 1

As reported last week in Rants to Riches, on December 28th, the New York State Department of Financial Services released revised proposed Cybersecurity Requirements For Financial Services Companies effective March 1st subject to a 30-day notice and public comment period. As noted in this Ballard Spahr memo, covered entities (banks, insurance companies and other financial services institutions regulated by the NYDFS) have 180 days from the effective date to comply with the requirements, with these specific exceptions:

• One year: Chief Information Security Officer (CISO) reporting to the board (500.04(b)), penetration testing and vulnerability assessments (500.05), risk assessments (500.09), multi-factor authentication (500.12), and cybersecurity awareness training (500.14(a)(2)).
• 18 months: Audit trails (500.06), application security (500.08), data retention (500.13), policies and procedures to monitor the activity of authorized users (500.14(a)(1)), and encryption (500.15).
• Two years: Third party service provider security policy (500.11).

Among the noteworthy changes highlighted in the memo is that the CISO (Section 500.04) - who may be employed by the covered entity, one of its Affiliates or a Third Party Service Provider (all defined terms and, if the latter two, subject to additional enumerated requirements) - is no longer required to have that specific title or be an individual who is exclusively dedicated to CISO activity. In addition, a materiality qualifier was added to the Cybersecurity Event reporting provision (Section 500.17) - which is now also subject to a standalone confidentiality provision (Section 500.18); however, the 72-hour reporting time-frame was retained.

As previously reported, various aspects of the initial proposal launched in mid-September (reported on here) were met with significant opposition by numerous regulated banking and insurance industry organizations.

See also the NYDFS release and its assessment of the over 150 comment letters, these posts from BakerHostetler and Hunton & Williams, these memos from Skadden, Debevoise & Plimpton, and Sutherland, and these articles from American Banker, the WSJ, Reuters, and the Corporate Counsel.

Director Compensation for Mid-Market Companies

BDO's recently-released "2016 Survey of Board Compensation Practices of 600 Mid-Market Public Companies" reveals these director compensation practices and trends for three size categories of middle market public companies across industries (including Financial Services (FS) companies) based on proxies filed between March 2015 and March 2016: 

- Smallest: $100 –$500 million in revenues/$100 million - $1.25 billion in assets (FS)

• Average compensation of $120,336 was effectively flat from 2014 consisting of $51,218 in Board Retainers & Fees (up 7% from 2014); $6,760 in Committee Retainers & Fees (down 1% from 2014); $53,955 in Full Value Stock Awards (down 2% from 2014); and $8,403 in Stock Options (down 20% from 2014)

- Medium: $500 million –$1.25 billion in revenues/ $1.25 billion - $2.5 billion in assets (FS)

• Average compensation of $158,275 was up 2% from 2014 consisting of $61,795 in Board Retainers & Fees (up 1% from 2014); $8,569 in Committee Retainers & Fees (up 3% from 2014); $77,419 in Full Value Stock Awards (up 6% from 2014); and $10,491 in Stock Options (down 12% from 2014)

- Largest: $1.25 billion – $3 billion in revenues/ $2.5 billion - $6 billion in assets (FS)

• Average compensation of $184,770 was down 3% from 2014 consisting of $74,048 in Board Retainers & Fees (up 3% from 2014); $9,157 in Committee Retainers & Fees (up 2% from 2014); $92,125 in Full Value Stock Awards (down 5% from 2014); and $9,440 in Stock Options (down 23% from 2014)

The report also details pay mix and compensation components by industry. See BDO's release, and numerous additional benchmarking and other resources on our Director Compensation topical page.

M&A: Board Considerations

In the context of a May 2016 study of 2,500 M&A transactions concluding that more than 60% destroy shareholder value, PwC's new memo: "Considering an acquisition? What boards need to do before, during, and after the deal" identifies big picture considerations for boards during all stages of management-proposed acquisitions to improve the chances for deal success.

In addition to ensuring they understand the drivers of the deals and their consistency with the company's strategy, boards are advised to establish a framework for deal consideration and review, understand all of the potential risks, and query and monitor the integration strategy - inclusive of potential changes to board composition post-acquisition. See also the firm's "Exploring an IPO: the 9 ½ questions boards should ask," Deloitte's "M&A Trends" year-end report, and additional resources on our M&A topical page.

