Homeopathic Drug Regulation

Somewhat below the radar screen, in late October the FDA has changed the ground rules concerning manufacture and distribution of homeopathic drugs.

Refusing to endorse the then-status quo policy by issuing an official regulation, the FDA stated that the current policy does not reflect the “current thinking” of the Agency as it is inconsistent with the Agency’s “risk-based approach to enforcement generally.”  This “new” approach apparently requires premarket approval from the FDA.  The current Agency thinking appears to be that homeopathic drugs continue to have certain related health issues.  The FDA also warned that consumers opting for homeopathic products were likely bypassing “medical products that have been scientifically proven to be safe and effective.”

This is a complex area.  The FDA is receiving comments on its current position until January 23, 2020.  Those interested in further detail will need a deep dive; one good place to start is reading the Federal Register FDA announcements during the last week of this past October.

Proxy Access

Earlier this month, the SEC proposed amendments affecting the process by which shareholder proposals are evaluated for inclusion in public company proxy statements.

In the proposed amendments, the SEC has maintained the $2,000 minimum ownership requirement, but shareholders seeking a place in the proxy process must have held those shares for at least a three year period so as to demonstrate a long-term investment in the company.  Further, the requirements for affirmative shareholder votes for re-submission of defeated shareholder proposals have been increased in a sliding scale of between 5% and 25% prior support before resubmission is permitted.

Comments to the SEC can be made until in early January.  The import of these changes appears related to an attempt to bar shareholder proposals propounded by small shareholders who take a stock position just for the purpose of exerting policy pressure on the issuer, divorced from any true interest in the shareholder’s economic stake.

Trends in Executive Comp

It is boom time, particularly in the tech sector, and CEO compensation is climbing.  Comp consultants are in their heyday.  Twenty-five years ago, comp consultants were hired by management; today they are hired by boards of directors to figure out what to pay the C-suite.

At last Tuesday morning’s breakfast meeting of National Association of Corporate Directors/New England, an expert panel discussed the factors that enter into fixing CEO comp.  Needless to say, there were no pat answers.  However, certain themes emerged.

First, what are you aiming for?  What does the company need?  Is it all about the price of the stock?  To what degree does ESG enter into the equation?

Second, you are after all dealing with people.  Before getting embroiled in the metrics, what about the personality, and the goals and passions, of the CEO?

The experts guiding the discussion wanted to focus on current compensation (base salary and target bonus) and then long-term incentives, and whether those incentives should be tied to performance or longevity.  The answer, not surprisingly, is that each category needs to be filled to some degree.  There was also an expression of fear with respect to explaining to proxy advisors what the public company board was doing.  There was an undercurrent that if you did your job you could explain it to ISS, and a counter undercurrent that sometimes ISS didn’t listen.

One significant consideration:  it is very expensive to hire a new CEO, someone who is making a lateral move is likely to be seeking a step-up in salary.  There is a balance to be struck between paying for the performance you are getting and paying more for an unknown level of performance.

I’ve Been Thinking

Don’t normally post about international or domestic politics, but over the last week or so I found striking similarities between the political pressures in China and in the United States. My comments are not designed to be partisan (those thoughts are not the subject matter of any of my posts).

I start with a post by George Friedman, a noted political scientist and commentator whose viewpoint fairly can be summarized (at least by me) as “geography is history and does not change.” At risk of collapsing too much data into this restatement, I believe he sees the history of China since it was opened to the West in mid-19th century as a tension between the internationally oriented trading areas on the coast and the left-behind inland areas. One suggestive factoid: when Mao wanted to seize the country he had to leave the coast, take the great march inland, and find his army in the hinterlands.

Today’s on-line mid-day NBC News had an interesting piece on US politics; seems our US equivalent of this dynamic is not all about the coasts so much as those US areas with robust international airline contacts. NBC divides the country based on international orientation of airports, and those areas with substantial international exposure (many but not all are along the coasts) are trending Democratic and those airports in non-international areas (different from “rural areas”) are trending the other way.

Without drawing any conclusions about American elections or Chinese policy, I was struck by what seems to be a common socio-political dynamic: areas of a country end up with different outlooks and sensibilities depending on exposure to non-domestic exposure, and these differences appear to have significant rather than merely interesting political ramifications. This seems logical when you think about it, but never thought about it that way before, and sorting the US polity by airport analysis I thought was fascinating.

