SEC Provides Guidance on Tweeting

On April 21, 2014, the Division of Corporate Finance of the Securities and Exchange Commission issued two new Compliance and Disclosure Interpretations (CDI) dealing with social media.  The first CDI deals with how to affix required legends to tweets and other social media communications.  The second CDI addresses retweeting or otherwise resending social media communications.

The securities laws require certain communications by public companies to include legends.  The mere length of these legends prohibited the use of social media like Twitter, because its 140 character limit would be exceeded.  Now, the SEC has approved the use of Twitter or similar social media by permitting a hyperlink to the required legend instead of including the legend itself.  However, the CDI permits the use of Twitter or similar social media only if the following conditions are met:

  • the electronic communication is distributed through a platform that has technological limitations on the number of characters or amount of text that may be included in the communication;
  • including the required statements in their entirety, together with the other information, would cause the communication to exceed the limit on the number of characters or amount of text; and 
  • the communication contains an active hyperlink to the required statements and prominently conveys, through introductory language or otherwise, that important or required information is provided through the hyperlink.

The dilemma lies in the last condition – what will be sufficient to “prominently convey” that important or required information is provided through the hyperlink.  Will it be sufficient to state something like “The information in this hyperlink is important” (which is already 40 characters), or something similar?  Also left unresolved is whether a company using a series of tweets can include a hyperlink to the legend or other disclaimer only in the first tweet, rather than repeating it in all of the subsequent tweets.  We are aware that this technique has been used, but the SEC has not yet sanctioned it.

Despite the SEC guidance, that does not mean it is a good idea to use Twitter or other social media for securities law disclosures.  After all, the anti-fraud rules still apply and it is difficult to provide disclosure that complies with the securities laws on Twitter in 140 characters, or as little as 100 characters if the hyperlink example above is used. 

Of course, once an issuer tweets something it is inevitable that it will be retweeted, and that could violate state securities or other laws.  The retweeter could modify the text or delete the link to the required legend.  The SEC's guidance states that an issuer is not responsible for such retransmissions.  Specifically, the guidance provides:

“If the third party is neither an offering participant nor acting on behalf of the issuer or an offering participant and the issuer has no involvement in the third party’s re-transmission beyond having initially prepared and distributed the communication in compliance with either Rule 134 or Rule 433, the re-transmission would not be attributable to the issuer.  As explained in Securities Act Release No. 33-8591 (July 19, 2005), “[W]hether information prepared and distributed by third parties that are not offering participants is attributable to an issuer or other offering participant depends on whether the issuer or other offering participant has involved itself in the preparation of the information or explicitly or implicitly endorsed or approved the information.”

The staff at the SEC has stated that they will be monitoring the use of social media in this context.  They also indicated that if a social media platform allows for enough characters to include the legend, then the full legend must be included.  That is, you can't game the guidance by maxing out the character limits so as to exclude the legend.  

Thus, tweeting is allowed, but tweeter beware.


NYSE Proposes Relaxation of Independence Test For Directors Of Spin-Off Companies

Prompted by a request for interpretive guidance, on April 1, 2014, the NYSE proposed to relax its bright line director independence tests in certain limited circumstances, so that “a director may be deemed independent of a company that has been the subject of a spin-off transaction regardless of the fact that such director or his employer had a relationship with the former parent of such spun-off company.”  The new interpretation is reflected in a rule filing that the NYSE has submitted to the SEC for approval.

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ISS Issues FAQs on Director Qualification/Compensation Bylaws

Yesterday, ISS issued FAQs explaining its views on director qualification/compensation bylaws.  These types of bylaws disqualify from serving as directors persons who receive third-party compensation, typically from activist investors, for their service as directors.  Such bylaws have been adopted since last spring by some companies to prevent arrangements similar to those proposed by activist shareholders running minority slates of directors for the boards of Hess Corp. and Agrium, Inc. in early 2013.  See here.

In November 2013, ISS recommended that shareholders of Provident Financial Holding withhold their votes from three director candidates coming up for re-election who were serving on the company’s nominating and governance committee, because the Provident board had adopted a director qualification/compensation bylaw.  See here.  At the company’s annual meeting on November 26, 2013, the three candidates were re-elected by low margins, receiving withhold votes ranging from 33.4% to 34.1%.  See here and Provident Financial’s November 27, 2013 Form 8-K.

