SEC Adopts New Regulation SCI to Strengthen Securities Markets

Last week, the SEC approved new rules for Regulation Systems Compliance and Integrity (Regulation SCI) designed to strengthen the technology infrastructure of the U.S. securities markets. These rules require securities exchanges and self-regulatory organizations (SROs) to establish comprehensive policies and procedures to help ensure the robustness and resiliency of their technological systems. The SEC noted that “a seemingly minor systems problem at a single entity can quickly create losses and liability for market participants, and spread rapidly across the national market system, potentially creating widespread damage” and cited examples of such disruption in recent years, including system issues affecting the Facebook IPO. Under the rules, exchanges and SROs will be required to report system disruptions and intrusions within 24 hours and take prompt corrective action. Regulation SCI represents the first comprehensive regulatory effort aimed at automated trading systems in over two decades and replaces what was previously a voluntary program.

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ISS, Glass Lewis Publish Policy Updates for 2015 Proxy Season

Earlier this month, ISS and Glass Lewis each released policy updates for proxy voting recommendations for the 2015 proxy season. Notably, both ISS and Glass Lewis will recommend votes against directors responsible for adopting bylaw provisions materially limiting shareholder rights without shareholder approval. As previously released in its draft policies, ISS will take a new “scorecard” approach to evaluating equity compensation plan proposals. In a more holistic approach than previously proposed, however, ISS generally will recommend a vote in favor of independent board chair proposals after considering a variety of factors, such as a company’s current governance structure and practices, board leadership and performance. In response to recent IPO trends, Glass Lewis will recommend voting against directors of companies adopting exclusive forum or fee-shifting bylaws before going public if those provisions are not put up for shareholder vote after the IPO.

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ISS Launches Governance QuickScore 3.0

ISS also released updates to its governance rating system known as QuickScore. Ratings under the new “QuickScore 3.0” officially launched on November 24, 2014. The methodology for QuickScore 3.0 weighs several new factors, including: (1) whether a board has taken unilateral action that materially reduces shareholder rights, (2) whether there is a policy requiring annual board evaluations, (3) whether there are sunset provisions on any unequal voting structures, and (4) whether there is a controlling shareholder (this factor is considered but not weighted). QuickScore 3.0 gives weight to factors previously considered on an unweighted basis, including how many women serve on the board and how many financial experts serve on the audit committee. ISS has modified how it considers certain factors by specifying new shareholder support levels for say-on-pay and director approvals. ISS also expands the types of investigations and enforcement actions it will consider.

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Revisiting Risk Factors for Disclosure Reform

As the SEC considers how to improve disclosure effectiveness for public company periodic reports, numerous suggestions for reform have been presented. Recently, teams of grad students at The George Washington University School of Business offered their take after reviewing hundreds of Form 10-K filings. One award-winning team focused on how to improve risk factor disclosure. These students noted that the current approach to risk factors is not particularly useful to investors, noting that “for [an average] company across five fiscal years, only two risks ever changed, even if 20 or more were listed.” They suggested either: (1) segregating company-specific risks from those applicable to the company’s industry generally or (2) sorting risk factors based on their potential impact on company performance and probability of occurrence.

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The Ticker shares recent developments in SEC compliance, capital markets, corporate governance, executive compensation and other matters important to public companies and their officers and directors.  It is published by Fredrikson & Byron’s Public Companies Group.