The dawn of a new year marks an important time for companies with SEC reporting obligations to prepare for the upcoming reporting season. This memorandum highlights a variety of important topics that companies should be mindful of as the new year begins and includes reviews of and updates on, among other topics, certain existing and new disclosure obligations (including a discussion of the use of social media), annual eligibility assessments and other reminders, NYSE and NASDAQ rule changes, executive compensation matters relevant to the upcoming proxy season and top trends in regulatory and SEC enforcement. In addition, a convenient SEC reporting calendar highlighting due dates for key filings and other important information is attached to this memorandum. Regulation FD Compliance. SEC Regulation Fair Disclosure (“Reg. FD”) remains a challenge for the management of every reporting company. Reg. FD regulates the constant informal contacts between companies and investors – investor conferences, “one-on-one” meetings, day-to-day telephone calls and other informal contacts. Reg. FD restricts investor relations contacts for public companies from selectively disclosing material, nonpublic information to investors. Looking at the year ahead, recent SEC Reg. FD developments underscore two practical issues: Management Training. In bringing a September 2013 settled action alleging Reg. FD violations against Lawrence Polizzotto, the SEC announced that no proceeding would be initiated against his former employer, First Solar Inc., due to its cooperation and a number of other factors, including the SEC‟s observation that “First Solar cultivated an environment of compliance” through its disclosure committee and Reg. FD training. See SEC Release 2013-174 (Sept. 6, 2013). Many public company managers have to learn “real time” reporting skills to make quick materiality assessments and disclosure judgments. These are skills different from those honed through financial reporting obligations. Even the most experienced management team benefits from a “refresher” on the Reg. FD rules and the constant potential pitfalls. Social Media as Disclosure Tools. The most closely-watched SEC Reg. FD investigation in recent memory focused on an alleged 2012 disclosure of material corporate information on the Facebook page of Netflix, Inc. CEO Reed Hastings. The SEC closed the investigation with an April 2013 report specifying that social media channels – such as Facebook or Twitter – can serve as appropriate vehicles to disclose material information if companies have previously alerted investors that these channels will be used for these purposes. See Exchange Act Release No. 69279 (Apr. 2, 2013). For the vast majority of companies, established tools (like the press release and SEC Form 8-K) remain the best channels for disclosure of material corporate information. At the same time, social media channels provide a useful tool to supplement public company disclosures. Revisiting Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”). The beginning of a new year for many companies means it‟s time to dust off last year‟s Form 10-K or Form 20-F and start preparing the company‟s annual report for the recently completed fiscal year. Although MD&A is nothing new in the landscape of disclosure, it continues to embody a critical source of information for investors. With this in mind, it is helpful to revisit the purpose, focus and other aspects of MD&A as companies begin the process of drafting the upcoming annual report. The purpose of MD&A is to satisfy three objectives: (1) to provide a narrative explanation of a company‟s financial statements that enables investors to see the company through the eyes of management, (2) to enhance the overall financial disclosure and provide a context for investors to analyze financial information, and (3) to disclose information about the quality and variability of a company‟s earnings and cash flow, so that investors can judge whether past performance is indicative of future performance. Companies should focus on providing material information, disclosing key performance metrics (both financial and non-financial performance indicators) used by management to run the business and that are material to investors, identifying known trends and uncertainties that are reasonably likely to have a material effect on the company‟s financial condition and operating performance and including an analysis that explains management's view of the implications and significance of the information required by the rules. When drafting MD&A, companies should collectively review Item 303 of Regulation S-K, Item 5 of Form 20-F (in the case of foreign private issuers) and a series of SEC interpretive releases, which together set forth the disclosure requirements and the SEC‟s expectations on the purpose, form, content and approach to MD&A. Companies should also make sure to continue to reflect disclosure arising from past SEC comment letters that affect MD&A disclosure, to the extent still applicable. We encourage companies to use the opportunity of a new reporting season to approach drafting and improving MD&A as they would in connection with drafting a prospectus for an IPO or other securities offerings. Revisiting Risk Factors. Including a robust and current risk factor section in periodic reports serves the dual purpose of satisfying express form requirements and protecting against potential antifraud liability for forward-looking statements. When reviewing the risk factor