Shareholder Activism: Don't Just Settle

On the heels of well-founded concerns about more frequent and faster settlements with activists that often encompass seats on the target company board, this recent post from the Shareholder Activism Response Team at Vinson & Elkins: "Think Twice Before Settling With An Activist" discusses a number of reasons why boards should think twice before settling with activists, including: (i) increasingly vocalized institutional investor concerns about activists' short-term views and objectives, (ii) activist directors' inherent conflicts of interests arising from their duties to both the target company as well as their nominating fund and its investors, and (iii) the failure of settlements to provide a long-term solution and preclude future proxy contests (with the same activist). 

The post advises boards to approach activism resolution "down the middle," i.e., in lieu of the extremes of either a settlement or a proxy contest, identifying common ground that can serve as the basis for the company's implementation of one or more of the activist's sound suggestions or - alternatively - exploring other "creative tactics" short of a settlement. 

Aspen Institute Suggests Long-Termism Tactics

Aligning public policy and corporate governance protocols to facilitate companies' and investors' focus on long-term investment is among the three broad goals espoused by the Aspen Institute's nonpartisan American Prosperity Project in its recent policy statement to drive a national conversation and action on sustained long-term investment to promote America's economic health. The recently released policy statement: "A Nonpartisan Framework for Long-Term Investment" reveals three concrete suggestions aimed at making it easier for public companies to act long term:

• Discourage short-term earnings guidance and encourage more transparency on drivers of long-term corporate value by requiring companies that offer guidance to do so within the context of their long-term strategy.
• Consider the most appropriate interval between shareholder votes on executive pay. The SEC requires a “say on pay” vote at least every 3 years; companies that establish a 3-year cycle enable investors to evaluate executive performance over a longer time-frame.
• Incentivize patient capital through enhanced shareholder voting rights and/or dividends that vest over time.

The policy statement - which also advocates government investment in infrastructure and R&D and modernization of the corporate tax system - was signed onto by thirty diverse signatories including, e.g., Leo Strine, Jr., Janet Hill, and representatives of the AFL-CIO, the Brookings Institution, big-name law firms such as Gibson Dunn and Sidley Austin, Harvard Business School, McKinsey, the Kellogg School of Management, and major companies like General Dynamics and Unilever. See also this article from The Atlantic: "How to Stop Short-Term Thinking at America's Companies, and this WSJ article: "CEOs should focus on the long term, a study says" and the underlying research.

Business Roundtable Announces Successor President & CEO

The Business Roundtable announced international economic policy advisory firm Rock Creek Global Advisors Managing Director Joshua Bolten as its new President & CEO - succeeding former Michigan Governor John Engler, who announced his intention to retire from the organization this past December. As previously reported, JPMorgan Chase Chair & CEO Jamie Dimon was named Chair of the organization for a 2-year term beginning January 1st, succeeding Caterpillar Chair & CEO Doug Oberhelman, who retired December 31, 2016.

Enhanced Audit Committee Disclosure Benchmarking

Deloitte’s latest review of S&P 100 (as of August 1, 2016) proxy statements filed as of October 1, 2016, reveals slow and steady progress in enhanced voluntary audit committee disclosures. The firm's newly-released report: "Trends in audit committee reporting" reveals modest changes (+/-3%) in disclosures year-over-year other than in these three areas, which revealed increases of over 10% in 2016:

• Number of audit committee financial experts on the committee
• Audit committee’s role in reviewing earnings or annual report press releases with management and the independent auditor
• Audit committee’s role in approving audit engagement fees

Also particularly noteworthy: Virtually all companies disclosed the audit committee's role in risk oversight, with 61% disclosing that the audit committee's role extends beyond traditional areas such as financial reporting, internal controls, and compliance - subject to varying degrees of responsibility. About 25% of these companies reported audit committee oversight of the company's ERM program, and 14% of the total sample (S&P 100) tagged the audit committee with cybersecurity risk oversight. 

See Deloitte's suggested types of enhanced disclosures on page 5 and the table on page 6 of the report summarizing the results, its 2015 report, and numerous additional resources on our Audit Committees and Disclosure Reform topical pages.

