Six U.S. companies--H.J. Heinz, Supervalu, Electronic Arts, Legg Mason, J.M. Smucker Co., and BMC Software--have reached settlements with investors to provide more information on auditor independence, according to the United Brotherhood of Carpenters, which is leading a shareholder campaign on this issue.
The six issuers have agreed to provide an audit firm independence statement that details the company's audit firm, the firm's tenure, and states that the audit committee "periodically considers whether there should be a regular rotation of the independent external audit firm," according to the Carpenters.
"The points of disclosure in the settlement are a solid step in providing shareholder information about the tenure of the relationship and the audit committee's role in various processes (fee negotiations, audit partner rotation, [and] periodic consideration of firm rotation), and it also includes a statement that the committee believes the continued retention of the audit firm is in the best interests of the company and its investors," Ed Durkin, director of corporate governance at the Carpenters union, told ISS.
So far this year, the Carpenters have filed 16 proposals that seek annual audit firm independence reports. Dell, McKesson Corp., Xilinx, and Computer Sciences Corp. have submitted no-action petitions to exclude these resolutions, but the Securities and Exchange Commission has not yet ruled on those requests. Earlier, the Carpenters filed dozens of resolutions that called for seven-year auditor rotation policies, but the SEC staff allowed companies to omit those proposals on "ordinary business" grounds.
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Earlier today, President Obama signed into law the "Jump-start Our Business Startups (JOBS) Act," which will exempt newly public companies from say-on-pay votes and other governance and accounting rules.
The JOBS Act, which passed with bipartisan support in both chambers of Congress, creates a new category of "emerging growth companies," which will be exempt from votes on executive compensation; golden parachute votes; and various audit, disclosure, and initial offering requirements for five years after their IPO or until they reach $1 billion in annual revenues or $750 million in market capitalization. It is estimated that more than 90 percent of new companies will qualify for these exemptions.
In addition, the new law exempts these firms from the auditor attestation requirements of the Sarbanes-Oxley Act. The legislation also increases the threshold for companies to register with the SEC to 2,000 investors (or 500 persons who are not "accredited" investors.)
Investor advocates, audit experts, and regulators have criticized the law for weakening critical protections for shareholders. Institutional investors backed a Senate amendment that would have lowered the law’s threshold to $350 million in annual revenues, but Senate Republicans opposed that measure and it failed to gain the necessary 60 votes needed for passage.
During remarks today while signing the bill, Obama sought to address concerns that the law may increase the likelihood of securities fraud and said that the U.S. Securities and Exchange Commission would play “an important role in implementing this bill.”
“It also means that, to all the members of Congress who are here today, I want to say publicly before I sign this bill, it's going to be important that we continue to make sure that the SEC is properly funded, just like all our other regulatory agencies, so that they can do the job and make sure that our investors get adequate protections,” the president said.
Since the Republicans won control of the U.S. House after the 2010 elections, the SEC has not received the funding that it anticipated it would need to implement the many provisions of the Dodd-Frank Act.
On Tuesday, the U.S. House of Representatives voted 380-41 to approve final legislation that would exempt newly public companies from say-on-pay votes and various accounting and disclosure rules. Investor advocates and regulators have criticized the bill for weakening essential shareholder protections.
The Senate approved the bill, known as the “Jump-start Our Business Startups (JOBS) Act,” late last week by a 73-26 margin. The legislation now awaits the signature of President Obama, who has expressed support for the bill. The JOBS Act would create a new category of newly public issuers, “emerging growth companies,” that would be exempt from say-on-pay votes; golden parachute votes; and various audit, disclosure, and initial offering requirements for five years or until they reach $1 billion in annual revenues or $750 million in market capitalization. It is estimated that more than 90 percent of new companies would qualify for these exemptions.
Last week, Senators Jack Reed, Mary Landrieu, and Carl Levin offered an amendment that would have lowered the threshold for these “emerging” companies to $350 million in annual revenues, and made other revisions to the bill. The Council of Institutional Investors, labor funds, and other activist investors urged the Senate to support this amendment. However, Senate Republicans opposed this amendment, and it failed to win the 60 votes necessary for passage under Senate rules. Earlier, the House voted mostly along party lines against a Democratic-backed amendment that would have removed the say-on-pay exemption.