Blog posts don’t have the space for deep dives, but those interested might take a look for themselves.

SEC Initiatives for 2020

On Monday of this week the SEC addressed its enforcement initiatives for the coming year. No major changes, but things to note:

The Commission lacks staff to police all issues, including cyber issues. It expects all companies to have a cyber policy in place to warn the public of the risk and to make disclosures if there is an incident. (They noted their prosecution of Yahoo, which suffered wholesale data breaches.) This was in reply to a question as to whether the SEC would hold boards accountable, but does not really resolve that issue one way or another. Later it was noted that in 70% of its cases, the SEC in fact names individuals as well as the companies involved.

The SEC also sent yet another signal warning about coin offerings as involving securities, and thus a need for disclosure and for either an exemption from registration or undertaking such a registration.

A couple of interesting insights into SEC operations:

Lack of money for staff, and the disruption of the government shutdown, limits SEC cyber focus to larger companies, number of breaches which were not disclosed properly, and whether some other government agency (or country government) is already taking action.

The SEC is struggling under a learning curve to keep up with the increasing sophistication of matters requiring attention, particularly since crimes develop quickly and are effected electronically. But they note one positive fall-out of the staff shortage of people and resources: the SEC claims it is learning how to work more efficiently to cover its policing beat.

M&A Litigation Goes Federal

It used to be routine for law firms to file litigation against parties to M&A transactions, alleging among other things inadequate disclosure of material facts and unfair compensation to equity holders of the acquired party.  Many of these suits were lacking in substance and, of course, many ended up in Delaware State Courts by definition.  A “settlement” between plaintiffs’ attorneys and the companies would result in the provision of some additional disclosure, typically of little value to target shareholders, and the only cash compensation would come by way of the extraction of legal fees in favor of plaintiffs’ counsel. 

Companies were relatively anxious to enter into these settlements, paying small sums of money in exchange for a judgment which protected them from future substantive litigation based on actual corporate improprieties.  In a way, merger partners were purchasing future anti-litigation insurance for short dollars.

The Delaware Supreme Court, in a widely reported 2016 decision, put a clamp on this practice by noting in fact that many of these settlements were useless to shareholders and, therefore, not worthy of compensation of lawyers.

Lawyers, being ingenious, have started to bring these claims in Federal Court.  Federal judges, spread all through the United States, do not have experience with such matters.  They do not necessarily follow the Delaware lead.  There has been an incredible proliferation in Federal litigation of this sort.  Many transactions were challenged in multiple jurisdictions.  One law firm was reported, through approximately the end of September, 2019, as having filed 163 complaints in Federal District Courts opposing mergers, alleging inadequate disclosure in all but one of these filings.

One might expect that Federal Courts will end up where Delaware ended up for the same reasons of administration of justice.  However, no one has a fix on the timeline.

Easier IPOs

Today the SEC announced an amendment, effective in about two months, of regulations that will allow all companies to “test the waters” for an IPO without risking violation of the Securities Act. The original regulation allowed emerging companies (as defined) to speak to certain qualified investors (large and sophisticated, as defined) to test the market by asking potential investors as to their level of interest in an IPO that was going to be filed or had just recently been filed. Absent this regulation, such contact in most instances violated Section 5 of the ’33 Act as a solicitation of investment without an effective Registration Statement. The purpose was to jump-start investment in emerging companies.

The expanded regulation makes this “testing the waters” approach open to all companies regardless of size or stage of development, again designed to foster greater use of the Federal securities registration system. Why now?

You no doubt have observed that many large and successful companies, indeed some unicorns, have remained privately held. And, helped by registration relaxation under the ’34 Act, these companies could grow, have many shareholders, permit some trading of their securities, all without ever having to become subject to Federal registration and disclosure and governance control under any Federal law. This resulted in a decline in IPOs. This decline was thought to be to the detriment of the regulated trading markets. The SEC has taken this new action in order to increase “the likelihood of successful public securities offerings,” according to SEC Chair Jay Clayton.

Reg BI Under RIA Atack

Last week I posted that eight States had sued the SEC over the allegedly weak content of the SEC Regulation BI that set fiduciary standards for registered investment advisers and something a bit less robust (and more confusing perhaps) for registered broker dealers.