Carpenters Fund Again Seeks Enhanced Auditor Independence Disclosures

A member's recent inquiry triggers a reminder that the United Brotherhood of Carpenters' Pension Fund reportedly announced in the latter part of 2016 (as we reported on here) its plans to continue its now 5-year (and counting) campaign to elicit from targeted companies specific enhanced auditor independence-related proxy statement disclosures. 

The historically-requested independence representations include the following:

• The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of the independent external audit firm retained to audit the Company’s financial statements. 
• The year in which the Audit Firm was first retained  
• The Audit Committee is responsible for the audit fee negotiations associated with the Audit Firm.
• The Audit Committee periodically considers whether there should be a regular rotation of the independent external audit firm.
• The Audit Committee and its chairperson are directly involved in the selection of Audit Firm’s new lead engagement partner at time of mandated rotation. 
• The members of the Board and its Audit Committee believe that the continued retention of the Audit Firm to serve as the Company’s independent external auditor is in the best interests of the Company and its investors.

According to CII, Director of UBC Corporate Affairs Ed Durkin said that the fund would be sending letters to about 75 companies beginning approximately November 2016 for the 2017 proxy season.

ISS Posts Equity Plan Scorecard Primer & TSR Medians

ISS recently posted its stand-alone US Summary Proxy Voting Guidelines for meetings on or after February 1, 2017; this primer: "Setting the Bar for Equity-Based Compensation," which reportedly provides the basics surrounding ISS Research’s Equity Plan Scorecard methodology that will affect meetings on or after February 1st; and the most recent (as of 9/30/16) US quarterly industry-specific TSR medians for performance-related policies. ISS incorporates company performance relative to industry medians into its evaluation of shareholder proposals seeking an independent chair and director performance.

Proxy Access Adopted by Over 50% of S&P 500

Sidley Austin's just-released robust proxy access report updates its equally robust September and June 2016 reports (which we reported on here and here, respectively), inclusive of: (i) GAMCO Asset Management's recent failed proxy access attempt at National Fuel, (ii) the spate of late 2016 "fix-it" shareholder proposals seeking amendments to existing proxy access bylaws, (iii) major institutional investor and proxy advisor positions on proxy access, (iv) SEC Staff no-action request dispositions, (v) an appendix that highlights - on a company-by-company basis - various terms of proxy access provisions adopted by 342 companies in 2015 - 2016 to date, including terms adopted by 79 additional companies since the September report, and much more.

As has been the case historically, the memo includes a helpful table summarizing the factors that have increased or decreased shareholder support for proxy access proposals based on voting results to date, as well as practical guidance for companies considering whether and when to adopt proxy access on a stand-alone basis or in response to a shareholder proposal.

Access numerous additional resources on our Proxy Access topical page.

Triennial SoF Adopters Averaged Over 73% Shareholder Support in 2011

CII's new "Say-on-Pay Frequency: A Fresh Look" includes: (i) an analysis of 2011 say-on-frequency (SoF) recommendations, investor preferences/support, and ultimate frequency adoptions based on Equilar data for 818 Russell 1000 companies; (ii) data regarding correlations between the adopted frequency and SoP support between 2011 and the present for the same Equilar company sample group; and (iii) investor arguments in support of annual and triennial votes. Although institutional investor voting policies for 2017 are still pending, the report notes that CII anticipates a slight increase in support for an annual frequency in 2017 based on its current information.  

Vanguard, Aberdeen & Others Join SASB's Investor Advisory Group

SASB announced the addition of ten founding members - including representatives of Aberdeen Asset Management, Capital Group, PGGM, PIMCO, UBS and Vanguard - to its now 24-member Investor Advisory Group reportedly committed to improving the quality and comparability of sustainability-related disclosure to investors. The asset owner and asset manager-composed group already included representatives from BlackRock, CalPERS, CalSTRS, Calvert Investments, SSGA and others - all of whom sign onto this statement: 

IAG Members:

• Encourage companies to disclose material and decision-useful ESG information to investors
• Believe standards would improve the quality and comparability of sustainability-related information
• Believe SASB’s approach—which is industry-specific and materiality-focused—will help provide investors with relevant and decision-useful information
• Agree to participate in SASB’s ongoing standards development process, so that outcomes best reflect investor needs
• Agree to encourage companies to participate in SASB’s ongoing standards development process, so that outcomes reflect both issuer and investor viewpoints
• Believe that SASB standards can inform integration of sustainability factors into investment and/or stewardship processes, such as corporate engagement and proxy voting

Access additional resources on our ESG and Institutional Investors topical pages.