section, it is important to make sure that the section is up-to-date with respect to both the selection of risks included as well as the description of the risks. Risk factors should be specifically tailored to the company‟s business and circumstances rather than reflecting generic risks that could apply to any company. Other questions to consider when revisiting the risk factor section include: Are the risks logically grouped and ordered? It is helpful to group risks into categories (e.g., business risks, industry risks and risks relating to debt and common stock) and to list risks in order of priority with the most critical risks appearing first. Does the caption for each risk factor adequately describe the risk presented in the accompanying text? Risk factor captions should not only serve as sub-headings but should also stand alone as a succinct summary of the risk being discussed. Are the risk factors written in plain English? The SEC requires that the risk factor sections of disclosure documents comply with the SEC‟s plain English writing principles. Do any of the risk factors contain mitigating language? Mitigating language may diminish the value of the warning that the risk factor is intended to convey and should be eliminated. The staff of the SEC frequently raises this point when providing comments on a company‟s risk factors. Has the company issued a prospectus or private offering document since filing its latest periodic report? Companies should make sure to update their annual reports to reflect any new or revised risk factors included in offering documents issued since the prior year‟s annual report. The same principle applies to Form 10-Qs, which are required to include any material changes from the risk factors disclosed in the most recent Form 10-K. Revisiting Forward-looking Statements. The forward-looking statements disclaimer that companies typically include in their SEC filings and press releases is designed to protect against antifraud liability by complying with the safe harbor under Section 21E of the Exchange Act. 1 This safe harbor protects against antifraud liability for any forward-looking statement that is (1) identified as a forward-looking statement and (2) accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement. 2 In order for the forward-looking statements disclaimer to be effective, it is important that it is both welltailored and up-to-date. Accordingly, companies should review the disclaimer and consider the following: Is the portion of the disclaimer that is intended to identify the forward-looking statements consistent with the actual forward-looking statements made throughout the document? If the disclaimer is set up to include a list of topics about which forward-looking statements are being made, the company should update this list for any relevant changes in its business (e.g., expectations concerning the anticipated success of a new major product line or the projected effects of a recent or proposed material business combination). In particular, the material trends and uncertainties discussed in MD&A should be captured by the forward-looking statements disclaimer. If the disclaimer lists meaningful cautionary statements, is it consistent with the risk factors described elsewhere or incorporated by reference in the document? In particular, the list of factors that could cause actual results to differ materially from those in the forward-looking statements should track very closely the risks presented in the risk factor section. Conflict Minerals Disclosure – Form SD due May 31, 2014. The 2014 reporting season brings with it a new reporting obligation for covered companies – Form SD. Pursuant to Rule 13p-1 adopted by the SEC on August 22, 2012, implementing the “conflict minerals” disclosure requirements in Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), companies that file reports with the SEC under Exchange Act Sections 13(a) or 15(d) – including foreign private issuers – for which conflict minerals are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, by that company will be required to file a specialized disclosure report on Form SD for the first time by May 31, 2014 3 disclosing, among other matters, whether its necessary conflict minerals originated in the Democratic Republic of Congo or adjoining countries (the “Conflict Countries”). At a minimum and regardless of the conclusion, a company is required to disclose on Form SD the determination and the reasonable “country of origin” inquiry process it used in reaching the determination, make the same information publicly available on its website and provide the address of that website in the Form SD. In addition, a company that determines both that (a) it knows or has reason to believe that the minerals may have originated in the Conflict Countries and (b) it knows or has reason to believe that the minerals may not be from scrap or recycled sources is required to undertake “due diligence” on the source and chain of custody of its conflict minerals, file, as an exhibit to its Form SD, a separate report that describes, among other matters, the measures taken to exercise due diligence on the source and chain of custody of its conflict minerals (the “Conflict Minerals Report”), make the Conflict Minerals Report publicly available on its website and provide the address of that website in its Form SD. In addition, under certain circumstances, Rule 13p-1 requires that the company obtain an independent private sector audit of the processes described in the company‟s Conflict Minerals Report. As a general matter, companies will need to, depending on each successive determination: (1) determine whether the company is subject to Rule 13p-1, (2) conduct a reasonable country of origin inquiry, (3) conduct supply chain due diligence, and (4) prepare and file a Form SD and, if applicable, a Conflict Minerals Report. With the first filing date quickly approaching, any affected company should consider placing renewed attention on the Form SD requirements and make sure that the compliance policies and procedures in place are working as planned and that the company is on schedule in meeting its first filing deadline. 