Posts Tagged ‘SEC’

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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What’s material? It depends …

November 3, 2015

Materiality is one of those fuzzy ideas. Is it a piece of information that makes your stock price move (or would if disclosed)? A change that impacts sales or profit by 10% … or 5 … or 1? One of those events requiring an 8-K filing? Is anything investors want to know material?

Early in my career in investor relations, I learned that accountants can be surprisingly philosophical – arguing vehemently when gathered around a table for late-night discussion of a draft. The same is true of lawyers. And I suppose IROs can disagree on such issues, too.

The Wall Street Journal offered up a couple of explorations this week:

In “Definition of Materiality Depends Who You Ask” on Nov. 3, the quicker read, a WSJ blogger quotes five different definitions of materiality – such as they are – and notes that they are in flux.

In “Firms, Regulators Try to Sort Out What’s Worth Disclosing to Investors” on Nov. 2, the paper focuses on potential shifts in regulatory views – and pushback from companies against overlegislation.

This debate is perennial, and probably unresolvable. But a refreshing aspect is the new interest in whether companies are disclosing too much detail that has nothing to do with investors making decisions – and by its sheer volume may obscure what the real issues are.

Honeywell International Inc., the paper notes, is pursuing on a “disclosure simplification” project to enhance the quality of reporting. In October, Honeywell and its CPAs met with the SEC staff – and the agency filed a short Honeywell slide deck outlining key themes:

  • Eliminate duplicative and immaterial disclosures
  • Customize disclosures to Honeywell
  • Streamline footnotes to address information overload
  • Assess the relevance of recurring disclosures
  • Challenge boilerplate language typically included in company filings
  • Use of cross references

Hmmm … novel ideas. Reducing repetition, making footnotes digestible, taking a red pen to boilerplate and questioning verbiage that’s been in the 10-K so long no one can remember why. This will be interesting.

And what do you think “material” means?

© 2015 Johnson Strategic Communications Inc.

Disclosure committees and IR

November 24, 2014

With ever-growing regulatory requirements and the complexity of global business, disclosure committees are playing a crucial role in ensuring accurate and useful reporting to investors, according to “Unlocking the Potential of Disclosure Committees,” a new report by the Financial Executives Research Foundation and Ernst & Young LLP.

And investor relations officers – in most companies – play an important role with the disclosure committee.

In more than 100 companies surveyed, some 65% of disclosure committees included the head of investor relations as a member – along with the controller or chief accounting officer, general counsel or equivalent, CFO and assorted other executives (usually not the CEO).

The study says having multiple functions represented in addition to finance and accounting – such as general counsels, heads of communications and IROs – adds value because diversity brings to the table insights on the business from multiple points of view:

“It’s a cross between finance and non-finance,” said one of the executives, a senior director of corporate accounting and reporting. So it’s important, she continued, to “make sure the right representation of the business is there … I think we have pretty good coverage.”

As a non-accountant and occasional participant in disclosure committees, I try to ask big-picture questions and challenge insiders to explain the business more clearly … because what investors need most from disclosure is clarity and perspective.

Twitter IR could be interesting

November 8, 2013

TWTR NYSEA few years ago an investor relations colleague told me Twitter was “the end of the world as we know it.” Bothered by the cacophony of 140-character mini-messages, this Old Schooler was offended by the damage that tweeting could inflict on our language. To me, it looked interesting rather than scary.

And now Twitter, Inc., after a hugely successful IPO on Thursday that raised roughly $2 billion (which The New York Times DealBook blog sniffed was “more modest” than what the company might have gotten if pricing had been higher), is going to be even more interesting for IR people to watch.

The social media platform has begun life as a public company pledging to talk to investors through – well, social media. To be sure, there is a Twitter investor relations webpage, though I found the corporate site only after some searching. The IR page itself is worth checking out, a bit unconventional with its news from the company blog of mostly non-investor related happenings, a page of financial releases (“Coming soon” … like the earnings, a cynic would say) and, of course, a feed from @twitter.

But this will be worth following. In rolling out Twitter’s stock offering, management pledged to practice its own preaching – using online postings and social media (its own) to get the word out. From the TWTR prospectus:

Channels for Disclosure of Information

Investors, the media and others should note that, following the completion of this offering, we intend to announce material information to the public through filings with the Securities and Exchange Commission, or the SEC, our corporate blog at blog.twitter.com, the investor relations page on our website, press releases, public conference calls and webcasts. We also intend to announce information regarding us and our business, operating results, financial condition and other matters through Tweets on the following Twitter accounts: @dickc, @twitter and @twitterIR.

The information that is tweeted by the foregoing Twitter accounts could be deemed to be material information. As such, we encourage investors, the media and others to follow the Twitter accounts listed above and to review the information tweeted by such accounts.

