Posts Tagged ‘Regulation’

Easing the small-cap regulatory burden

June 29, 2018

Companies at the low end of the market cap spectrum often view compliance with Securities and Exchange Commission regulations as a Sisyphean burden, with costly, recurring, quarterly and yearly work. While designed to protect investors, the level of detail demanded can be daunting. Adding to the practical burden of finding and reaching investors in a competitive capital market, small-cap managements can struggle with the weight of legal and accounting fees built into corporate overhead.

This week, the SEC provided some relief for nearly 1,000 businesses. As reported by The Wall Street Journal, the new rule classifies a company with less than $250 million in publicly traded shares as a “smaller reporting company,” with less detailed reporting requirements, especially on executive compensation. That enlarges the category from the previous threshold of $75 million. The SEC also added companies with less than $100 million in annual revenue and a public float of less than $700 million.

The new rule also allows smaller reporting companies (SRCs) to report two years of audited financial statements rather than three. Read the SEC’s announcement on the changes here or the full 100-plus page final rule here.

SEC Chairman Jay Clayton was quoted in the agency’s release:

I want our public capital markets to be a place where smaller companies can thrive … Expanding the smaller reporting company definition recognizes that a one size regulatory structure for public companies does not fit all.  These amendments to the existing SRC compliance structure bring that structure more in line with the size and scope of smaller companies while maintaining our long-standing approach to investor protection in our public capital markets.  Both smaller companies — where the option to join our public markets will be more attractive — and Main Street investors — who will have more investment options — should benefit.

In my mind, the main beneficiaries will be emerging businesses like biotech and IT companies, starting up the market-cap scale – plus small, regional businesses that seem to stay in the $100-200 million range. In both cases, the costs and time involved in reporting have discouraged going public or remaining public. Simplifying seems like a good thing.

No doubt there are critics. And regulatory philosophies are cyclical – the next time there’s a bear market, we’ll hear cries of “Never again!” along with tightening up on rules that are being relaxed now. For now, it’s a positive for our small-cap friends.

© 2018 Johnson Strategic Communications Inc.

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Washington revs up enforcement

September 12, 2013

Wall Street’s Top Cop: SEC Tries to Rebuild Its Reputation,” an interesting piece on page 1 of The Wall Street Journal today, traces the enforcement actions of the Securities and Exchange Commission since the financial crisis reached meltdown five years ago.

SEC logoThe agency is still smarting from suggestions that too little was done to punish Wall Street fat cats for the supposed malfeasance behind the financial crisis, the article says. Actually the SEC brought civil charges against 138 companies and individuals related to the crisis, and garnered $2.7 billion in fines, forfeited gains and other penalties, the Journal says, enumerating them in a timeline graphic.

But the gummy bear image persists in Washington, the story says, so leaders at the SEC feel they’ve got something to prove. For example …

In April, former federal prosecutor Mary Jo White started work as SEC chairman with a simple enforcement motto:

“You have to be tough.”

As crisis-era cases run their course, the SEC will redeploy resources to new enforcement actions, the paper reports.

© 2013 Johnson Strategic Communications Inc.

Crisis rules

July 16, 2013

When a company gets into a crisis – a real crisis with the mob at the gates wanting to tear the place down – management can call a lawyer. Or a politician. Or a PR person. Lanny Davis, a Washington lawyer who served in Bill Clinton’s White House when the Prez got caught with his pants down, is a player in all three realms. He’s a guy people call when it all hits the fan.

Now Davis has a book, Crisis Tales (Threshold Editions, 2013), laying out five rules for how to survive a crisis. War stories from many crises in business and government illustrate these rules. Says Davis:

My work in crisis management has taught me a series of rules and one overall guiding principle. The guiding principle: Tell it all, tell it early, tell it yourself.

The core idea of the book is to take control of a story – a narrative, as the pundits say – by becoming the person who tells the story. This is a valuable lesson for companies and CEOs whose business blows up, literally or figuratively, in the harsh light of media or public attention. And it’s a good guideline for us as investor relations professionals.