4 Companies should also be aware that Form SDs are filed, not furnished, with the SEC, subjecting them to potential liability under Exchange Act Section 18 for false or misleading statements. However, the failure to timely file a Form SD relating to Conflict Minerals will not impact a company‟s eligibility to use the short-form registration statement on Form S-3. See “Checking Shelf Eligibility” below. Disclosure of Payments by Resource Extraction Issuers – Delayed. Pursuant to Section 1504 of Dodd-Frank, the SEC adopted Rule 13q-1 on August 22, 2012 (concurrently with the adoption of Rule 13p-1 described above), which would have required resource extraction issuers 5 – including foreign private issuers – to publicly file annually with the SEC a specialized disclosure report also on Form SD beginning with fiscal years ending after September 30, 2013. The Form SD would have required the disclosure of information relating to any payment made by the company, or by a subsidiary or another entity controlled by the company, to a foreign government or the U.S. federal government for the purpose of the commercial development of oil, natural gas or minerals, including details regarding the total amount of payments, the governments that received the payments and the projects to which the payments related. In response to claims made challenging the validity of the rule by a group of plaintiffs, which included trade and other associations representing the interests of companies that would have been directly affected by the rule, a U.S. federal court vacated Rule 13q-1 on July 2, 2013 on grounds the court characterized as “substantial errors,” thereby delaying the implementation of Section 1504 of Dodd-Frank. 6 For companies with calendar year ends, this disclosure obligation would have been first required in 2014. Although resource extraction issuers should benefit from efforts already taken to comply with Rule 13q-1, until the SEC adopts a revised version of the rule implementing Section 1504, which it is obligated to do, resource extraction issuers will not have to comply with the rule. We will continue to keep you informed of the SEC‟s next steps and proposals relating to the implementation of Section 1504 in 2014. Disclosure of Certain Activities Associated with Iran. 2014 marks the second year SEC filers are required to comply with the disclosure obligations set forth in Exchange Act Section 13(r), which imposes an obligation on a company to disclose certain information about activities it or any of its affiliates engaged in that are associated with Iran. Specifically, the disclosure requirements apply to any company required to file an annual or quarterly report – including foreign private issuers whose home jurisdictions may not restrict or prohibit business dealings with Iran – and applies to, and must be included in, any annual or quarterly report required to be filed with the SEC after February 6, 2013. To the extent a company or any of its affiliates has engaged in or conducted any of the covered activities during the period covered by the relevant annual or quarterly report being filed with the SEC, the company must disclose a detailed description of the nature and extent of the activity, the gross revenues and net profits, if any, attributable to the activity and whether the company or its affiliate intends to continue the activity. Given the seriousness of conducting business with sanctioned nations and the severe consequences that could follow, companies should continue to make sure that their organizations, in particular foreign subsidiaries and affiliates, are periodically reminded of these disclosure requirements and the potential implications involved and that any failure to timely make the required disclosures could result in the company violating the U.S. securities laws. Disclosure Committees. The beginning of the year is a good time to review the objectives and composition of a company‟s disclosure committee and set the schedule of meetings for 2014. Although there are no rules that obligate companies to have a disclosure committee, the SEC has recommended maintaining one. Disclosure committees play an important role in supporting a company‟s compliance with the requirement to maintain disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(a) and 15d-15(a). Often governed by a charter that establishes its purpose and enumerates responsibilities, disclosure committees, among other functions, help determine disclosure obligations on a timely basis, finalize and approve disclosure and oversee the flow and review of material information to do so, and help establish a framework that supports CEO and CFO certification requirements pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act. Companies should review the composition of their disclosure committees. Although there is