Any updates to the list of Twitter accounts through which we will announce information will be posted on the investor relations page on our website.

That all seems to be in line with the SEC’s guidance on IR use of social media and company websites for disclosure (speaking as a non-lawyer). Twitter has the advantage of starting afresh – investors aren’t accustomed to seeing its news in one particular place or format.

Twitter fin releases

The end of the world? Hardly – but IROs will be watching with interest.

© 2013 Johnson Strategic Communications Inc.

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.

Reg FD: Does $50,000 get your attention?

September 7, 2013

Court gavelIn the old days, companies sometimes tried to soften the shock of bad news by getting on the phone with key analysts to tweak their assumptions, whether on this quarter’s earnings or another issue. A Regulation FD case against an IRO, resolved Friday by the Securities and Exchange Commission, sends a clear message: The old days are over.

Here’s my non-lawyer version of what Reg FD says to IROs: When things are changing in ways that may be material for shareholders, don’t think about “signaling” or “telegraphing” the market by talking to a few analysts and investors. Instead, broadly disclose the changes through a news release, 8-K filing, or conference call open to all investors. Selective disclosure is out, fair disclosure is in – that’s been true at least since Reg FD took effect in 2000.

The recent SEC case involves Lawrence Polizzotto, former head of investor relations for First Solar, Inc., an Arizona firm whose financing was part of the political controversy a couple of years ago over Energy Department loans to renewable energy companies. On Friday, Polizzotto agreed to pay a $50,000 penalty in the selective disclosure case and accepted a cease-and-desist order with the SEC, without admitting guilt.

Here’s the scenario the SEC painted: In September 2011 Polizzotto attended an investor conference with First Solar’s CEO at the time. The firm had conditional commitments from the Energy Department for three loan guarantees totaling $4.5 billion, and the CEO expressed confidence  the company would receive that backing.  Two days later, word came that First Solar would not get at least one of the guarantees. According to the SEC:

A group of employees including Polizzotto and one of First Solar’s in-house lawyers began discussing how and when the company should publicly disclose the loss of the loan guarantee.  The company lawyer specifically noted that when the company received official notice from the Energy Department, “we would not have to issue a press release or post something to our website the same day.  We would, though, be restricted by Regulation FD in any [sic] answering questions asked by analysts, investors, etc. until such time that we do issue a press release or post to our website …”

Comment: When lawyers talk, IROs should listen. SEC went on …

Polizzotto violated Regulation FD during one-on-one phone conversations with approximately 20 sell-side analysts and institutional investors on Sept. 21, 2011 – the day after a Congressional committee sent a letter to the Energy Department inquiring about its loan guarantee program and the status of conditional commitments, including three involving First Solar.  This Congressional line of inquiry caused concern within the solar industry about whether the Energy Department would be able to move forward with its conditional commitments.

Analysts began issuing research reports about the Congressional inquiry, and analysts and investors began calling Polizzotto. Despite knowing that the company had not yet publicly disclosed anything, Polizzotto drafted several talking points that effectively signaled that First Solar would not receive one of the three loan guarantees.  His talking points emphasized the high probability of receiving two of the loan guarantees and the low probability of receiving the third.

Polizzotto delivered his talking points in the one-on-one calls with analysts and institutional investors, and he directed a subordinate to do the same.  Polizzotto went even further than his talking points when he told at least one analyst and one institutional investor that if they wanted to be conservative, they should assume that First Solar would not receive one of the loan guarantees.

So there it is: material nonpublic information. The proof of materiality is that, when First Solar learned of the one-on-one disclosures and issued a press release the next day, its stock dropped 6 percent.

If you want guidance on Regulation FD or its application, ask your securities counsel. You can read Reg FD here, see the Polizzotto order here or explore links on the SEC’s selective disclosure webpage.

The philosophical heartbeat of Reg FD was captured by Michele Wein Layne, director of the SEC’s Los Angeles office: “All investors, regardless of their size or relationship with the company, are entitled to the same information at the same time.”

© 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.

What a week, eh?

May 25, 2012

The week leading up to our long weekend in the U.S. gave investor relations people plenty of reasons to pause and consider what our profession is about:

Facebook faced issues with its IPO – including a brouhaha over the analysts for Morgan Stanley and three other underwriters lowering their estimates in the middle of FB’s road show. Some commentators call for SEC regulations to require investment banks running IPOs to disclose their analysts’ opinions broadly, not just to their favorite institutional investors. Something about a level playing field.

Reuters says Facebook told the analysts they’d better bring down their revenue and earnings forecasts, a wink-and-nod sort of investor relations not regarded as acceptable in recent years. Something about Regulation FD.

People care because the IPO lost its sizzle on the very first day, then dropped further. FB shares closed this week 16% below the IPO price. The Financial Times has a good narrative. Poor Wall Street. Poor Mark Zuckerberg. Poor speculators.

