This Conference will lead off with the SEC Staffers who wrote the rules. Then, the Rule 144 experts – Jesse Brill, Alan Dye and Bob Barron – will provide the essential implementation guidance that you will need to protect yourself and your executives. With well over a century of Rule 144 experience among them, each of them continues to advise issuers, transfer agents and the major banks on Rule 144 issues on a daily basis – just as they have done since Rule 144 was adopted.
The Key Conference Materials alone – which will provide the specific procedures, new memos, legends, representation letters, etc. that you will need to protect yourself – make this Conference invaluable. Act now to take advantage of reduced rates for those of you that use the TheCorporateCounsel.net and The Corporate Counsel by registering online or via this order form.
Hot Topic: CEO Succession Planning
Earlier this week, the WSJ ran a column noting how relatively few boards (still) don’t engage in the important practice of CEO succession planning. I say “few” even though the ratio is about 50%, because all boards should regularly engage in succession planning. In this podcast, Ron Garonzik of the Hay Group provides some insight into the CEO succession process and issues related to it, including:
- How should boards plan for orderly succession planning?
- What factors should a board consider when weighing internal vs. external succession candidates?
- How about emergency succession planning?
- Are there any developments recently changing how boards plan?
- Should boards have any written policies regarding planning – or is it more of an informal process?
Full Circle: Pfizer Adopts a Majority Voting Bylaw
Over two years ago, Pfizer kicked off the “majority vote movement” when it became the first company to adopt a director resignation policy. Last month, Pfizer joined the many companies that have taken a step further and adopted a majority voting bylaw (that requires director nominees to receive a majority of votes cast to be elected in an uncontested election). A plurality vote threshold would continue to apply in contested elections.
Many investors – including the Carpenters Union – argue that director resignation policies alone are not sufficient since it’s unknown whether these policies could be enforced against a recalcitrant director. According to this report, nearly half of the S&P 500 now have a majority vote standard, with about another quarter having director resignation policies.
Perhaps exhausted by the ongoing controversy surrounding the dual shareholder access proposals – 34,000 comment letters! – yesterday’s open Commission meeting failed to produce the type of confrontation that were widely expected. Many felt this Commission meeting could rival a WWF match. But alas, after each Commissioner read their statement, few questions were even asked of the Staff. Here is the SEC’s press release, a Corp Fin Staff statement and the Chairman’s statement.
The vote was 3-1 – with short-termer Commissioner Nazareth dissenting – for the Staff to overturn the AFSCME decision and adopt rules to reiterate the Staff’s long-standing view that companies may exclude access proposals under Rule 14a-8(i)(8). As he had stated before this vote, Chairman Cox noted he would have preferred to do more and promised to revisit this topic next year – but said the SEC needed to clarify the ground rules ahead of this proxy season.
Following up on some thoughts expressed in comment letters, Commissioner Nazareth expressed concerns that this rulemaking might affect the SEC’s other 14a-8 interpretations, such as on majority voting and declassifying boards, but the Staff said they felt comfortable that this would not happen.
The real fireworks began right after the meeting, when all sorts of investor groups, members of Congress, etc. issued statements disapproving the SEC’s rulemaking (eg. CalPERS; CII; RiskMetrics; AFL-CIO; Rep. Frank; Sen. Dodd) – and some approved (eg. Marty Lipton). It’s notable that the opposition is fairly organized on this issue; I can’t imagine something like this happening even five years ago.
In addition, AFSCME submitted proposals to amend the bylaws of Bear Stearns and JP Morgan Chase to create proxy-access procedures (North Carolina’s Treasurer joined in co-filing both proposals and New Jersey’s Division of Investments joined in the Bear Stearns one). And I think we will be seeing more of these proposals submitted to companies soon enough – so expect this issue back in court fairly soon…
[Speaking of fireworks, check out this 1-minute video of the last classic hotel in Vegas being imploded a few weeks ago. The Rat Pack used to do their thing at the Frontier.]
SEC Adopts Rules to Facilitate Shareholder E-Forums: My Ten Cents (Sorta)
As noted in this press release and Corp Fin Staff statement, the SEC also voted to amend the proxy rules to facilitate the use of electronic shareholder forums. The rules enable participation in an electronic shareholder forum, which could potentially constitute a solicitation subject to the current proxy rules, to be exempt from most of the proxy rules if the exemption conditions are satisfied. Here is a statement from Chairman Cox.
What does this mean? The demise of the traditional annual meeting? No more shareholder proposals (the rule itself doesn’t prohibit proposals, but maybe shareholders will find better avenues for their concerns and wishes)? Or will nothing happen? With Web 2.0 in its infancy, I think it’s too soon to tell what the future holds.
Borrowing very liberally from Gary Lutin (who has done a related podcast described below), here is a 10,000 feet level perspective on how e-forums might work effectively:
- The nature of a forum process depends on the issue or agenda that’s defined, and on who’s attracted to participate. If a genuinely open forum is established to address value issues, I think it will attract a fairly broad range of “mainstream” investors interested in how management will make the company successful.