The final bill does include a Senate amendment that calls for additional requirements on companies that seek to raise funds from investors through "crowd funding" over the Internet.
Amy Borrus, deputy director of the Council of Institutional Investors, pointed out that smaller companies are more prone to fraud and accounting scandals. “We may rue the day this bill passed,” Borrus told the New York Times.
Earlier today, the U.S. Senate voted 73-26 to approve legislation that would exempt newly public companies from say-on-pay votes and various accounting and disclosure rules. Investor advocates and regulators have criticized the bill for weakening essential shareholder protections.
Twenty-five Democrats and one independent voted against the bill, which was dubbed the “Jump-start Our Business Startups (JOBS) Act.” Twenty-six Democrats joined Senate Republicans in supporting the legislation, according to news reports. A similar bill already has passed the House of Representatives, and President Obama likely will sign the final legislation.
Senator Richard Durbin, the second-ranking Democrat in the Senate, was one of the lawmakers who spoke against the bill. He argued that it would reverse many of the reforms that were adopted following the 2008 global financial crisis.
“The bill’s supporters have characterized it as a jobs bill, but this bill is really designed to change disclosure, accounting and auditing standards and to exempt many firms and corporations from the Securities and Exchange Commission oversight,” Durbin said, according to TheHill.com.
The JOBS Act would create a new category of newly public issuers, “emerging growth companies,” that would be exempt from say-on-pay votes; golden parachute votes; and various audit, disclosure, and initial offering requirements for five years or until they reach $1 billion in annual revenues or $750 million in market capitalization. It is estimated that more than 90 percent of new issuers would qualify as "emerging" companies. The bill also would excuse these firms from Section 953(b) of the Dodd-Frank Act, which would require disclosure of the ratio between a CEO's total compensation and that of the firm's median employee. These companies also would be spared from the Sarbanes-Oxley Act's requirement to hire an outside auditor to attest to the sufficiency of their internal financial controls.
Earlier this week, Democratic Senators Jack Reed, Mary Landrieu, and Carl Levin offered an amendment that would have lowered the threshold for these “emerging” companies to $350 million in annual revenues, and made other revisions to the bill. The Council of Institutional Investors, labor funds, and other activist investors urged the Senate to support this amendment. However, Senate Republicans opposed this measure, and it failed to win the 60 votes necessary for passage under Senate rules.
The Senate did approve an amendment that would impose stricter reporting requirements on companies that seek to raise funds from investors through "crowd funding" over the Internet.
The amendment, which was sponsored by Senators Jack Reed, Mary Landrieu, and Carl Levin, received 55 votes, five votes short of the 60 needed for consideration, according to news reports. The three Democratic senators offered the amendment, known as the “INVEST in America Act,” as an alternative to the “Jumpstart Our Business Startups (JOBS) Act," which was passed by the House of Representatives by a 390-23 vote earlier this month.
The Senate, which has fast-tracked consideration of the bill during this election year, likely will vote on the House legislation on Wednesday. The Obama administration has welcomed the House bill, but also was supportive of Senate Democrats’ efforts to add investor protections to the bill.
The JOBS Act would create a new category of newly public issuers, “emerging growth companies,” that would be exempt from say-on-pay votes; golden parachute votes; and various accounting, disclosure, and initial offering requirements for five years or until they reach $1 billion in annual revenues or $750 million in market capitalization.
The Reed-Landrieu-Levin amendment called for lowering the threshold for these “emerging” companies to $350 million in annual revenues. “The House bill would allow very large companies, with up to $1 billion in revenues per year, to offer stock to the public and yet avoid financial transparency and auditing requirements designed to ensure they’re not cooking the books,” Levin said in a statement.
In an editorial, Bloomberg News warned that the House bill would “gut many of the investor protections established just a decade ago in the 2002 Sarbanes Oxley law."
“A wave of accounting scandals--think Enron and WorldCom--had destroyed the nest eggs of millions of Americans and upended investor confidence in Wall Street. The relief would extend beyond small businesses and apply to more than 90 percent of companies that go public,” the editorial noted.
The United Brotherhood of Carpenters and Joiners union has crafted a revised shareholder proposal that seeks an annual report on auditor independence. This proposal has been submitted at 14 companies; engagement is ongoing with several of these firms, although Dell has filed a no-action petition with the SEC earlier this month.