The hounds of the plaintiffs’ bar are in full chase, of course, barking loudly and threatening in all directions. The SEC and Congress are investigating. As a high-impact disclosure issue, this will be one to watch.

JPMorgan Chase continued to convulse over its trading loss of $2 billion, or is it $3 billion, or … whatever the amount, reputational damage exceeds the financial loss.

From an IR perspective, at least two aspects of JPM’s debacle are interesting:

  • The disclosure (or lack of disclosure) of the risks JPMorgan and its “London whale” were taking – and the losses they incurred. IR people should take a close look and consider how we would treat similar setbacks in our companies.
  • Corporate governance concerns came to a boil over doubts about the JPM board’s risk-policy committee and whether it had the right stuff to actually oversee risk for what is, basically, a huge global risk-taking machine.

Washington stalwarts, once again, are calling for new laws and regulations to codify the good sense that the old laws and regulations haven’t quite brought about. And we’ll be treated to the spectacle soon of Jamie Dimon going before Congressional panels to be used as a prop for politicians’ campaign videos. Oh, well.

General Motors filed an amendment to its proxy statement today noting that it “recently learned” of a related party transaction last year that it hadn’t disclosed.

GM says CFO Dan Ammann’s wife is a partner and COO of an advertising agency that got about $600,000 from a GM subsidiary in 2011 – and he didn’t know about it, so it wasn’t in the proxy. The deal was reported in AdWeek last fall, according to the Detroit Free Press, but apparently the $600K eluded the proxy writers. Oops.

Executive compensation remains a lightning-rod issue, especially in an election year. Plenty of misinformation is floating around, including this misleading headline from Associated Press: “Typical CEO made $9.6 million last year, AP study finds.”

You have to read way down into the story to find that AP’s sample included only S&P 500 companies, the largest cap companies in the U.S. market. Actually, AP had data from only 322 that had filed proxy statements through April 30. The other 7,000-plus publicly listed companies in the United States? Not part of the study.

None of my clients’ CEOs has $9.6 million in compensation. How about your boss or clients? But the AP headline paints with a very broad brush: “Typical CEOs …”

The AP headline might have said: “Large-cap CEOs made $9.6 million …” As it is, politicians trading on Joe Sixpack’s envy will just run with the anti-CEO broadside.

And companies will deal with the widespread assumption that CEOs and other execs are paid too much. Investor relations pros need to focus on providing the real numbers and explaining – in plain English, not legalese – why pay is what it is.

What do you think?

© 2012 Johnson Strategic Communications Inc.

IR nightmare: leaking earnings

August 2, 2011

As the Q2 reporting season winds down, a nightmare scenario for investor relations professionals comes to mind: accidentally leaking your company’s earnings release or M&A announcement by inadvertently posting it online. Such a leak spreads easily into a widespread spill into social or traditional media.

Can’t happen? Well, it does. A panel discussion at the NIRI 2011 Annual Conference in June was all about warning IR people of this potential mishap. Two folks from Microsoft, IR manager Dennie Kimbrough and IT manager Josh Bailey, courageously provided the red meat of the NIRI panel discussion called “Keep a Lid on It: How to Guard Against Leaks, and What to Do if One Happens.”

Most importantly for all of us in investor relations, the Microsoft staffers shared lessons learned on how to guard against similar leaks at our companies.

The software giant is one of a handful of companies – Walt Disney, NetApp and Transocean are others – recently tripped up by the interplay of humans and technology, causing the inadvertent, early and selective release of earnings.

For MSFT, it happened on January 27, 2011. According to Kimbrough, the first word of a problem came about 12:35 p.m. Pacific time, an hour before the market would close. A Reuters reporter called to confirm an online report of the software giant’s Q2 earnings – not due out until after the close. Not the media call you want to get.

It seems MSFT’s 77-cent earnings per share figure was already out on StockTwits, through the work of Selerity, a “low-latency news aggregator.” For us non-techies, that means Selerity uses web crawler programs to snoop around continually for information on web pages that might move stocks – and move the data quickly to its clients, who are hedge funds, banks and prop traders.

What Selerity’s crawlers found was a page where someone at Microsoft posted Q2 earnings data on what they assumed was a secure “staging” page, but actually was a live web page. “It was just a simple human error,” Kimbrough said.

There was no link to it, as an official news release gets when posted to a website, but crawlers don’t need a link. Kimbrough said MSFT put its earning data up on the blind (but public) web page at 11:23 a.m., and Selerity’s crawler found it six minutes later. Selerity sent the numbers right out to its clients – and broadcast MSFT’s 77-cent EPS on StockTwits at 12:50, a full 70 minutes before the close.