According to the FAQs, ISS continues to view director qualification/compensation bylaws negatively, in particular if they have not been put to a shareholder vote.  A board-adopted director qualification/compensation bylaw “may be considered a material failure of governance” and ISS “may, in such circumstances, recommend a vote against or withhold from director nominees for material failures of governance, stewardship, risk oversight, or fiduciary responsibilities.”  If such a bylaw is put to a shareholder vote, “ISS will apply a case-by-case analytical framework, taking into consideration among other factors the board’s rationale for proposing the bylaw, whether the proposed bylaw materially impairs . . . shareholder rights, and any market-specific practices or views on the underlying issue.”


SEC Report on Regulation S-K Disclosure

Just in time for the holidays!  On December 20, 2013, the staff of the Securities and Exchange Commission (the “SEC”) released its Report on Review of Disclosure Requirements in Regulation S-K, as mandated by Section 108 of the Jumpstart Our Business Startups Act (the “JOBS Act”).  Section 108 required the SEC to issue its report within 180 days of its enactment on April 5, 2012, but all of the other rulemaking requirements imposed on the SEC made that timetable difficult to meet. 

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Corp Fin Guidance Begins to Address Early Questions under New General Solicitation Rules

On November 13, 2013, the Division of Corporate Finance at the Securities and Exchange Commission (SEC) updated its "Securities Act Rules Compliance and Disclosure Interpretations" (or CDIs) to provide 11 new interpretations relating to new Rule 506(c) and revised Rule 144A.  The staff  is providing guidance on the new general solicitation rules and how they relate to private placements.  There are two new CDIs in Section 138 and nine new CDIs in Section 260 of the Securities Act Rules CDIs. 

Some interesting observations about the new interps. 

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SEC Proposes Pay Ratio Disclosure

On September 18, 2013, the Securities and Exchange Commission proposed a new rule that would require public companies to disclose the ratio of the pay gap between its chief executive officer and the median compensation of their employees.  The proposed rule, which is required under the Dodd-Frank Act, was approved by the SEC commissioners 3-2 along partisan lines. 

The proposal does not prescribe a specific methodology for companies to follow in calculating the pay ratio.  Companies would have flexibility to determine the median annual compensation of its employees.  However, companies would be required to disclose the methodology that they use, as well as any material assumptions, adjustments or estimates used to calculate the employee’s median or the CEO’s total compensation.  Companies would be required to disclose the information in registration statements, proxy and information statements, and annual reports pursuant to Item 402 of Regulation S-K. 

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Recent Federal Court Decisions Revitalize the Government's Civil Enforcement Power Under FIRREA

Our partner Marvin G. Pickholz recently co-authored Recent Federal Court Decisions Revitalize the Government's Civil Enforcement Power Under FIRREA, which appeared in the July/August issue of the Financial Fraud Law Report.

Marvin comments in the article that in its latest wave of civil actions, the Department of Justice has resurrected an old weapon to wield in a new way: the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). Consistent with Congress’s tendency to pass ill-defined legislation and then leave it to the courts to later flush out and shape the law, FIRREA was passed in a sweeping flurry of legislation aimed at addressing a pressing issue, and then lay dormant for many years. Similar to the Foreign Corrupt Practices Act and the Racketeer Influenced and Corrupt Organizations Act, over two decades after its creation, FIRREA has now resurfaced in federal cases involving financial fraud and is likely to create more disincentives for a company or individual to litigate against the government.  Click here to read the rest of the article.

While the article discusses FIRREA, the concepts therein potentially apply to cases brought by the SEC or DOJ in securities litigation.


SEC Ends Losing Streak; Conflict Minerals Rule Upheld

The SEC scored a victory in the U.S. Court of Appeals for the District of Columbia Circuit in a case filed in October 2012 by the U.S. Chamber of Commerce, the Business Roundtable, and the National Association of Manufacturers.   The plaintiffs challenged the SEC’s rule on disclosure of the use of conflict minerals on grounds that aspects of the rule were arbitrary and capricious under the Administrative Procedure Act and claiming that the disclosures required by the SEC and by Congress run afoul of the First Amendment.  In a 63-page decision in favor of the SEC, the Court found no problems with the SEC’s rulemaking and disagreed that the “conflict minerals” disclosure scheme transgressed the First Amendment. 

Our client alert discussing the adoption of the conflict minerals rule is available here.  Issuers subject to the conflict minerals rule first became required to comply with the rule for the calendar year that began January 1, 2013 and must file their first reports on new Form SD by May 31, 2014.  The calendar-year reporting requirement applies to all issuers no matter what their fiscal year may be.