- Rather than a narrow constituency that’s attracted to protest rallies,
corporate managers can – and should – make effective use of the “forum” processes themselves to define issues, rather than simply respond once someone else has defined an issue.
- A genuinely open forum can actually be a very effective means for management to understand and respond to investor concerns, assuming one defines the agenda properly and keeps it on track.
The Future? Independent Shareholder Forums
Quite an interesting person with some great ideas – and who has executed some of these ideas! (that’s the hard part) – Gary Lutin, CEO of Lutin & Company and Founder of ShareholderForum.com, shares some insight into how an independent shareholder forum works in this podcast, which includes discussion on:
- What is ShareholderForum.com?
- How do the shareholder forums work?
- Can you describe what happened recently with the forum devoted to Verizon?
- What should be the goals of independent shareholder forums?
Yesterday, Tom Kim was named Corp Fin’s new Chief Counsel, filling the slot that Dave Lynn lit up until six months ago when he joined our team. Tom has rather large shoes to fill.
Tom has been serving in Chairman Cox’s office and as Counselor to the General Counsel, focusing on Corp Fin issues. Before that, he worked under former Deputy Director Mike McAlevey at General Electric and for former Director John Huber at Latham & Watkins – so he’s had plenty of exposure to the Division. Tom’s new position also includes a title of “Associate Director,” a new title (and more money) for the Chief Counsel position.
A Tale of Two Voluntary E-Proxy’ers
Over the past month, I have found only a few new companies trying voluntary e-proxy (eg. Fannie Mae; see full list in our “E-Proxy” Practice Area) – so maybe the initial reports of low retail shareholder turnout is driving companies to “wait and see.” For the companies doing e-proxy, I am still disappointed about how they fail to clearly inform shareholders about what they’re doing on their IR web pages – and more importantly for them, fail to make it easy for shareholders to vote.
One of these new e-proxy’ers – Pike Electric – has put together a 6-minute video annual report. As noted in this press release, the purpose of providing the video is “provide viewers with highlights of Pike Electric’s key accomplishments in fiscal 2007, and includes an overview of Pike Electric and its strategic initiatives. The short documentary also provides stockholders and other interested parties the opportunity to see and hear directly from Pike Electric’s management team.”
The idea of an annual report video is pretty interesting on its face, but more important in my mind is that the Pike Electric IR web page contains a prominent link to Broadridge’s page where shareholders can vote. This is something that I urge every company to do, even if they are not doing e-proxy!
In the “CEO’s Letter to Shareholders,” Pike Electric informs shareholders that they are doing e-proxy – and explains briefly how the company is using a video this year rather than a 10-K wrap. Two points – one substantive and one not:
1. I guess I’m a little confused why the video is called an “annual report.” I understand the theory that it’s part of a 10-K wrap, but looking at the video’s contents, my guess is that the company will be relying on the 10-K itself to satisfy Rule 14a-3(d) – so it doesn’t really matter what the video’s content is except from a 14a-9 perspective. However, by calling it a “video annual report,” it might imply that the video standing along somehow meets the 14a-3 requirements, which I don’t think it does. Anyone else have thoughts on this?
2. In my opinion, it would be better if the CEO’s letter was in HTML rather than a PDF. In this alert, Jakob Nielsen – the godfather of online usability – does a fantastic job of explaining why the PDF format not good for online reading.
In comparison, another new e-proxy’er – Itex – also has a bunch of videos with the CEO describing its business – but this company doesn’t label any of them as an annual report. I really don’t view Pike Electric’s video as being different than what Itex has done (although some of the statements in Itex’s latest video scare me – check out the CEO’s statements about “how buying Itex’s stock is no different than buying Microsoft and Intel, just call your broker”).
I like the idea of companies using video to illustrate what they are doing, but I hope that the legal department screens these before posting. To play it safe, I would ensure the CEO refrains from ever mentioning the term “stock” in a video.
Regarding e-proxy, Itex’s “Annual Meeting” page has a link to enroll in e-delivery – but it doesn’t mention that Itex is doing e-proxy nor does it provide a link to allow shareholders to vote. It’s also notable that Itex didn’t bother to update their “Investor FAQs” to indicate they are doing e-proxy; rather the FAQs note that shareholders can request e-delivery if they want. Although companies that do e-proxy may also want to collect consents, I worry that shareholders may find this FAQ confusing if there is no mention of e-proxy in any of the FAQs.
I randomly selected these two companies for this blog; I easily could have selected almost any other company trying e-proxy so far because I haven’t seen many that do a solid job of clearly communicating to shareholders what they are doing – and making it easy for them to vote…
Another Potential E-Proxy Implementation Issue?
Believe it or not, Keith Bishop recently came upon another potential e-proxy implementation issue. If a company has issued stock options in California at a time when it was not listed on the NYSE or the Nasdaq Global Market (fka National Market), it’s likely that the company’s option plan requires delivery of financial statements to security holders.
