As noted in FEI’s “Financial Reporting Blog,” the SEC’s Office of Chief Accountant posted this “Staff Paper” last week that seeks comments regarding how to incorporate IFRS into US GAAP, including the “condorsement” approach (which is a process by which the FASB would gradually adopt specific parts of IFRS over a transitional period). The paper makes clear that the SEC hasn’t yet decided whether to incorporate IFRS – or highlight a preferred method to do so. Instead, it seems comments on alternative approaches in case it does. Comments are due by July 31st.
FINRA: IPO Spinning Rule Delayed
Suzanne Rothwell reports the SEC recently approved an amendment to FINRA’s new Rule 5131 – which will regulate IPO allocation abuses – to delay the new spinning and acceptance of aftermarket orders provisions to September 26th and delete a provision that would have required that broker/dealers have procedures that prevent investment banking personnel from influencing a new issue allocation. The latter requirement would have been problematic because it’s the investment banking personnel that are often also engaged in the syndicate allocation activities – it may be impossible to separate them. The rest of the rule was implemented last Friday. We have posted memos on Rule 5131 in our “Underwriting Arrangements” Practice Area.
Webcast Transcript: “Nuts & Bolts of Bank M&A”
We have posted the transcript from the DealLawyers.com webcast: “Nuts & Bolts of Bank M&A.”
Yesterday, the SEC adopted rules – by a 3-2 vote – to implement Section 922 of Dodd-Frank, which added Section 21F to the Exchange Act. Here’s the 305-page adopting release – and here’s the press release and SEC Chair opening remarks.
Despite much criticism and lobbying, in the end, the SEC didn’t change its proposed framework to require whistleblowers to use a company’s internal reporting system as a condition to receiving a SEC bounty – although the final rules do include more incentives for whistleblowers to “blow” internally first. This controversial rulemaking will produce a torrent of memos and opinion pieces – we’ll post them in our “Whistleblowers” Practice Area as they come in. Here’s memos from Cooley, Morgan Lewis and Morrison & Foerster. The final rules become effective 60 days from Federal Register publication.
House Bill: Attacking Dodd-Frank’s Whistleblower Provision
Meanwhile, House Representative Michael Grimm (R-NY) has introduced a bill that seeks to change the whistleblower provision in Dodd-Frank. Some believe the bill was introduced to put pressure on the SEC ahead of its rulemaking. This May 24th letter from a group of groups asks Congress to leave the whistleblower provision intact.
SEC Proposal: Changes to Rule 506’s “Bad Actor” Disqualification
Yesterday, also by a 3-2 vote, the SEC proposed amendments to Rule 506 of Regulation D to implement Section 926 of Dodd-Frank, which would disqualify offerings by companies involving persons covered by the rule if they were subject to a “bad actor” order from the SEC (formerly known as “bad boys” in a less-politically correct world). Here’s the proposing release – and the press release. As this Skadden memo notes: “With more than 90% of the offerings made under Regulation D seeking exemption pursuant to Rule 506, these proposed rules could have a significant impact on the applicability of the exemption.”
As I blogged back in January, I’ve come around to realize that the importance of Twitter has grown immensely over the past six months. I see broad acceptance by investors and investor relations departments. I see it growing as a mainstream news source. Although I still don’t see as many corporate lawyers on it, I know that day will come soon – soon I will revise my periodic blog about how Twitter is not yet critical for our corporate law community.
Meanwhile, I have been having fun getting back on the road preaching how social media is changing how we get information – and how the nature of it is different than just “push” or “pull,” rather it’s both since it’s supposed to be a “conversation.” And how ultimately social media can change your career if you take advantage of its opportunities.
The best part is that these social media panels give attendees an opportunity to do something they might not have done before – dance at a conference! Here is the MidAtlantic Chapter of the Society of Corporate Secretaries dancing in Philly yesterday before Doug Chia and I spoke on a social media panel. We were bewildered when what was left of the crowd – we were the last panel of the day – asked hordes of questions at the end. Far too many for us to answer in the time allotted. The entire panel should have been just Q&A!:
And here’s the Southeastern Chapter of the Society in Atlanta thinking about dancing before my solo presentation. They probably thought conference dancing was a little strange – but that’s okay as my stated primary goal was scaring folks into dipping their toes into workforce use of social media (ie. trying something new):
Can a Tweet Meet a Company’s Regulation FD Obligations?