A top-line look at Davis’ five rules of crisis management:

  1. Get all the facts out.
  2. Put the facts into simple messages.
  3. Get ahead of the story.
  4. Fight for the truth using law, media and politics.
  5. Never represent yourself in a crisis.

This is a crisis communications guide worth perusing. I’m uncomfortable in the swampland we call politics, even cynical about anyone whose address ends in “DC.” But Davis’ examples of damaged reputations – and the process of damage control – are instructive.

In a public company, it’s well worth considering the strategy for handling a crisis before something blows up. What’s your crisis plan?

© 2013 Johnson Strategic Communications Inc.

Inside information & avoiding illegal trading

July 3, 2013

Pillory woodcut2In medieval times, morality plays taught people through dramatic performance the difference between good and evil. A related phenomenon was the public punishment of malefactors by locking them in “the stocks.” The prisoner was immobilized in a wooden device, usually in the town marketplace, making his or her crime very public and subjecting the individual to ridicule and abuse as an example to all.

Today, we pillory people through online news and social media.

I thought of the stocks – the medieval kind – as I read how former KPMG senior partner Scott London pleaded guilty to providing inside information obtained through his auditing job for use in illegal trades. Fourteen times, Mr. London gave confidential info on KMPG clients like Herbalife and Skechers to a “friend” to make trades that ostensibly would rescue the man from a financial pinch. The friend, by the way, raked in $1.3 million and gave Mr. London a Rolex, some jewelry and about $50,000 in cash.

“I didn’t do it for money,” London said in a hallway outside [the] courtroom. “I did it to help out someone whose business was struggling. It was a bad, bad mistake.”

It’s not a mistake that will generate much sympathy – especially from professionals entrusted daily with nonpublic information. Now the 50-year-old Mr. London is held captive in the public square, recoiling from scorn and a possible prison term, wondering at what he has lost:

“It was probably the worst day of my life,” London said moments after entering the guilty plea. “Imagine what you do, you do it for 30 years, you go to school for it, and in a matter of weeks it’s all gone. It’s my fault.”

Yes, it was his fault: 14 illegal transactions amounted to 14 betrayals of trust. Each leak of earnings or M&A news corrupted the market.

I don’t share share this to throw more rotten vegetables at the guy in the stocks – but to say that investor relations people have a role to play in protecting ourselves and those around us. Illegal trading didn’t begin or end with Scott London. The SEC makes 50 to 60 cases a year nailing people for misuse of inside information as traders or tipsters. IR people are not immune to this conduct that brings scandal.

Trading on inside information can be a professional, organized crime involving stock-market sharks, such as the Galleon hedge fund guys. But it can also be a temptation for fairly ordinary people: a secretary, an accountant, a doctor helping in a clinical trial … and, yes, an IRO.

My feeling is that people in IR should not trade in our own stocks, or those of other companies about which we have nonpublic information. The NIRI Code of Ethics includes a pledge to “Not use confidential information acquired in the course of my work for my personal advantage nor for the advantage of related parties.” That seems to allow investing in one’s company or client as long as you’re not using confidential information. But for my personal investing, I’d rather not worry about when I know something or don’t. Apart from receiving (and holding) my employer’s stock as compensation when I was on the corporate side, my position is simply not to trade in companies I work with. Maybe that’s extreme, but I prefer to avoid being pilloried.

Also, investor relations professionals should seek clear policies to prevent trading on nonpublic information by everyone in our organizations – and periodic reminders to keep people well-warned.

What’s your take on IR people trading, and on cautioning co-workers?

© 2013 Johnson Strategic Communications Inc.

The phone call no IRO wants

June 8, 2013

As a non-lawyer, I always pay heed when an attorney for a client speaks. Certainly when a letter from a law firm or government agency arrives (though most are friendly). And when the phone rings and a caller says he or she works for the SEC or FINRA, well …

In 20-plus years of IR work, I’ve never personally heard from a regulator. But a piece in the June/July issue of NIRI’s IRupdate, “What to Do When You Get ‘The Call’,” caught my eye. And it’s worth noting.