This new auditor independence resolution is a departure from the auditor rotation proposals submitted by the Carpenters late last year. In the previous version, the labor pension fund sought mandatory auditor rotation at least every seven years in an effort to increase objectivity and to "limit long-term client-audit firm relationships that may compromise the independence of the audit firm's work." Further, the resolution asked boards to implement a three-year cooling-off period before the auditor could be reengaged.
The staff of the SEC's Corporation Finance Division granted no-action requests by Walt Disney Co., Deere & Co., and various other firms where the original auditor rotation proposal was filed. The SEC staff has refused to reconsider its rulings that auditor rotation policies are part of a company's "ordinary business" operations. Dell also makes an ordinary business argument in its March 2 request to exclude the revised Carpenters proposal.
Given the SEC's views on the original resolution, the Carpenters have retooled and, in many ways, softened their proposal. The revised resolution seeks increased disclosure with regard to the auditor-client relationship as opposed to the more prescriptive request of mandatory rotation.
The revised proposal requests that the firm's audit committee prepare an independence report that includes the following: (1) information concerning the tenure of the company's audit firm as well as the aggregate fees paid over the period of its engagement; (2) information as to whether the audit committee has a policy or practice of periodically considering audit firm rotation or seeking competitive bids from other public accounting firms; (3) information regarding the mandated practice of lead audit partner rotation; (4) information as to whether the board's audit committee assesses risk with regard to auditor tenure; (5) information regarding any training programs for audit committee members relating to auditor independence, objectivity, and professional skepticism, and (6) information regarding additional policies or practices, other than those mandated by law and previously disclosed, that have been adopted by the board's audit committee to protect the independence of the company's audit firm.
In anticipation of the European Commission's plans to review and reform the audit market, the Dutch Parliament approved a bill on Feb. 14 that would set strict rules regarding auditor terms and the content of the mandate.
Following a parliamentary investigation on the causes of the financial crisis in the Netherlands, the Dutch government submitted a bill that seeks to reduce the chance that auditors would unjustly provide unqualified opinions. Opposition political parties submitted amendments that were approved and are now subject to approval by the Dutch Senate before becoming law.
The bill sets two important restrictions:
- The auditor may not provide non-audit services to the company for which the auditor provides the statutory audit of the financial statements. Up until two years after the effectuation date of the bill, non-audit services may be provided as part of contractual obligations.
- It will be mandatory that the auditor is changed every eight years. There will be a cooling-off period of two years, after which the previous auditor may be mandated again. It is expected that this part of the bill be applicable as of January 2014.
Meanwhile, in the United States, the Public Company Accounting Oversight Board plans to hold a roundtable on March 21-22 on auditor rotation and other measures to bolster audit firm independence.
Following a “vote no” campaign by labor pension funds, Dell investors withheld 25.1 percent support from Chairman and CEO Michael Dell at the information technology company’s Aug. 12 annual meeting.
The AFL-CIO and the American Federation of State, County, and Municipal Employees opposed Michael Dell, who founded the Texas-based company, in an attempt to prod the board to appoint an independent chair. The labor investors announced their campaign after the company announced a $100 million settlement in late July to resolve an SEC accounting probe; the accord includes a $4 million payment from Michael Dell. According to an SEC lawsuit, the company failed to disclose exclusivity payments it received from Intel from 2003 through 2006.
“Considering that his name is on the company, this is an important percentage of shareholders asking the board to institute independent leadership,” said Lisa Lindsley, director of capital strategies at AFSCME.
Director Thomas Luce, who chaired the audit committee in 2007 and served on that panel earlier, received 23.7 percent opposition, according to a Dell filing this week. Three other board members, who served on the committee during the period covered by the SEC probe, received more than 17 percent dissent.
The withhold vote against Michael Dell is notable, because he was elected with more than 96 percent support at the annual meetings in 2009, 2008, and 2007. This year’s opposition would have been even higher but for the 273.7 million shares held by the chief executive, his family, and other officers and directors. John Keenan, a strategic analyst with AFSCME, notes that the CEO would have received 30.7 percent dissent without the insider vote.