During our recent “Tackling Social Media Issues” webcast, the panel tackled many tough issues that many of us will be facing in the near future. One issue not covered much during the program was the issue of whether a tweet can comply with Regulation FD. Dominic Jones provides his analysis – partly drawn from the comments made during the webcast – in this great piece on his “IR Web Report.”
Webcast Transcript: “Tackling Social Media Issues”
We have posted the transcript for the webcast “Tackling Social Media Issues.”
By the way, here’s a 4-minute video interview where I discuss social media after I spoke about the topic at a PLI conference recently:
Last week, the American Federation of State, County, and Municipal Employees released its annual report regarding how mutual funds vote on compensation agenda items. The report reviews how 26 large fund groups voted on 10 specific items, including the voluntary “say on pay” votes at Motorola and Occidental Petroleum, compensation committee members at Nabors and Abercrombie & Fitch, and a shareholder proposal to end “golden coffin” benefits at Verizon Communications. The report doesn’t include any 2011 votes, as mutual funds aren’t required to disclose those votes until this August.
As noted in their press release, the report criticizes four mutual fund groups as “pay enablers” (Vanguard, BlackRock, ING and Lord Abbett). On average, these four fund groups supported over 90 percent of management proposals. In comparison, AFSCME praises four other fund families for being “pay constrainers” (Dimensional, Dreyfus, Oppenheimer and Wells Fargo).
Risk Realized? What Happens When the Regulators Go Public?
Way back when the NYSE and Nasdaq went public a few years ago, one of the biggest concerns was how they would regulate their listed companies when they had the pressure of being public on their shoulders. In his “IR Web Report,” Dominic Jones analyzes how the NYSE may be changing their rulebook to favor one of their side businesses in his recent piece entitled “Alarm as NYSE seeks to add IR services to rulebook.”
Our “Q&A Forum”: The Big 6500!
In our “Q&A Forum,” we have blown by query #6500 (although the “real” number is much higher since many of these have follow-up queries). I know this is patting ourselves on the back, but it’s over eight years of sharing expert knowledge and is quite a resource. Combined with the Q&A Forums on our other sites, there have been over 20,000 questions answered. It’s pretty cool now that the Q&A format is all the rage in Silicon Valley (eg. Quora) – we’ve been in this space for a decade!
You are reminded that we welcome your own input into any query you see. And remember there is no need to identify yourself if you are inclined to remain anonymous when you post a reply (or a question). And of course, remember the disclaimer that you need to conduct your own analysis and that any answers don’t contain legal advice.
One of the oddest provisions of Sarbanes-Oxley was Congress creating the PCAOB with a dotted line to the SEC. I’m not sure that this was an obligation that the SEC wanted, particularly after a lawsuit involving this unusual regulatory framework (ie. one regulator reporting to another) wound up in the Supreme Court. After its SCOTUS victory, the SEC posted written procedures for appointment of a member or chair of the PCAOB in November.
Now that the SEC is actively seeking a PCAOB board member with a CPA background, it has taken another new step – posting information about this job search and even posting “sample letters” that it sent on Friday to 14 leaders in the financial industry seeking their input (egs. Ben Bernanke, Timothy Geithner, Jim Doty).
The SEC’s New Chief Economist and Risk Fin Director
On Friday, the SEC announced it had hired Vandy Professor Craig Lewis to serve the twin roles of Chief Economist and Risk Fin Director. Craig has some awkward shoes to fill in the new Risk Fin Division in the wake of this Reuters article about the inaugural Director Henry Hu’s perceived lack of accomplishments and his unusual reimbursement arrangement with the agency.
The LinkedIn IPO: A Favorable Comparison to the Internet Bubble Years
An anonymous member sent in these thoughts on last week’s IPO by LinkedIn:
In the LinkedIn IPO, I was glad to see that:
1. a rational pricing of the security;
2. the company’s CEO down-played the market performance of the stock on the first day; and
3. the prospectus disclosure made clear that it won’t be profitable in 2011 – although still running a profit for the first quarter.