no mandated prescription for the composition of disclosure committees, the SEC has suggested that these committees include the principal accounting officer or the controller, the general counsel or other appropriate counsel with responsibility for disclosure matters, the principal risk management officer, the head investor relations officer and other appropriate officers or employees (e.g., key business unit heads, those responsible for executive compensation and those involved with the company‟s internal audit functions). Companies should also consider, when appropriate, whether outside auditors or counsel should be present for any particular meetings. As the reporting season begins, companies should schedule disclosure committee meetings for key filings throughout the year, including annual and quarterly reports and proxy statements, determine the frequency and format of the meetings, and review existing arrangements for handling other public disclosures, such as Form 8-Ks and press releases. Experience from last year may be the best barometer when establishing the 2014 schedule. Entering and Exiting Filer Status. Companies with SEC reporting obligations are required to assess annually, as of the end of each fiscal year, their status as a “non-accelerated filer,” “accelerated filer” or “large accelerated filer” under the Exchange Act. 7 For a domestic company, its acceleration status determines the filing deadlines for its annual report on Form 10-K and its quarterly reports on Form 10-Q during the following fiscal year and thereafter until its status changes. See the “SEC Reporting Calendar for 2014” below for key SEC filing deadlines in 2014. For companies that are nonaccelerated filers, in particular, in addition to determining the time within which they must file their annual and quarterly reports, transitioning from non-accelerated to accelerated filer status is significant as accelerated filers must start providing the auditor attestation regarding the adequacy of the company‟s internal controls required by Section 404(b) of the Sarbanes-Oxley Act. 8 All new SEC filers start out as non-accelerated filers and remain so at least until the first year-end determination date on which they have (1) been subject to Section 13(a) or 15(d) of the Exchange Act for at least 12 months and (2) filed at least one annual report. If those conditions are satisfied the filer status is determined based on the size of the company‟s public float (i.e., the aggregate market value of the company‟s voting and non-voting equity held by non-affiliates). While the accelerated filer status is determined as of the end of the company‟s fiscal year, the public float is calculated as of the last business day of the company‟s preceding second fiscal quarter, which gives a transitioning filer six months to prepare for its new status. A company will qualify as an accelerated filer if it has a public float of $75 million or more, but less than $700 million, and as a large accelerated filer if it has a public float of $700 million or more. Once a company becomes an accelerated filer or a large accelerated filer, it will transition back to a non-accelerated filer or an accelerated filer only after the end of the first fiscal year in which its public float, as of the last business day of the preceding second fiscal quarter, was less than $50 million (in which case it would transition back to a non-accelerated filer) or equal to $50 million or more but less than $500 million (in which case a large accelerated filer would transition back to an accelerated filer). Accordingly, although a critical aspect of the annual assessment is tested in the middle of a company‟s fiscal year, companies should nevertheless monitor changes, or potential future changes, to their filer status so that they have sufficient time to make adequate preparations that may be required if a transition has occurred or will be occurring, in particular if they are not currently subject to the requirements of Section 404(b) of the Sarbanes-Oxley Act. Routinely Verifying Foreign Private Issuer Status. A critical annual assessment for a foreign company that qualifies as a foreign private issuer and does not voluntarily comply with domestic SEC reporting obligations is the verification of its status as “foreign private issuer.” A foreign company that is a foreign private issuer is required to reassess its status as of the last business day of its second fiscal quarter. If a company no longer meets the criteria for qualifying as a foreign private issuer, it must transition to the more stringent SEC reporting obligations applicable to domestic issuers starting on the first day of its next fiscal year and would no longer be able to avail itself of the benefits associated with being a foreign private issuer. A “foreign private issuer” is any company organized under the laws of a jurisdiction outside of the United States unless: (1) more than 50% of its outstanding voting securities are directly or indirectly owned of record by U.S. residents; and (2) any of the following applies: (a) the majority of its executive officers or directors are U.S. citizens or residents; or (b) more than 50% of its assets are located in the United States; or (c) its business is administered principally in the United States. As long as a foreign company does not meet any of the three tests under clause (2), it can remain a “foreign private issuer” notwithstanding the fact that it is or becomes majority-owned by U.S. residents. Although the