The advice of the lawyers NIRI cites comes down to this:

… if you are the one to get the call, it’s not hard to know what to do: Basically, it’s say little and listen a lot …

Be polite but reserved. Neither hostile nor chatty. Don’t volunteer details or opinions. Your goal at this stage is to gather information to give your general counsel or securities lawyer – who can then manage the process. Ask the caller what the focus of the inquiry is, if it relates to a specific event, time  or person. Then head for your company lawyer’s office.

This seems like good advice to me. Any reactions?

© 2013 Johnson Strategic Communications Inc.

All I wanna know is, how much?

December 20, 2011

Private companies contemplating an IPO – and small caps debating whether it’s worth it to stay public – sometimes tally up the costs of complying with Sarbanes-Oxley, filing SEC reports, releasing earnings and so on.

Now Ernst & Young has gathered data from 26 companies that did IPOs in the past two years to come up with an answer. As reported in “The True Cost of Going Public” in CFO magazine’s December 2011 issue:

Operating as a public company adds about $2.5 million, on average, to a company’s cost structure, with $1.5 million of that devoted to higher compensation for CEOs, CFOs, and others in the finance function, such as investor-relations professionals, according to the survey. That figure also covers increased board costs, as more than 80% of companies had either added new members to their boards or increased director compensation prior to their IPO.

The accounting firm said companies spent an average of $13 million on advisers to help with the IPO – plus $1 million a year in various other fees for advisers. Where does all this advice come from?

Most companies retained at least 11 third-party advisers in connection with the IPO, the survey found, including, universally, investment bankers, attorneys, and auditors. About 70% of companies hired an investor-relations firm, while 40% hired a road-show consultant.

The benefits of being public vary – among them access to capital, liquidity for founders or venture capitalists, reduced cost of capital, currency for acquisitions, higher visibility and stock-based compensation. All figure in the reasons companies cite for going public and staying that way. Ultimately, each firm and its own shareholders must decide whether the benefits do outweigh the costs.

What do you think: Is being public worth it?

© 2011 Johnson Strategic Communications Inc.

Still too big to fail

June 23, 2011

Tom Hoenig, president of the Federal Reserve Bank of Kansas City and a skeptic on loose monetary policy and the state of the world’s biggest banks, is convinced the United States still hasn’t heeded the lessons of the last financial crisis.

During an otherwise happy gathering in our hometown, the “CFO of the Year” awards event organized by the Kansas City Business Journal, Hoenig climbed on his soapbox to warn of the prospect of another crisis in the future. The trouble is, he said, the same too-big-to-fail banks that starred in the 2008 meltdown and the recent HBO dramatization of Andrew Ross Sorkin’s book Too Big to Fail are still, well, too big to fail – even moreso.

The financial reform law enacted in 2010 to guard against the next crisis doesn’t solve the issue of systemic risk, Hoenig said. And the world’s central banks continue to be “held hostage” by issues raised in 2008, he said. Exhibit A is the way everyone is worrying that debt problems of one smallish country could reverberate through big banks worldwide – roiling capital markets and threatening a new crisis.

“Dodd-Frank does three things, and it leaves one thing undone – and that is the most significant thing,” Hoenig said. What the financial reform law does:

  • Enhances supervision. “We’ve enhanced supervision after every crisis,” and it hasn’t prevented the next cycle of financial collapses, Hoenig noted.
  • Raises capital standards. But commercial banks used to hold capital around 15% of assets, and now some bankers feel 8% is too onerous a requirement, he said.
  • Mandates a new resolution process. But the next time a giant bank teeters on the brink, the bailout impulse will be as strong as ever, Hoenig said.

What Dodd-Frank leaves undone is addressing “too big to fail,” Hoenig said. The U.S. banking system is more concentrated than ever, and that fact haunts the financial markets, he said.

Hoenig offered a “TBTF” history lesson: In 1913, when the Federal Reserve was created, the five largest U.S. financial institutions managed assets totaling 2½% of the country’s GDP. In the Great Depression, the government created a safety net for banks – FDIC insurance and the like – and barred bank holding companies from speculative activities through the Glass-Steagall Act of 1933.