I also note that, unlike so many of the tech companies going public during the “IPO Internet Bubble,” this is a company that had a profit last year and that the underwriters and their affiliates did not purchase LinkedIn securities in a pre-IPO private placement or extend a credit facility to the company. Such pre-IPO private placements by the underwriting firms had the effect of enhancing the company’s stockholder’s equity and also adding to the underwriting entity’s risk because the firm was also, directly or indirectly, an investor in the company.
My view is that so long as Wall Street can restrain itself from engaging in pre-IPO investments in the companies they take public and otherwise “fixing” the aftermarket in some new way not already addressed by the SEC’s expansion of the prohibitions of Regulation M to aftermarket trading, the “irrational exuberance” of the public to purchase shares in these kinds of companies will not cause broader economic problems when the trading price falls back to more rational levels in line with the IPO price and the value of the company.
The quality underwriting firms in the “good old days” required at least three years of profits before taking a company public. It would be good if the WSJ tended to indicate disfavor about the secondary market hysteria in acquiring the shares of an IPO company with just one year of profits – in order to inject a voice of reason – and not appear to encourage “Bubble” mentality. The run-up in the aftermarket price is irrational – and maybe at least partially the result of too many ordinary folks having the ability to trade for themselves directly.
Nonetheless, this is a better situation than the ’90s IPO Bubble because if the public wants to overpay for the stock in the secondary market (as noted in this NY Times article today), then each person takes that risk and their individual loss should not have far-reaching consequences because the broker-dealer firms are not taking a position in the company and the secondary market price is not the result of fraud and manipulation.
Broc’s note: I love how Dominic Jones has put together this “story” of how LinkedIn’s IPO played out over social media channels. It’s a brilliant idea to tell the story like that. And I also love Mark Suster’s look at how LinkedIn compares to all the other hot start-ups in Silicon Valley right now.
In addition, I have found a Form 8-K filed by IsoRay from back in February where the company reported failing its SOP even though there were many more “For” votes than “Against” based on the way it decided to interpret Minnesota law (in comparison, Target – another Minnesota corporation – described the SOP standards a bit differently in its proxy statement – their way seems to make more sense). Actually, Seth Duppstadt of SharkRepellent.net found this for us – thanks!
The SEC recently announced its first use of a deferred prosecution agreement, one of the initiatives announced in January 2010 to encourage greater cooperation in enforcement investigations. The announcement of this agreement with Tenaris S.A. follows the agency’s first non-prosecution agreement in December with Carter’s Inc.
Tenaris, a manufacturer of steel pipe products, is incorporated in Luxemburg and has American Depository Receipts listed on the New York Stock Exchange. Tenaris allegedly bribed Uzbekistan government officials in bidding for government pipeline contracts, and made almost $5 million in profits from the contracts. A world-wide internal investigation triggered by other matters and conducted by outside counsel revealed Foreign Corrupt Practices Act violations in Uzbekistan. The company self-reported to the SEC and the Department of Justice, cooperated with the government and undertook extensive remediation efforts.
The SEC explained that Tenaris was an “appropriate candidate” for the agency’s first deferred prosecution agreement because of the company’s “immediate self-reporting, thorough internal investigation, full cooperation with SEC staff, enhanced anti-corruption procedures, and enhanced training.” The SEC noted that the “company’s response demonstrated high levels of corporate accountability and cooperation.”
Under the deferred prosecution agreement (available here), the SEC will refrain from bringing civil charges against the company; however, if the Enforcement Staff determines that the company has failed to comply with its obligations under the agreement, the Staff may then proceed with an enforcement recommendation to the Commission. The agreement includes a statement of facts that is not binding against Tenaris in other proceedings. Tenaris also agreed to cooperate with the SEC, DOJ and other law enforcement agencies; although the company shared the results of its internal investigation with the government, its continuing cooperation does not require it to waive the attorney-client privilege. Tenaris further agreed to pay $5.4 million in disgorgement and prejudgment interest. Relatedly, the company entered into a non-prosecution agreement with DOJ under which the company is paying a $3.5 million criminal penalty.