determination of whether a foreign company can keep its status as a foreign private issuer does not take place until the middle of a company‟s fiscal year, it is important to routinely monitor throughout the year the factors that may disqualify the company from foreign private issuer status because the consequences of no longer qualifying are significant. Checking Shelf Eligibility. Companies that already have an effective short-form shelf registration statement on Form S-3 or Form F-3 on file with the SEC should make sure that (1) the company is still eligible to use the shelf to do “takedowns” from time to time and (2) the registration statement does not need to be re-filed because it has expired or is due to expire (shelf registration statements for most primary offerings can only be used for three years after the initial effective date, subject to a limited extension). Companies that do not have an effective shelf registration statement should assess their eligibility to file a shelf registration statement on Form S-3 or Form F-3 and, if they are eligible, should consider whether it would be beneficial to have a shelf on file for potential future “takedowns.” The company should also assess whether it qualifies as a well-known seasoned issuer (“WKSI”), in which case the Form S-3 or Form F-3 will go automatically effective upon filing without any prior SEC review. In general, for a company to be eligible to file a Form S-3 or Form F-3, among other criteria, it must satisfy several threshold requirements: it must have securities registered pursuant to Exchange Act Sections 12(b) or 12(g) or be required to file reports pursuant to Exchange Act Section 15(d) and have been subject to the Exchange Act reporting requirements for at least 12 months immediately preceding the filing of the Form S-3 or Form F-3 (and, in the case of a foreign private issuer, filed at least one annual report), and it must have timely filed (subject to certain exceptions) all required materials 9 with the SEC during that 12-month period and any portion of the month immediately preceding the filing of the Form S- 3 or Form F-3. 10 In addition, in order to be generally eligible to use the Form S-3 or Form F-3 for primary offerings, the issuer must have a public float of at least $75 million. However, there are exceptions from the publicfloat requirement for certain types of securities and for offerings of limited amounts, and offerings by selling stockholders not involving any primary sales by the company are not subject to this requirement. In order to qualify as a WKSI, the company must, among other requirements and in addition to those requirements described above, either (a) have a public float of at least $700 million or (b) have issued in the last three years at least $1 billion aggregate principal amount of nonconvertible securities, other than common equity, in SEC-registered primary offerings for cash (not exchange offers). Under certain circumstances, a company may continue to use an effective shelf registration statement for takedowns even after it no longer meets the relevant eligibility requirements. However, the company must reassess its eligibility each year at the time of the filing of its annual report. If the company concludes at that time that it no longer meets the relevant shelf eligibility requirements (including WKSI status, in the case of an automatic shelf registration statement), it may not use that shelf registration statement for any further takedowns. Reminding Directors and Officers of Their Section 16 Filing Obligations. As public companies with domestic SEC reporting obligations are well aware, Section 16 of the Exchange Act requires directors, officers and beneficial owners of more than 10% of any class of the company‟s equity that is registered under Section 12 of the Exchange Act (“reporting persons”) to file Forms 3, 4 and 5 with the SEC to report their equity holdings and transactions involving those securities. Companies should consider reminding existing directors and officers of their Section 16 obligations (and that the obligations apply to their family members and trusts), reviewing the list of employees who are deemed “officers” for the purpose of Section 16 and reviewing internal pre-clearance, notification and other procedures in place to facilitate the filing process for purchases and sales by directors and officers. Companies should also consider reminding officers and directors that companies are required to disclose in their annual proxy statement and/or Form 10-K the total number of late Forms 3, 4 and 5, the total number of transactions in the company‟s securities not timely reported and any known failure to file a required Form 3, 4 or 5, during the most recent fiscal year or prior fiscal years, including the requirement to identify these reporting persons by name. In addition, any officers or directors to be appointed or elected in 2014 (e.g., directors elected at the company‟s annual meeting) should be similarly informed. NYSE and NASDAQ Compensation Committee Standards. By the first annual meeting after January 15, 2014 or, if earlier, by October 31, 2014, companies listed on either the NYSE or NASDAQ will be required to comply with the applicable exchange‟s new listing requirements relating to compensation committee independence, which emanated from SEC rules mandated by Section 952 of Dodd-Frank. The exchanges‟ listing requirements, which were approved by the SEC on January 11, 2013, require that compensation committee member