The insider voting bloc also dampened support levels for two shareholder proposals. Keenan estimates that the AFL-CIO’s “say on pay” resolution would have received 48.7 percent support, instead of a 39.7 percent vote. Likewise, AFSCME’s solicitation reimbursement proposal would have earned 43.9 percent support, instead of a 35.8 percent vote, Keenan said.
The AFL-CIO and the American Federation of State, County, and Municipal Employees (AFSCME) are urging Dell investors to vote against Chairman and CEO Michael Dell at the computer company’s Aug. 12 annual meeting. The labor funds say they hope that a high withhold vote against Michael Dell will prompt the board to appoint a new chairman.
The union pension funds announced their “vote no” campaign after the Texas-based company reached a $100 million settlement with the Securities and Exchange Commission on July 22 over the company’s accounting and disclosure practices from 2001 to 2006. As part of that accord, Michael Dell has agreed to pay a $4 million fine. The SEC accused the company of failing to disclose exclusivity payments it received from Intel to not use central processing units manufactured by a rival. Without these payments, Dell would have missed its earnings targets between 2002 and 2006, according to the SEC.
The labor investors also contend that Michael Dell “received excessive levels of compensation” during the period that the alleged disclosure and accounting problems occurred. The funds point to a recent Wall Street Journal article, which said that Michael Dell was the 12th highest-paid U.S. CEO over the past decade. According to the funds, he received $453.8 million in total compensation, including exercised options, between 2000 and 2009, while shareholders lost 66 percent of their share value.
“Based on the allegations in the SEC’s complaint against our Company and Michael Dell, we believe that shareholders would be better served by the removal of Michael Dell as the Chairman of our Company’s Board of Directors,” the labor funds said in a letter to Dell investors.
Dell’s board has publicly maintained its support for the CEO since the announcement of the SEC settlement. “Dell’s Board reaffirms its unanimous support for Michael Dell’s continued leadership, and the management team in its ongoing commitment to transparent accounting, integrity in financial reporting and strong corporate governance," Sam Nunn, the board’s presiding director, said in a press release.
The labor funds also are urging investors to support an AFSCME proposal to provide for the reimbursement of proxy solicitation expenses, and an AFL-CIO resolution to establish an annual advisory vote on executive compensation.
Longtime readers may recall that back in 2005, more than 40 mutual fund managers were sued for allegedly failing to file claim forms in settled securities class actions where the fund had eligible transactions. That began our long running series of posts "File Those Claims ... Or Else."
In general, what little litigation there has been over securities class action settlements has been in a fairly similar vein - that is that an entity that had a legal or contractual duty to file claims on behalf of another failed to do so, or did so improperly.
A case filed earlier this month against several Wachovia and Wells Fargo entities attempts to take that line of cases to an entirely different level (Hat Tip: Courthouse News Service).
The allegation is pretty straightforward, and potentially far-reaching. Essentially, a securities class action was filed in 2001 on behalf of purchasers of various securities issued by Asia Pulp & Paper. That case settled in 2006 for $46 million, and in May 2007 a distribution was made to investors that had filed claims.
Here's where Wachovia and Wells Fargo come into the picture, or not as the case alleges.
As with most securities, the majority of Asia Pulp & Paper investors had their securities held in "street name," or the name of a nominee, typically a bank, broker or custodian. Thus, as is customary in most securities class action settlements, the court overseeing the Asia Pulp & Paper litigation ordered these nominee (record, but not beneficial owner) purchasers to either notify their clients of their eligibility to participate in the Asia Pulp & Paper litigation, or to provide the claims administrator with a list of those clients so that the claims administrator could undertake the notification.
The newly filed complaint alleges that Wachovia and Wells Fargo failed to do so, and as a result, their clients were not informed of the Asia Pulp & Paper settlement, did not submit claims forms, and thus did not collect their pro-rata share of the settlement.
Now, the complaint was just filed, and we have no idea how it will shake out, but it should give any institution that holds securities in their own name on behalf of their clients pause. This was a relatively small case, with the net distribution to the class of just under $35 million. That isn't even halfway to being on our SCAS 100 list of the largest securities class action settlements, and a far cry from many of the mega-settlements that have been reached in the last few years. The potential exposure in the larger cases, such as Enron, WorldCom, Adelphia, Tyco, and Nortel is dramatically larger.
I recently chatted with Bruce Carton over at Securities Docket regarding the case. You can see our discussion here.