The factors and considerations that the Staff will rely upon in determining whether to enter into a non-prosecution agreement, a deferred prosecution agreement or a conventional settled enforcement action remain uncertain at this point, but, based upon the Commission’s actions to date, it is apparent that the breadth of any misconduct, the involvement of more senior corporate officers and a willingness to disgorge all profits from the alleged misconduct will likely be relevant factors beyond those specifically highlighted by the Staff in the Carter’s and Tenaris cases.
Wilson Sonsini Wins Chancellor Chandler Sweepstakes
As noted in this press release, Delaware Chancellor William Chandler announced he’s headed to Wilson Sonsini to open a Georgetown, Delaware office (as well as work in NYC). This WSJ blog captures the essence of the story – and here is more from Francis Pileggi…
Coming Soon: Over 175 New Derivatives Provisions
In their memo, Davis Polk notes that over 175 new Dodd-Frank derivatives provisions are scheduled to automatically go into effect on July 16th. Many of these provisions do not require action from market participants. Many other provisions could be deferred by the regulators based on their close connection to proposed rules. Yet, a number of significant self-executing provisions remain. The firm’s memo identifies some of these new provisions and some of the required tasks to become compliant with them.
The White House on Wednesday submitted to the Senate a pair of nominees for the Securities and Exchange Commission, requesting a second term for Democrat Luis Aguilar and naming former SEC staffer Dan Gallagher Jr. for a Republican seat that is due to become vacant in June. Mr. Gallagher, now a partner at law firm Wilmer Cutler Pickering Hale & Dorr LLP’s securities practice, served as a top official in the SEC’s trading and markets division during the financial crisis. He had served for several months as that division’s acting co-head when he left the agency in January 2010.
Mr. Gallagher, who joined the SEC in 2006, has served as counsel to former SEC Commissioner Paul Atkins and SEC Chairman Christopher Cox, both Republicans. Mr. Gallagher, if confirmed, would fill the seat being vacated by SEC Commissioner Kathleen L. Casey. Ms. Casey is stepping down next month, when her term expires. Mr. Aguilar, the Democrat, was nominated under President George W. Bush in 2008. His term expired last June. SEC rules allow commissioners to stay for as long as 18 months past the expiration of their terms if no successor has been appointed.
The SEC is an independent federal agency with five commissioners. With a Democrat in the White House, the commission is split, with three Democratic and two Republican seats. On commission votes, Mr. Aguilar typically sides with Chairman Mary Schapiro and Commissioner Elisse Walter, who occupy the other two Democratic seats. Messrs. Aguilar and Gallagher will need Senate confirmation. If confirmed, they would be serving at an agency that in recent months has stepped up insider-trading cases and is grappling with changes to the financial industry in the wake of the financial crisis.
SEC to Adopt Dodd-Frank Whistleblower Rules on May 25th
Next Wednesday, the SEC will hold an open Commission meeting to adopt final whistleblower rules under Dodd-Frank.
Putting an Overall Pricetag on XBRL
I’ve been blogging about the upcoming deadline regarding mandatory XBRL for smaller companies and the relative high pricetag for them. There is an interesting blog on this topic by Daniel Roberts, CEO of raas-XBRL, who estimates it will cost companies an aggregate of $550 million and over $1 billion during the 2011/2012 filing season.
Surprises from Spin-Offs
In this podcast, Carrie Darling of Callaway Golf Company shares her list of Top 5 surprises from spin-offs including:
– Work flow expectations and reality
– Culture (parent versus new co.)
– Restructurings
Poll: The Backyardigans
I had never heard of the TV Show called “The Backyardigans” but Carrie assures me it’s all the rage with the tot set and wanted me to post this poll:
In memory of Steve Carell’s departure from a fine show. An episode of “The Office” from a few seasons ago was a classic. Entitled “Shareholder Meeting,” the episode deals with a suffering corporate performance by Dunder-Mifflin – which is close to declaring bankruptcy – and an annual shareholder meeting that is not too far off the “bizarro” mark from Fortis’ crazy meeting last year. [The episode is archived on Hulu.]
