1. SEC Technology Budget Slashed in Half

In mid-January, Congress removed $50 million that the Securities and Exchange Commission had set aside for technology initiatives. The decision is a setback for the SEC as it had hoped to beef up its tools for spotting violations such as illegal trades and accounting fraud. Congress did not offer a reason explaining its decision.

More information about the budget cuts can be found here.

  1. SEC Announces 2014 Examination Priorities

The SEC announced its examination priorities for 2014. Among the issues it will focus on are financial institutions, including investment advisers and investment companies, broker-dealers, clearing agencies, exchanges and other self-regulatory organizations, hedge funds, private equity funds, and transfer agents. The priorities were selected by senior exam staff and managers and other SEC divisions and offices in consultation with the chair and other commissioners. The analytics used to select the priorities included:

  • Tips, complaints and referrals, including from whistleblowers and investors
  • Information reported by registrants in required filings with the SEC
  • Information gathered through examinations conducted by the SEC and other regulators
  • Communications with other U.S. and international regulators and agencies
  • Industry and media publications
  • Data maintained in third party databases
  • Interactions outside of examinations with registrants, industry groups, and service providers .

While not exhaustive, the examination priorities hope to address market-wide issues and those that are specific to particular business models and organizations.

The SEC press release can be found here.

  1. SEC Commissioner’s Speech on Disclosure Reform

SEC Commissioner Daniel M. Gallagher gave a speech in front of the Forum for Corporate Directors in Orange County, California where he laid out his thoughts on disclosure reform. Some of his priorities include tackling disclosure reform in pieces rather than all at once, eliminating non-material disclosure requirements, reducing the number of Form 8-K triggering events, reducing redundancy by providing guidance when disclosure is not needed, and using core filing for one-time disclosures.

The full speech transcript can be found here.

  1. SEC Issues Report of Investigation Pursuant to Section 21(a)

The SEC investigated KMPG for violating the auditor independence rules. In a published report, the SEC uncovered that KMPG provided prohibited non-audit services, such as restructuring, corporate finance, bookkeeping, payroll and expert services to affiliates of companies whose financial statements they were auditing.

The SEC Report can be found here.

  1. SEC Issues Additional Transition Guidance Related to Rule 506 Offerings

The SEC issued new Compliance and Disclosure Interpretations (C&DIs) connected with Rule 506 offerings commenced prior to September 23, 2013, the effective date of the new 506(c) exemption. The new 506(c) exemption states that an issuer may choose to continue an offering commenced prior to September 23, 2013 in accordance with requirements of either Rule 506(b) or Rule 506(c). If an issuer chooses to continue an offering under the latter, then any general solicitation that occurs after the effective date will not affect the exempt status of offers and sales of securities that occurred prior to the effective date in reliance on Rule 506(b). The new CD&Is offer more transitional guidance and effectively state that if an issuer commenced a Rule 506 offering prior to September 23 and decides at some point after such date to continue the offering as a Rule 506(c), then the issuer is not required to take “reasonable steps to verify” the accredited investor statute of investors who purchased securities in the offering before the issuer conducted the offering in reliance on Rule 506(c).

The SEC Interpretations can be found here.

  1. ISS Announces It Will Revise QuickScore

On January 8, ISS announced it will launch a new version of QuickScore in mid-February. The new version will use a different method to score companies’ governance risk and will automatically reflect changes in companies’ corporate governance structures based on publicly disclosed information. By adding new factors and modifying the weightings assigned to the governance factors, ISS hopes to highlight more distinctions between companies and align scores with ISS voting policies and company performance. It should be noted that companies will continue to be scored on an overall basis and across four categories: (1) Board, (2) Compensation, (3) Shareholder Rights, and (4) Audit. Further, companies will also continue to be scored relative to other companies in the Russell 3000 Index.

The data verification period began on January 27 and a technical document will be available here.

  1. ISS Publishes Guidance on Director Compensation Bylaws

ISS adopted a new policy position that is designed to prevent board efforts to protect against “golden leash” incentive bonus schemes. The schemes are popular within certain activist hedge funds as a tool to recruit director candidates to stand for election in support of whatever business strategy the fund seeks to impose on a company. ISS warns that if a board adopts “restrictive director qualification bylaws” designed to prohibit “golden leashes” without submitting them to a shareholder vote, ISS “may” recommend a withhold vote against director nominees “for material failures of governance, stewardship, risk oversight, or fiduciary responsibilities.”

The Director Qualification/Compensation Bylaw FAQs can be found here.

  1. Nasdaq’s Final Compensation Committee Certification is Now Available

 The final form of the compensation committee certification is now available on Nasdaq’s Listing Center. Anyone can view a blank form in preview mode and Listing Center User’s can log in to complete the form online on behalf of company.

A preview of the form can be found here.

  1. “Nasdaq Private Market” Gets Regulatory Approval

Last year Nasdaq and SharesPost announced Nasdaq Private Market (NPM), a joint venture which intends to create a preeminent marketplace for private growth companies. This month, FINRA approved the registration as a broker-dealer of NPM Securities, LLC, a Nasdaq OMX Group brokerage unit. In the FINRA broker-dealer profile, NPM Securities stated that it is in “the process of registering with the SEC as an alternative trading system assisting in the matching of buyers and sellers in primary and secondary offerings of the securities of privately held companies.”

For more information, click here.

  1. NYSE Updates its “Annual Written Affirmation”

The NYSE updated its “Annual Written Affirmation” to reflect the new compensation committee independence requirements. This form must be used for companies who held their annual meeting on or after January 15, 2014.

The Annual Written Affirmation Form can be found here.

  1. FINRA Releases Its Annual Priorities Letter

FINRA’s annual priorities letter reflects market changes. For example, given the resurgence of the IPO market, FINRA will review due diligence activities, monitor the accuracy of firms’ filings regarding public underwritings with FINRA’s Corporate Finance Department, and review compliance with rules concerning the sales and allocation of IPO securities. FINRA continues to remain concerned with abuses in the private placement market, including the use of advertising and marketing materials, and the diligence undertaken by placement agents in private offerings.

The FINRA letter can be found here.

  1. Administrative Law Judge Sanctions Auditors

An administrative law judge sanctioned Chinese affiliates of the Big Four auditors for willfully refusing to produce their work papers to the SEC related to China-based companies. The refusal to produce work papers is a violation of Section 106 of Sarbanes-Oxley and sanctions include censure and a six-month practice ban. The Chinese affiliates plan to appeal the decision to the SEC and then a federal court if they lose again. The ALJ sanctions potentially could have the effect of keeping any of the Chinese companies from the US markets as there is a six-month total practice ban for the Big Four China affiliates. However, the ban does not go into effect pending determination of the appeal.

To read the 112-page decision, click here.

Aliena Mejer