And it worked, Hoenig said. Banks lent money and cushioned their balance sheets against downturns. Investment banks, kept separate from the safety net, took on leverage and invested in riskier assets for greater returns. The economy grew. Markets did well. While the banks expanded, by 1980 the five biggest still held assets equal to only 14% of GDP. One failure wouldn’t have crashed the system.

That changed after the 1999 repeal of Glass-Steagall freed banks to enter other financial services, growing bigger and bigger – and taking on more and more risk. Despite the turmoil of 2007 to 2010, Hoenig said, the banks kept getting bigger.

“Even today, after the crisis, the five largest financial institutions control 20% more assets than before the crisis,” Hoenig said. With the mergers caused by the financial crisis, concentration in U.S. banking has grown to around 60% of GDP.

As one who has lived through weekend “too big to fail” negotiating sessions, Hoenig said, when another giant teeters on the brink the story will be the same. Given the threat that a huge bank failure could lead to collapse in the real economy, he said, “on Sunday evening, before the Asian markets open, you will in fact bail it out.”

Before that next crisis arrives, Hoenig suggested, big U.S. banks should be broken into more manageable pieces – especially, separating commercial banking with its publicly provided safety net from those riskier investment activities in the capital markets. Hoenig laid out more specifics in a speech last month in Philadelphia.

I agree. Let’s dismantle too-big-to-fail before it fails us, again.

© 2011 Johnson Strategic Communications Inc.

Gridlock? Not the end of the world

November 2, 2010

Of the talking heads on the airwaves and op-ed pages, George Will is one of my favorites – for his insights and the way he offers opinions calmly, without shouting. I appreciate two things Will said on Sunday about the US midterm elections.

Regarding GOP gains in Congress possibly causing gridlock in Washington, which many pundits greatly fear, the conservative Will said on ABC’s “This Week”:

Gridlock is not an American problem – it’s an American achievement. The framers of our Constitution didn’t want an efficient government, they wanted a safe government. To which end, they filled it with slowing and blocking mechanisms: three branches of government, two houses of the legislative branch, a veto, veto override, supermajorities, judicial review. … When we have gridlock, the system is working. [Video here, Will about 5:30]

Asked about calls for more civility in politics, Will likewise gave a contrarian view:

Nothing wrong with that, until you begin to equate civility with the absence of partisanship, as though there’s something wrong with partisanship. We have two parties for a reason. We have different political sensibilities. People tend to cluster – we call them parties. And we have arguments – and that’s called politics. [Video here, Will at about 3:00]

For business issues like taxes and regulation, the new climate in Washington could be contentious. Partisan. Even polarized. The next two years could seem awful to those who wanted the Obama administration’s agenda to fly through. Some analysts like those in this AP story also worry about gridlock hurting the economy.

I think I’m with Will on this one. After all, businesses do not usually get more robust when the government is in activist mode. A unified Capitol Hill can mean businesses have to send more money to Washington, or must try to figure out more 2,000-page laws. So gridlock may be OK, if we can tune out the shouting.

That’s my two cents’ worth. What’s your opinion?

© 2010 Johnson Strategic Communications Inc.

Not on the agenda

November 2, 2010

At a breakfast meeting this morning of a few colleagues in the NIRI Kansas City chapter, topics ranged widely over investor relations how-tos, idiosyncracies of sell side relationships, and so on. One subject that didn’t come up:

The Election.

Maybe it tells you something. Either we’re all so sick of political ads, or politics itself – or we just want to focus on things we can control. Happy Election Day.

Funny thing about …

October 1, 2010

October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.

– Mark Twain, American humorist, 1894

At a NIRI meeting last night in Kansas City, I commiserated with a friend over dinner about the state of the economy. It’s like a patient drifting in and out of consciousness in the recovery room – we don’t know whether the surgery was a success until the patient wakes up, smiles and moves a bit. Meanwhile, the job market is lousy. Consumers are cautious. The Fed frets. Companies worry. Waves of regulation and additional costs are looming. And the Nov. 2 election? Bah.

This morning brought a new month and fresh outlook. Hey, let’s have some fun in October – look beyond the macro anxieties – and do some good in investor relations this fall. And the market will do what it will do.

© 2010 Johnson Strategic Communications Inc.