independence be assessed based on consideration of all relevant factors, including (1) the source of compensation of such director, including any consulting, advisory or other compensatory fee paid by the company to such director, and (2) whether such director is affiliated with the company, a subsidiary of the company or an affiliate of a subsidiary of the company. In addition, the NASDAQ rules initially prohibited compensation committee members from accepting any consulting, advisory or other compensatory fees from the company, other than fees received for board or committee service or fixed amounts of compensation received under a retirement plan. However, NASDAQ listed companies have been afforded relief with respect to this prohibition. In November 2013, in response to feedback from companies indicating that such a prohibition would create a burden, NASDAQ amended its listing rules to remove such prohibition. NYSE Removes 50% Quorum Requirement for Proposals Requiring Shareholder Approval. Effective July 11, 2013, the NYSE requirement that the total vote cast on a proposal where shareholder approval is a prerequisite to the listing of any additional or new securities must represent more than 50% of all securities entitled to vote on the proposal was eliminated from Section 312.07 of the NYSE Listed Company Manual. These proposals include the sale or transfer of common stock (or securities convertible into or exercisable for common stock) above certain thresholds (e.g., more than 20% of the outstanding voting power being issued), stock issuances to certain related parties or that would result in a change of control, and the adoption of equity compensation plans and material amendments. The rule still requires that these proposals be approved by a majority of votes cast, but without being subject to the explicit 50% quorum requirement. 11 The NYSE also added language to Section 312.07 clarifying that the voting standard set forth in Section 312.07 is applicable to any matter requiring shareholder approval. The NYSE cited three principle reasons for eliminating this quorum requirement: (1) companies are already subject to state law quorum requirements based on their jurisdiction of incorporation, (2) requiring companies to adhere to the NYSE quorum requirement and state law quorum requirements for a limited number of proposals and only state law quorum requirements for other proposals can be confusing to both the companies and their shareholders (e.g., the NYSE‟s treatment of broker non-votes not counting for the quorum requirement), and (3) neither NASDAQ nor NYSE MKT burden companies with a similar quorum requirement. In preparation for the upcoming proxy season, NYSE listed companies should make sure to reflect the revised voting standards in their proxy statement. Also, to the extent applicable, the new standard should help listed companies obtain approvals for proposals that may have been more difficult to obtain in the past due to the NYSE‟s treatment of broker non-votes in calculating the 50% quorum requirement. Executive Compensation and Proxy Matters Pay Ratio Disclosure Proposal. On September 18, 2013, the SEC voted to propose for public comment rules to implement Section 953(b) of Dodd-Frank, requiring U.S. public companies to provide disclosure regarding internal pay equity (the “Proposed Pay Ratio Rule”). Section 953(b) of Dodd-Frank requires the SEC to amend Item 402 of Regulation S-K to require companies to disclose (1) the median of the annual total compensation of all employees of the company, excluding the chief executive officer, (2) the annual total compensation of the chief executive officer, and (3) the ratio of these two amounts. Referred to as the “pay ratio” disclosure, it would be required in any SEC filings that currently require executive compensation disclosure pursuant to Item 402 of Regulation S-K, including any annual report, proxy statement, information statement or registration statement. The Proposed Pay Ratio Rule would not apply to emerging growth companies, smaller reporting companies or foreign private issuers. If the Proposed Pay Ratio Rule is adopted in 2014, a company with a fiscal year ending on December 31 would first be required to include pay ratio information in its proxy statement for its 2016 annual meeting of shareholders. While it remains to be seen whether the final rule will be substantively different from the Proposed Pay Ratio Rule, the internal process necessary to determine the median compensation amount will be an additional burden, and reporting companies should begin to consider how to implement the pay ratio disclosure rules based on their structure and specific business circumstances. Proxy Litigation. In August 2013, The Clorox Company prevailed in its defense of a say-on-pay shareholder class action, which had been predicated upon claims of inadequate proxy disclosure relating to (1) peer group analysis, (2) total shareholder return information, (3) Institutional Shareholder Services (“ISS”) CEO pay-for-performance analysis, (4) share usage and dilution analysis, (5) fair value transfer analysis, (6) shareholder value transfer analysis and (7) burn rate analysis. The court found that the information that had not been included in the proxy statement was not “material” as defined under Delaware law, and stated in its holding that “were [the] court to find on this record that material information was withheld, it would be a license to file suit where anything was withheld, for any information can always be labeled as potentially „helpful.