- Although we would love to believe the pending lawsuit on conflict mineral disclosure rules will prevail (to be pending perhaps for awhile, a source suggests here), we note the SEC posted 12 FAQs, here, addressing interpretive issues under the rules. A host of law firms have slightly condensed the already skimpy FAQs, but we note three items we were heartened to see: (1) the packaging protecting or keeping fresh your products doesn’t count; (2) if you are a cruise line, your product is services, not boats; and (3) a missed or bad Form SD does not ruin your eligibility to use Form S-3. To balance things, two items we were disheartened to see: (1) “generic” components included in a product are covered under the rule if they are essential even though you presumably have no influence over what’s in those components; and (2) you must include an audit report on your conclusion that minerals are “DRC conflict free” if you source them from the DRC but not if you source them from outside the DRC. (Did we say we wanted to make it harder for violent warlords in the DRC to profit from mineral sales? We meant “everyone.”)
- While the conflict mineral rules and FAQs make clear that mining ore, and related activities like smelting and shipping it, isn’t “manufacturing” a “product” that subjects one to conflict mineral reporting, resource extractors have their own disclosure cross to bear in that they must disclose payments to governmental entities for the purpose of the commercial development of oil, natural gas or minerals. The SEC also published (a mere nine) FAQs about those rules, here.
- Recent SEC Compliance and Disclosure Interpretations, on a hodge-podge of topics, are summarized here.
- NASDAQ paid $10 million to the SEC to settle charges that it violated several Exchange Act rules when it mishandled trading during Facebook’s IPO, including failing to comply with some of its own rules and to maintain sufficient net capital reserves. It also violated short sale rules, and pocketed a tidy $10.8 million profit, when it assumed a short position of more than 3,000,000 shares in an “error account” and subsequently covered while Facebook’s early investors continued to wildly click the “I don’t like” button. The SEC’s blow-by-blow is here.
- NASDAQ also withdrew its proposal to require listed companies to have an internal audit function, here, to give itself time to adequately assess comments.
- The Committee of Sponsoring Organizations of the Treadway Commission (COSO) released its much anticipated updated internal control-integrated framework, the framework for assessing internal controls over financial reporting. The release is announced here, an executive summary is here, FAQs are here, and a summary from Financial Executives International is here.
- And speaking of internal controls, note the SEC’s apparent effort to apply algorithmic analysis to MD&A disclosure to help identify financial fraud, see here and here. It is not without irony that our editorial staff found the linguistics studies cited in the FEI blog extremely difficult to read (as did the writer of the blog, apparently: colons are good, Christopher), but here is what we gleaned: verbose disclosure with little content is a bad sign.
Recall that July 1, 2013 is the date after which compensation committee adviser standards apply through NYSE (here) and NASDAQ (here) listing standards. An “adviser” includes not just a compensation consultant but also outside legal counsel and others. A compensation committee of a listed company can hire or accept advice from whomever it likes, but it must first consider the person’s independence from management, including the six considerations specified in the listing standards ((1) other services the adviser provides to the company; (2) percentage of the adviser’s revenue the company provides; (3) the adviser’s conflict of interest policies; (4) whether the adviser has a business or personal relationship with a committee member; (5) stock ownership in the company; and (6) whether an adviser has a business or personal relationship with an executive officer). This is somewhat silly in the context of the company’s general outside legal counsel, which interacts primarily with company management but which may also participate in compensation committee meetings and provide general advice to committee members about, for example, tax, corporate, accounting and disclosure obligations associated with compensation matters. But it is what it is, as they say. Practice among companies may develop as follows:
- Annually, the compensation committee will consider the six factors, and perhaps request that its advisers, including the company’s outside counsel, provide summary information that responds to the factors.
- The committee will document in meeting minutes that it considered the factors before engaging advisers or receiving advice, and will document specifically its determination that its compensation consultant is independent.
- The company will voluntarily disclose in its proxy statement that the compensation consultant is independent but not disclose information about others. (If the work of a compensation consultant raises a conflict of interest, proxy rules require disclosure of the nature of the conflict and how it is being addressed. In light of scrutiny of compensation consultants, negative assurance seems easy and beneficial.)
Note too that companies should also review their compensation committee charters before July 1 to ensure they include the committee’s authority to engage advisers only after considering the independence factors.