For companies that were on the sidelines either hoping the case would lead to a delay or a de minimis reporting exception, a proactive approach to meet the fast approaching May 2014 reporting deadline is now advisable.  That group is sizeable as The Wall Street Journal this week reported that two-thirds of respondents to a new survey say their companies are in the early stages or have not yet started compiling information needed to meet the SEC’s requirements for conflict minerals reporting.   A copy of the article is available here. 


Fifth Circuit to Dodd-Frank Whistleblowers: Call the SEC First

The U.S. Court of Appeals for the Fifth Circuit’s decision last week in Asadi v. G.E. Energy (USA) has been hailed as a triumph for employers because it requires whistleblowers who bring retaliation claims under the Dodd–Frank Wall Street Reform and Consumer Protection Act to show that they suffered retaliation because they reported potential violations to the U.S. Securities and Exchange Commission.  The Fifth Circuit rejected the position adopted by the SEC in its regulations implementing Dodd-Frank and by the few district courts that have addressed the issue.  That rejected approach interprets Section 922 of Dodd-Frank to apply its enhanced protections to certain whistleblowers even if they had not reported their concerns to the SEC.  Although this decision narrows the category of employees who can seek the enhanced protections of Dodd-Frank, it will likely increase the number of whistleblowers who report their concerns to the SEC.

Our firm’s client alert regarding the case can be found here.


July 1, 2013 – D-Day for Compensation Committee Approval of Independent Legal Counsel

In theory, a company could be delisted from a national stock exchange as a result of a chance meeting anywhere and a casual conversation, if a compensation committee member receives any legal advice from independent company counsel.  Beginning on July 1, 2013, the listing standards of national securities exchanges and national securities associations mandated by Section 952 of the Dodd-Frank Act become effective.  Under these standards, compensation committees of issuers listed on national securities exchanges will be required to consider specified independence factors prior to the committee’s retention of or obtaining advice from a compensation consultant, outside legal counsel or other advisor.  If the compensation committee, or a committee member, chooses (or just happens) to discuss legal matters with the issuer’s current outside legal counsel, the exchange’s listing standards require the committee to have gone through the process of considering that firm’s independence prior to obtaining advice from such counsel; and neither the federal securities laws nor the exchanges’ listing standards afford a curative provision. 

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SEC Says Social Media Can Pass Muster for Regulation FD Disclosures

Yesterday, the Securities and Exchange Commission issued a release and report of investigation announcing that issuers can use social media outlets, such as Facebook and Twitter, to disclose material information in compliance with Regulation FD, so long as investors have been alerted in advance about which social media will be used by the issuer to disseminate such information. 

In issuing the Release and Report, the SEC clarified its position regarding its investigation of whether Netflix, Inc. and its CEO, Reed Hastings, violated Regulation FD and Section 13(a) of the Exchange Act when Hastings used his personal Facebook page to announce that Netflix had streamed 1 billion hours of content in June 2012 – information that Netflix had not previously disclosed to the public.  Neither Hastings nor Netflix had previously used Hastings’s personal Facebook page to announce company metrics, and Netflix had not previously informed shareholders that Hastings’ personal Facebook page would be used to disclose information about Netflix.  The post was not accompanied by a press release, a post on Netflix’s own web site or Facebook page, or a Form 8-K.  However, as noted in our prior blog post regarding the Wells notices issued to Hastings and Netflix, Hastings did have more than 200,000 Facebook subscribers, and many news outlets quickly reported on the Hastings’ Facebook post. 

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Nasdaq Proposes Internal Audit Function Requirement For Listed Companies

The NASDAQ Stock Market LLC (Nasdaq) recently proposed a rule change to require listed companies to establish and maintain an internal audit function.  Of course, many listed companies already have an internal audit function as a matter of best practice.  NYSE listed companies have been required to maintain an internal audit function since 2004.

The purpose of the internal audit function is to ensure that management and the audit committee receive information about their company’s risk management processes and internal control system.  Companies would be permitted to outsource the internal audit function to a third party service provider other than their independent auditor.  The audit committee would have sole, non-delegable responsibility to assist the board in overseeing the internal audit function.    

If the rule change is approved by the SEC, companies listed on Nasdaq on or prior to June 30, 2013, would be required to have an internal audit function no later than December 31, 2013.  Companies listing on Nasdaq after June 30, 2013, would be required to have an internal audit function prior to listing.