‟” The Clorox victory does not necessarily indicate an end to compensation disclosure-related shareholder litigation, especially in light of the pending Proposed Pay Ratio Rule. The Clorox decision, however, offers a helpful takeaway to companies for the upcoming reporting season – in considering the information that should (and should not) be included in the proxy disclosure, companies should consider whether there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having altered the „total mix‟ of information made available.” ISS 2014 Corporate Governance Updates. As in prior years, ISS has issued policy updates to its U.S. Corporate Governance Policy, which would apply to companies with annual meetings on or after February 1, 2014. Relative to the updates released in prior years, ISS‟ policy updates for 2014 are minimal. With respect to its compensation policies, ISS has modified its methodology for its pay-for-performance analysis, which considers (1) peer group alignment and (2) absolute alignment. The new methodology modifies the first prong such that for purposes of measuring peer group alignment, the relative degree of alignment (the “RDA”) between a company‟s annualized total shareholder return (“TSR”) rank and the CEO‟s annualized total pay rank within a peer group is measured over a three-year period. The prior methodology had calculated the RDA by measuring the difference between a company‟s annualized TSR rank and the CEO‟s annualized total pay rank measured over one-year and three-year periods (weighted 40/60). Section 162(m) Plans. Companies that have designed their incentive and executive compensation plans such that compensation paid to the chief executive officer and other named executive officers will qualify as “performance-based compensation” under Section 162(m) of the Internal Revenue Code of 1986, as amended, should consider whether such plans need to be reapproved by shareholders in the coming reporting season. In order for compensation to qualify as “performance-based compensation” under Section 162(m), among other requirements, it must be based on performance goals, the material terms of which have been approved by shareholders. If a company‟s compensation committee has the authority to change the targets under the performance goals, the material terms of such performance goals must be reapproved by shareholders every five years. U.S. Foreign Corrupt Practices Act (“FCPA”) and Related Enforcement. Although the quantity of combined Department of Justice (“DOJ”) (four) and SEC (13) FCPA prosecutions in 2013 was the lowest since 2006, and far below the numbers of recent years (e.g., 2010 – 74 combined), the expansion of non-U.S. anti-corruption enforcement was the leading FCPA trend of 2013 and is a harbinger for 2014. For the past several years, the DOJ and SEC attorneys leading the respective FCPA units have heralded the expansion of international anti-corruption enforcement and cooperation. Although the era of fully integrated multi-jurisdictional investigations and settlements has not yet come to fruition, and the United States plainly continues to lead the world in anti-bribery enforcement, 2013 saw other nations, particularly Canada, China, France, Germany, India and the U.K., ramp up their enforcement efforts and strengthen their anti-corruption laws. Many other countries have been fortifying their laws and beefing up enforcement activities, often seeking to impose new penalties after the announcement of FCPA pleas and settlements in the United States. These “carbon copy” prosecutions have become commonplace and given the relative ease with which foreign enforcers can bring such actions, they are becoming an increasingly familiar aspect of the fight against corruption. Non-governmental organizations have also joined in the effort to fight corruption, most dramatically seen by the World Bank‟s public debarment of almost 50 entities (and their affiliates) in 2013. Outside the United States, anti-corruption enforcement, as well as increased international cooperation and whistleblower tips, are all expected to increase multi-jurisdictional enforcement activity in 2014. As foreign enforcers ramp up their enforcement capabilities, multi-national companies should ensure that their anti-corruption policies and training are tailored to the language and issues of the various countries where they operate. Staying current with differing anti-corruption laws and standards, particularly in markets where the rule of law is not always clear, will present a challenge (and opportunity) for many multi-national companies. U.S. and foreign authorities have indicated that they are focusing closely on business conduct in Russia, China and Africa, meaning that organizations setting up operations or investing in opportunities there will need to perform robust due diligence in order to manage these risks. U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) Enforcement and Related Trends. In 2013, there were a greater number of penalties and settlements with OFAC but penalty/settlement totals decreased over the prior year. There were 27 penalties or settlements with OFAC for a total value of $137.1 million in 2013 compared to 16 penalties or settlements for a total value of $1.1 billion in 2012. The prior year included three large settlements of $619.0 million, $375.0 million and $132.0 million, while the largest settlement in 2013 was for $91.0 million by Weatherford International