The episode peaked at the end when Dwight Schrute endeavored to come up with a better way to run the meeting by making these suggestions during his turn to ask a question of management during the Q&A portion of the meeting:
“I’ve been standing in line all day. If this is any indication about how this company is being run, we are in big trouble. I want to say that there are options. What about taking a number? What about line varieties? Like an express line for quick comments of ten words or less that could move much more efficiently. What about ropes along the lines that you can hold on to?”
Corporate Governance Analysis: Issues Raised by “The Office”
Taking a page from the “That’s What She Said” Blog – a blog devoted to analyzing the employment law issues raised by “The Office” – below is my analysis of a few of the governance issues raised by this shareholder meeting episode:
1. Heavy security presence – Although a heavy security presence can needlessly scare attendees, it does make sense if a company believes there can be trouble and it wants to dissuade any would-be troublemakers from acting out. Given that Dunder Mifflin was in financial trouble, it probably was reasonable in this case.
2. Informing attendees of the ground rules – Attendees got rowdy pretty early, booing management right off the bat. Management should have done a better job controlling the meeting so it wouldn’t get out of control. One step in this direction is handing out ground rules for meeting conduct as folks came in the door.
3. Handling speakers – The all-white male senior management team also did poorly in managing its own microphone – allowing a middle manager (Michael Scott) to go beyond prepared remarks and blurting that the company had a 45-day plan when it didn’t. Not that I believe management’s remarks need to be completely scripted – but only true spokespersons should be delivering key statements. Then again, management was clueless in the face of angry attendees, essentially forcing Michael to do something to stem the tide.
4. 15-minute break during meeting – After Michael’s outburst about a non-existent plan, management called for a meeting break. This is not a bad idea if a meeting is getting out-of-control.
5. Long lines to ask questions – Perhaps the biggest surprise was that in terms of good governance, the meeting wasn’t a total wash. Numerous microphones were available and management appeared prepared to allow any and all questions.
6. Whistleblower protection – “That’s What She Said” provides analysis of the whistleblower implications of this episode, as well as the employee relations nightmare caused by management showing up in limos.
Poll: Who Should Serve as Inspector of Election & Tabulator for Annual Shareholder Meetings?
I’ve written before about my opinion on this topic – and practice still widely varies (and is evolving) – but this poll asks your opinion rather than what the practice actually is at your company (or at your clients):
Early Bird Extended for Say-on-Pay Intensive Conference – But One Time Only: Due to so many requests from those too mired in the proxy season to make the budget request, we have extended the early bird discount for our annual package of executive pay conferences to be held on November 1st-2nd in San Francisco and by video webcast: “Tackling Your 2012 Compensation Disclosures: 6th Annual Proxy Disclosure Conference” and “The Say-on-Pay Workshop Conference: 8th Annual Executive Compensation Conference.” We will not be able to extend this deadline again. Save 25% by registering by June 24th at our early-bird discount rates.
Posted: Complete List of Say-on-Pay Additional Soliciting Materials
Thanks to Dave, we have greatly expanded the list of additional soliciting materials filed by companies who campaigned for their say-on-pay – typically by disputing recommendations made by ISS in a letter to shareholders – in CompensationStandards.com’s “Say-on-Pay” Practice Area. We have 31 examples posted.
A note from a respected compensation consultant: “One of the reasons the Europeans are so muted in their criticism of pay is they get a fraction of the information the US and UK puts out. It is also worth noting that equity is vastly less in the EU than the US, so pay levels are much less.”
DOL: Considers Updating E-Delivery Standards for Employee Benefit Plans
Here’s news from Jeff Capwell and Lindsay Goodman of McGuireWoods, pulled from this memo: The DOL recently issued a request for information about providing information electronically to participants and beneficiaries of ERISA-covered employee benefit plans. Existing DOL standards for electronic delivery of plan information have been unchanged since 2002. Responses must be submitted by June 6th.
Last year, I blogged several times about Senator Grassley’s desire for a study to be conducted regarding SEC Staffers who depart for jobs at organizations that they regulate. I also blogged that this issue is as old as the SEC itself. And note that it’s an issue that exists at most federal agencies, not just the SEC (eg. last week’s FCC Commissioner announcement).