Apple – Einhorn Dispute Shines Spotlight on SEC’s Unbundling Rules

Although the dispute between hedge fund manager David Einhorn and Apple, Inc. is about Apple’s capital allocation strategy, it has brought attention to the SEC rules on “unbundling” of proxy statement proposals.  On Friday, the U.S. District Court for the Southern District of New York enjoined Apple from holding a shareholder vote at its February 27 annual meeting on a proposal (Proposal No. 2) to amend its articles of incorporation to “[(i)] eliminate certain language relating to the term of office of directors in order to facilitate the adoption of majority voting for the election of directors; [(ii)] eliminate ‘blank check’ preferred stock; [(iii)] establish a par value for the Company’s common stock of $0.00001 per share; and [(iv)] make other conforming changes . . ., including eliminating provisions in the Articles relating to preferred stock of the Company.”

The SEC adopted the unbundling rules in 1992 (SEC Release No. 34-31326 (Oct. 16, 1992)).  Exchange Act Rule 14a-4(a)(3) requires that “[t]he form of proxy . . . [s]hall identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters.”  Exchange Act Rule 14a-4(b)(1) requires that the proxy card provides shareholders with “an opportunity to specify by boxes a choice between approval or disapproval of, or abstention with respect to each separate matter referred to therein as intended to be acted upon.”  In 1999, the U.S. Court of Appeals for the Second Circuit held that an implied private right of action exists under Rules 14a-4(a)(3) and 14a-4(b)(1) (Koppel v. 4987 Corp., 167 F.3d 125, 134-138 (2d Cir. 1999)).

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Compliance Reminder: Smaller Reporting Companies Subject to Say-On-Pay Vote Requirements For 2013 Proxy Season

When preparing their proxy statements for the 2013 proxy season, smaller reporting companies should keep in mind that the temporary exemption from the say-on-pay vote requirements that applied to them during the last two proxy seasons is no longer available going forward.  For shareholder meetings occurring on or after January 21, 2013, smaller reporting companies will be required to conduct non-binding say-on-pay and say-on-frequency votes in accordance with Rule 14a-21(a) and (b) under the Securities Exchange Act of 1934. 

The non-binding say-on-pay vote is required at least once every three calendar years and covers only named executive officer compensation as disclosed pursuant to Item 402(m) through (q) of Regulation S-K.  The Instruction to Rule 14a-21(a) includes a non-exclusive example of a say-on-pay resolution that would satisfy the requirements.

At least once every six years, a non-binding say-on-frequency vote is required as to whether the say-on-pay vote should be held every one, two or three years.  The form of proxy must include four boxes, giving shareholders the ability to choose among one, two or three years for the say-on-frequency vote or to abstain.  Other alternatives are not permitted. 

A company has to disclose in an amendment to the Form 8-K disclosing the voting results of the last shareholder meeting its decision as to how frequently it will hold the say-on-pay votes.  The Form 8-K amendment must be filed no later than 150 days after the end of the shareholder meeting at which the say-on-frequency vote occurred, but not later than 60 days before the Rule 14a-8 deadline for submitting shareholder proposals as disclosed in the company’s most recent proxy statement.


SEC Approves Listing Standards Relating to Compensation Committees

On January 11, 2013, the SEC approved listing standards proposed by the NYSE and the NASDAQ Stock Market (Nasdaq) implementing the requirements of Rule 10C-1 under the Securities Exchange Act of 1934 relating to compensation committee member independence and compensation committee advisers.  Our client alerts on the NYSE’s and Nasdaq’s initial proposals can be found here and here, and our blog entries on amendments to the proposals can be found here and here.

Effective as of July 1, 2013, listed company compensation committees must have (i) authority to retain compensation consultants, legal counsel and other advisers, (ii) responsibility to appoint and oversee the work of such advisers, (iii) authority to fund such advisers and (iv) responsibility to consider certain independence factors before selecting such advisers.  Both NYSE and Nasdaq-listed companies will be required to comply with the new listing standards on compensation committee member independence by the earlier of (a) the listed company’s first annual meeting after January 15, 2014 or (b) October 31, 2014.  The same latter compliance dates apply to the new Nasdaq listing standard that will now require listed companies to have a standing compensation committee that is comprised of at least two independent directors and has a written charter.

The SEC orders approving the new listing standards include guidance on how frequently a compensation committee should conduct the required independence assessment with respect to compensation consultants, legal counsel and other advisers.  The SEC states that it “anticipates that compensation committees will conduct such an independence assessment at least annually.”


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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.