Our organization has long-standing board directors (no term limits) and experiences very low turnover in director appointments. With that said, it is likely that two directors will be replaced this year. Interest has been expressed in providing the outgoing directors with a gift as a token of appreciation for their years of services and dedication. I am interested if anyone has a practice of presenting a service recognition in honor of the outgoing director and/or presenting him/her with a gift and what that may be. 

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

One practice is to honor directors at a dinner sometime soon after their last board meeting and to give them a framed board resolution honoring their service. I always had the resolution printed by a calligrapher, had the board members actually sign the resolution, then had it framed nicely. The gift was always appreciated. The resolution verbiage is posted under Samples/Templates on the Society's Board Succession/Refreshment topical page.  Occasionally, in addition to the resolutions, we'd also get a nice desk clock from Tiffany's. 

Check out the Society Huddle.

• Schumer Takes Hard Line on Supreme Court Pick, Politico, January 3, 2017
• How Your Company Can Meaningfully Improve Diversity in 2017, FastCompany, January 3, 2017
• Disclosure, Incentives, Activists Top Governance Agenda for 2017, Bloomberg, January 3, 2017
• Wall Street Lawyer Jay Clayton Emerges as Top Candidate for SEC Chairman, WSJ, January 3, 2017
• GOP Lawmaker Brings Back Bill to Quash Last-Minute Obama Regs, The Hill, January 3, 2017
• Tech Companies Vying for Female Board Members, Honolulu Star-Advertiser, January 2, 2017
• How Trump's Regulation Skeptic Helps Wall Street Navigate the Rules, WSJ, December 31, 2016
• SEC Offers Guidance on DOL Fiduciary Rule Compliance, PlanAdviser, December 30, 2016
• U.S. Regulators Lighten Reporting Load for Small Banks, Reuters, December 30, 2016
• Study: Executives Act in Company Interest When Challenging Resolutions, Bloomberg, December 30, 2016
• Obama Administration Makes Closing Argument Before Trump Deregulatory Tide, WSJ, December 28, 2016
• SEC's Use of In-House Courts Unconstitutional, Appeals Court Rules, WSJ, December 28, 2016
• David Boies on Halliburton's End: Remembering a Daughter and a Disaster that Wasn't, Reuters, December 27, 2016
• Where the Boardroom is Still a Female-Free Zone, WSJ, December 27, 2016
• Here's What a Big Jump in Share Buybacks Says About the Stock Rally, WSJ, December 26, 2016
• Minority Shareholders Wise Up in 2016, WSJ, December 26, 2016
• Trump's Financial Deregulation Might be Bad News for Banks After All, WSJ, December 26, 2016
• GOP Push to Ax Key Agency Poses Risk, Bloomberg, December 23, 2016
• Icahn Regulatory Role Gives Activist Investors Strong Washington Voice, Reuters, December 23, 2016
• Carl Icahn is a Good Investor: But He Has no Business Being Donald Trump's Regulatory Scourge, Slate, December 22, 2016
• Senator Looks to Expand Protections for Whistle-Blowers, NYT, December 22, 2016
• Jamie Dimon on Trump, Taxes and a U.S. Renaissance, Bloomberg, December 22, 2016
• U.K. Needs a Deal to Ease into its Post-EU Future, WSJ, December 22, 2016
• Former Official at New York State Pension Fund, Two Brokers Charged in Bribery Case, WSJ, December 22, 2016
• Biggest Financial Merger of 2017: SEC and CFTC, Reuters, December 21, 2016
• Trump Names Billionaire Investor Carl ICahn as Adviser on Regulatory Overhaul, WSJ, December 21, 2016

See other recently posted Articles of Interest.