Ahead of reports expected from the GAO and the SEC’s Inspector General on the topic, the Project on Government Oversight (POGO) released a study on Friday that shows – between 2006 and 2010 – at least 219 former SEC staffers appeared before their former agency on behalf of private-sector clients in 800 different matters. POGO also has made its database available online, where you can search by Division or even an individual (yes, Big Brother is watching). Here’s an article covering the study.
Perhaps even more troublesome for the SEC, a House Financial Service Committee hearing produced fireworks on Friday when it was revealed that the former Chief of the SEC’s Fort Worth Regional Office – Spencer Barasch (now at Andrews Kurth) – has become the subject of a criminal investigation for continuing to represent fraudster Allen Stanford even after he was repeatedly told by the SEC’s Ethics Office that he couldn’t under rules barring former senior Staffers for appearing before the SEC on matters that they worked on during their time on the Staff. This NY Times article notes that Barasch blocked efforts to pursue Stanford at least 6 times over 7 years when he was at the SEC. Not good.
The SEC’s Whistleblower Office Does Not Want To Talk To You
Hat tip to Werner Kranenburg for pointing out this Forbes’ article entitled “SEC Whistleblower Office Does Not Want To Talk To You.” The author – Edward Siedle – tried calling the SEC’s new Office of the Whistleblower with disturbing results.
The SEC’s home page features a prominent button called “Questions – Tips and Complaints – Whistleblower Provisions,” right up in the top right corner. Prime real estate. But when you navigate to any of the pages associated with that button, your only options are submitting your facts electronically or through snail mail. No phone number.
And then Edward apparently called the Office of Public Affairs who told him the new Office didn’t exist (even though the SEC made the effort to issue this press release announcing the new head – my good friend Sean McKessy – back in February, even though the Office hadn’t been created yet. It still doesn’t exist as it’s still not funded). Edward was then given a phone number that wound up being the Office of Investor Education. And whistleblowing is not really their forte…
The Bigger Picture: Why Doesn’t the SEC’s Enforcement Division Provide a Phone Number?
Besides one more episode making the SEC seem silly, this article raises a serious issue. I often support the SEC – in this blog and otherwise – because I strongly believe in its mission, I’m in awe of the wisdom of many of its Staffers and I recognize how tough it is to get things accomplished there given its limited resources. But I had assumed that a fundamental problem from when I served there a dozen years ago had been fixed.
Now, I realize I was wrong to make that assumption. When I served in Corp Fin’s Office of Chief Counsel, a fair number of the calls I returned – returning calls to those with interpretive questions is the largest component of that job – were to laypeople who had some type of Enforcement complaint. Since the Division of Enforcement didn’t allow anyone with a fraud tip to phone it in, those calling the SEC with a complaint often got routed to Corp Fin – by the SEC’s receptionist I suppose – and trust me, it was not my favorite part of the job.
For starters, I wasn’t in Enforcement and I had enough on my plate as it was. But the real reason that I didn’t like these calls is that I couldn’t help them – they simply had made a bad investment decision and no fraud was involved. The caller just needed someone to talk to (i.e. they were kicking back drinking a beer on their couch, with Maury blaring in the background). Of course, the few calls that I received that appeared “legitimate,” I referred to the Enforcement Division.
Anyways, I always was troubled that Enforcement didn’t bother to make themselves accessible because collecting fraud tips is one of their primary functions regardless if a tip proves meaningful or not. As far as I can tell – nothing has changed. Here is Enforcement’s page regarding how to submit a tip – and that page eventually leads you to an online portal that requires a bunch of data to be submitted regarding your tip (after you click “accept” on a lengthy disclaimer). No phone number is posted. And this is a framework that doesn’t seem to provide a lot of comfort that taking the time to report a fraud will result in any action.
I know that Enforcement is strapped and has nowhere near the manpower it needs to pursue the numerous open investigations that it already has open. But it would seem relatively easy to rotate a group of Enforcement Staffers to pull phone duty so that someone would always be available to either take new complaints by phone or respond to calls left on voicemail. This is something that I imagine every other enforcement agency in the country maintains – and it would be seem particularly important to establish after the grief the SEC has received in the wake of Bernie Madoff, Allen Stanford, etc. Until that happens, I imagine the good folks in Corp Fin’s OCC receive fraud complaints and are taking in Maury…