Bailey, the Microsoft IT guy, explained three kinds of web crawlers: Those used by search engines “play nice” with web administrators in handling nonpublic files. Others scrape email addresses and phone numbers from thousands of websites to enable marketers to spam us. A third, scarier group of crawlers search for not-yet-public pages, systematically guessing URLs that might provide interesting data (something like “…/earnings/Q2/press release.html”).

The problem isn’t brand new. Another panelist, Andy Backman (a former IRO and now CEO of InVisionIR) recalled an encounter 10 years ago when a reporter guessed the URL for his company’s second-quarter earnings release – and reported the numbers an hour and a half before the release was due out.

Of course, the damage-control step to take if a leak of this sort happens is to issue the darn news release – get it out fast! Microsoft posted a brief statement to its corporate blog immediately after the reporter’s call and had the full earnings announcement up by 12:55 Pacific time, about 20 minutes after the reporter’s call.

But prevention is the real need.

And prevention is where IROs can play an important role by taking precautionary steps as part of the team that develops earnings and M&A announcements:

  • Keep online staging areas secure to prevent public posting of earnings and similar announcements. “The only way to protect yourself against web crawlers is to keep your files on your side of the firewall,” Bailey says. Both in-house staffers and third-party service providers like lawyers, CPAs and newswires need to have strict procedures in place. The IRO needs to check.
  • Don’t allow anyone to leave drafts lying around on a printer or desk. This is the old-fashioned leak, allowing non-confidential employees or even members of the public who pass by to see nonpublic information sitting out in the open. “Shred everything. Lock it away,” Backman advises.
  • Demand better code names for M&A projects or offerings. Lawyers and I-bankers love to create code names. And they’re fun – we all get a sense of adventure working on a hush-hush project called “Operation Pegasus.” Trouble is, Backman notes, code names are almost always picked because they point to the real name. We’re making a bid for Procter & Gamble, so we call it Operation Pegasus. Sometimes namers use a double entendre (the acquisition of Energizer might be “Project Bunny”). Backman suggests: Pick a code name that has nothing to do with the target company – a code name.

In many respects, IR professionals need to be a little paranoid. For most of us, Q2 reporting is finished (my excuse for not posting in July), but security of financial information is a process issue we can start working on now for next quarter.

As gatekeepers of material information, IR people need to work with colleagues in finance and IT to ensure that “Top Secret” remains so right up until our broad dissemination to the market.

© 2011 Johnson Strategic Communications Inc.

Having your say on pay

May 19, 2011

As the new reality of “say on pay” votes by shareholders settles in, a guiding strategy for companies should be to have your own say. Investor relations professionals (and senior execs) need to learn how to communicate more clearly and proactively on pay and governance.

By last week, 20 U.S. companies had lost (failed to get 50% support in) say on pay votes so far in 2011, according to a posting today on the CFA Institute blog by Matt Orsagh. He notes that say on pay votes are essentially a communication tool:

The institutional investors we talk to — and it is institutional voters who cast the vast majority of these votes — tell us that they have no interest in setting pay, that compensation committees should do that.  What they do want is to be listened to when they feel there is a disconnect between pay and performance, and to have constructive conversations with companies about how to set things right.

But why wait until shareholders slap you in the face over a disconnect? The “Across the Board” column in the NYSE Magazine second-quarter edition suggests three areas of pre-emptive action on executive compensation issues:

  • Publish readable proxies. “Too often proxy statements are viewed as – and written like – legal documents,” NYSE quotes Ken Bertsch, president of the Society of Corporate Secretaries and Governance Professionals. “… too many companies still try to cram too much information into too few pages with very little explanation about compensation policies and how they were developed.” Bertsch cites the CD&A in General Electric’s proxy as a model of clarity.
  • Launch a campaign. More companies are taking their governance and executive compensation stories on the road – meeting with big investors or holding conference calls on pay issues. Stephen Brown, TIAA-CREF’s governance guru, says companies like Avon Products are sending senior governance officers or independent board members to these meetings. (TIAA-CREF has published extensive policies and advice to companies here.)
  • Welcome shareholder views. Communication is, after all, two-way. Patrick McGurn of Institutional Shareholder Services cites the example of Pfizer inviting portfolio managers in to meet with execs for open-ended discussions on governance, pay and compliance issues. PFE has a Contact Our Directors page on its website, too. McGurn also suggests a “fifth analyst call” every year – to discuss governance issues rather than quarterly numbers.

My experience has been that corporate lawyers often guide the strategy on governance issues – and micromanage tactics like the wording of proxy statements. IR professionals, whose job is to communicate, should be more involved.

What’s your thought? Any best practices or examples of how to interact with institutional investors (or retail, for that matter) on governance and pay issues?

© 2011 Johnson Strategic Communications Inc.