It seems that a couple of registered investment advisers also have sued the SEC on September 10, making similar complaint that the SEC lacked authority to issue BI and its related confusing interpretive release. The suit notes that the SEC in so acting had ignored the recommendations of the SEC staff.

An observation: I don’t think BI is confusing, and I think it is made more user-friendly by the release. The real point here is not that people are confused; the real point is that many people do not like the regulatory bottom line.

The twists and turns of these suits are beyond the scope of mere blog posts, but the point generally is that lots of people are unhappy with BI, complaining that brokers are getting a skate. As of now BI stands and becomes effective for brokers the first of next year, and its implementation has not (yet) been enjoined. I bet all brokerages are gearing up for BI compliance, including extensive disclosure requirements; who can take the risk of being in SEC violation?

I am getting tired of saying, as to this subject, “stay tuned.”

I’ve Been Thinking Transit…

Why does the Mass Transit Authority, that runs public transit, have a fleet of new vehicles with ID numbers that run into the 900s? Don’t these people believe in mass transit?

Why are twenty or so of these cars parked on High Street in Boston every morning, in front of the operations center? Being used for commuting?

Why do conductors on my commuter rail trains fail to punch my ticket more than a third of the time?

Why did it take 30 minutes by subway one day last week, after rush hour, to travel the Green Line from Hynes Auditorium to Park Street (I think it is 3 miles, maybe less)?

When will life science and tech companies stop coming to Boston, where transportation is totally broken?

Don’t people see that broken transit encourages young high earners to live in the city, driving up rents and driving out the middle class?

Why did the city encourage this trend by allowing incredible density in the new Waterfront, spending money to increase the problems of both transit and wealth disparity?

Do you agree with me that a walk through the new Waterfront’s back streets gives one the creeps as the buildings seem to close in on you in dark menace?

Why are we seizing on bike lanes as a solution, allowing a very small number of people who bike, and only in good weather, to take up road space and thus constrict auto, commercial and bus traffic that involves delay for a vastly greater number of people? (Being “green” should not require ignoring unintended consequences. Btw, I love biking but the point here is not anti-biking, it is solving commutation issues.)

Why does Keolis do so much better a job running parts of the French transportation network than the Boston system?

Why can’t we drop a big pipe in the harbor and run a shuttle track between North and South Stations, like the NYC link between Times Square and Grand Central (they built that without even the benefit of an ocean route, right under the busiest streets in the world)?

CEOs: It’s All About Culture

CEOs of some of Boston’s leading corporations (IDG, Hancock, Boston Scientific and State Street) were unanimous in agreeing that the major issue for management, and boards of directors, is establishing and maintaining the culture of the enterprise.

At a Boston breakfast meeting last week convened by the National Association of Corporate Directors – New England Chapter, CEOs discussed their methodology for establishing a culture throughout a company with numerous employees in different locations, or indeed different countries.  The methods for communicating corporate culture were numerous, and many companies adopted many of them.  Some CEOs regularly communicate with everybody about what they themselves are doing on a given day (whether it is work-related or personal-related, as personal values matter).  But one major theme was to carefully pick the next tier of executives to be “innovators” and not “managers.”

In the context of constant technological change, the recent statement of the Business RoundTable, calling upon corporations to consider not just profit but also impact on people and communities and the world, takes on relevance.  There is an art to balancing current return to investors against societal results.  Those societal results are important to long-term of viability, and particularly important in attracting and retaining a generation of employees deeply interested in ESG factors.

One speaker, Mohamad Ali, former President of Carbonite and newly installed CEO of worldwide company IDG, made reference to those things which one might predict a CEO should be concerned with:  trade wars.  He believes that over time significant impairment of profitability will occur by their continuation.

Other major issues:  integrating women into the workforce by overcoming reticence (based on fear they lack the necessary tools), to “take a chance” and reach for more senior positions; and,  as workforces will require greater skills, companies cannot afford to tell people to “go away and when you obtain the necessary skills come back to us” (companies must themselves undertake that training).

There was discussion of European and California laws on maintaining data privacy.  The younger generation has less concern for data privacy, but privacy in the long run is absolutely necessary.  The problem is with Congress, which does not have an understanding of the issue; what is needed is a uniform law throughout the United States so as to avoid inconsistent regulations, such as the new California data privacy statute.