Ltd. for violations of multiple sanctions programs. During 2013, OFAC demonstrated a continued focus on preventing and addressing sanctions violations. In addition, there were significant developments during the year regarding the sanctions laws and regulations administered by OFAC, including as a result of the ongoing negotiations between the P5+1 countries and Iran. Top Trends in SEC Enforcement. In 2013, the SEC brought fewer enforcement actions involving financial fraud and company disclosure than during any year in the previous decade. However, recent developments suggest this downward trend will be reversed in 2014, perhaps dramatically. The SEC‟s Enforcement Division has stated its intent to “pivot away from the financial crisis cases and refocus on accounting fraud.” All signs indicate that 2014 will mark a renewed focus by the SEC into pursuing financial fraud enforcement. In addition, other important SEC enforcement trends in 2014 to be mindful of include: New Enforcement Tools and Tactics. In July 2013, the SEC‟s Enforcement Division launched its Financial Reporting and Audit Task Force, consisting of a small group of lawyers and accountants who do not directly prosecute cases, but who use high tech enforcement tools to investigate and flag cases for enforcement. The Task Force is part of the SEC‟s new “streamlined process” of enforcement, and also exemplifies an overall focus by the SEC on using technology both to identify potential enforcement actions and to aid in the investigation process. One tool among many used to identify instances of potential fraud is a new quantitative analytic model that evaluates a company‟s financial statements against an industry peer group and flags potential instances of fraud by producing a “score” for each filing. The SEC has noted the increasing importance of technology to detect and prevent fraud, including the use of analytics to mine data to detect “outliers” in trading activity for potential market manipulation, and follow-on investigations. These automated tools permit the SEC to monitor much more activity than it could otherwise cover with manpower alone, and will likely lead to increased enforcement actions following initial investigations. Whistleblower Tips and Bounties. The whistleblower program under Dodd-Frank has been gaining momentum, as federal bounties continue to grow. The SEC Office of the Whistleblower received 3,238 tips in fiscal year 2013 from individuals in all 50 states and the District of Columbia, up 8% from the 2012 fiscal year. Moreover, in October 2013, the SEC awarded its largest whistleblower bounty to date – $14 million – to an anonymous whistleblower, an incentive which may drive the number of tips received in 2014, spurring more enforcement proceedings. Decrease in Settlements without Admission of Wrongdoing. The SEC‟s “admission of wrongdoing” policy has been revamped over the last five years, a change largely attributed to current Co-Chief of Enforcement George Canellos. Despite Mr. Canellos‟ recently announced departure from the SEC (as of January 31), it is likely that the SEC‟s increased reluctance to accept settlements where the defendant does not admit or deny the allegations will continue under the leadership of Canellos‟ Co-Chief, Andrew Ceresney. In June 2013, the SEC announced that it would require admissions of wrongdoing in contexts beyond those with a companion criminal case having a guilty plea or verdict. The circumstances that would require an admission are not clear, but Ceresney has referred to numerous factors, including cases with (1) significant investor harm or a large number of investors, (2) egregious misconduct, (3) conduct that poses a significant risk to the market or investors, (4) situations where admissions would aid investors in future decisions, and (5) instances where there is a need to send a “message” to the market. Expect more settlements involving admissions in 2014. Increase in “Broken Windows” Prosecutions. Recent trends also reveal an increase in the enforcement of non-scienter based violations. This includes a trend of prosecuting seemingly minor conduct under a “broken windows” theory, assuming that such enforcement will have a deterrent effect on larger, intentional fraud. For example, in September 2013, the SEC prosecuted 23 cases under Rule 105 of Regulation M, a strict liability provision with no intent requirement. In these proceedings, which charged firms with short selling violations in advance of stock offerings, some of the disgorgement amounts were as small as $4,000, which lends credence to Chair Mary Jo White‟s recent assertions that the SEC will step up enforcement even in minor cases. Continued Focus on Gatekeepers. Expect the SEC to continue pursuing gatekeepers as another way to broaden the scope of its enforcement efforts. Chair White has stated that gatekeepers, such as lawyers, auditors, and investment company boards, share responsibility with the SEC to protect investors. She has expressed little sympathy for the argument that the increased prosecution of gatekeepers might deter some from serving in that capacity, noting that being a director or other fiduciary is “not for the uninitiated or the faint of heart.” The lesson to heed from these recent enforcement trends is to avoid complacency in 2014. The SEC‟s decreased enforcement activity in 2013 is unlikely to continue, as the SEC will be making more inquiries, analyzing more reports and financial statements, and ultimately bringing more actions this year.