The reason is that California’s exemption for option plans required plans to provide for shareholders to receive financial statements (except when the issuance was limited to key employees with access to equivalent information; see 10 CCR Sec. 260.140.46). This same requirement applied if the company qualified the plan.
Although the requirement was amended this year to be inapplicable to Rule 701 compliant plans, Keith suspects that many companies still have plans requiring delivery of financial statements to shareholders. This could present a problem if they intend to use the new notice and access alternative. Therefore, Keith recommends that companies check their option plans if they intend to use e-proxy.
Travis Laster notes: On November 21st, Chancellor Chandler of the Delaware Court of Chancery issued a further decision in Ryan v. Gifford, the stock option back-dating litigation involving Maxim Integrated Products, Inc. This ruling addressed whether certain officer defendants could be subject to jurisdiction in the Court of Chancery, but has broader implications for potential officer exposure.
Under 10 Del. C. sec. 3114, officers and directors of Delaware corporations implicitly consent to the jurisdiction of the Delaware courts for actions relating to their duties. Section 3114(b), the implied consent statute for officers, became effective on January 1, 2004. Certain officer defendants in Ryan argued that they could not be subject to jurisdiction in Delaware because they did not take any action in their official capacities after this date. The Chancellor agreed. He specifically held that the following acts are NOT sufficient to establish Delaware jurisdiction: (i) holding allegedly back-dated options, (ii) allowing allegedly back-dated options to vest, and (iii) exercising allegedly back-dated options.
The Chancellor went on to hold, however, that officers who were alleged to have participated in some way in the purported scheme after January 1, 2004 could be subject to Delaware jurisdiction. He based this ruling on his holding that steps allegedly taken to conceal stock option backdating constitute a breach of fiduciary duty sufficient to give rise to Section 3114(b) jurisdiction. In Ryan, it was enough that the plaintiffs had alleged facts suggesting that the officer (i) the officer knew of the back-dating and (ii) he kept silent and concealed his knowledge of the backdating in order to escape detection. The officer’s alleged breach post-2004 breach was thus not his role in the granting of the options, but rather his subsequent participation in the alleged concealment.
Although the Chancellor’s jurisdictional ruling will have importance for officers sued in Delaware, the more important and wide-ranging aspect of the holding is the additional clarification on how a claim can be stated against an officer for involvement in stock option backdating. Practitioners investigating stock-option backdating or who are involved in stock option backdating litigation should take particular note of this ruling.
Last week, Kevin LaCroix weighed in on his D&O Diary Blog on the recent dismissal of the backdating lawsuit filed against Apple. As Kevin notes, “Judge Fogel’s opinion is seemingly important, particularly his comments with respect to loss causation, given that many of the options backdating cases have been filed in his judicial district – and indeed many backdating cases are pending before Judge Fogel himself. However, in issuing his opinion, Judge Fogel has repeated his unfortunate practice of issuing his opinions as ‘Not for Citation.’”
Note last week’s WSJ article about the growing numbers of backdating lawsuits being settled or dismissed…
As noted above, private litigants are making headway with settling backdating cases. In this podcast, Chris Keller of Labaton Sucharow discusses options backdating lawsuits and the recent settlement of the Mercury Interactive options backdating litigation, including:
- What is options backdating securities fraud (not just derivative) and how do you distinguish these cases?
- What are the terms of the Mercury Interactive settlement?
- Why did Mercury settle for a large sum ($117.5 million) when most have been talking down the significance of such cases?
- How is this settlement significant for those companies out there still facing backdating lawsuits?
Three years ago, we posted an online survey regarding how companies are dealing with compensation committees and compensation consultants (here are those old results; I believe that survey’s low response rate was because the survey was ahead of its time). A lot has changed dramatically in this area since then – so we have posted a new survey on the same topic. Go ahead and participate now!
Yesterday, the SEC announced that Brian Breheny has been promoted to be Corp Fin’s Deputy Director for Legal and Regulatory Policy (which was Marty Dunn’s former job). Brian has been Chief of Corp Fin’s Office of Mergers & Acquisitions since 2003. A new Chief of OM&A will be forthcoming, but not likely for at least several months.
Corp Fin also announced that Wayne Carnall will rejoin the SEC to serve as the Division’s Chief Accountant (a job that has been vacant for six months since Carol Stacey left). Wayne has been working in the National Office of PricewaterhouseCoopers since he left the SEC in 1997.
It’s On! SEC’s Open Commission Meeting Calendared for November 28th
Despite many objections (as I blogged yesterday), the SEC intends to forge ahead on shareholder access next Wednesday. And #2 on the meeting’s agenda (repeated below) is a shocker that nearly knocked me out of my chair:
1. The Commission will consider whether to adopt amendments to Rule 14a-8(i)(8) under the Securities Exchange Act of 1934, to clarify its longstanding interpretation of that rule.
2. The Commission will consider whether to adopt amendments to the proxy rules under the Securities Exchange Act of 1934 to facilitate the use of electronic shareholder forums.
A Little British Banker Humor
With a hat tip to Kevin LaCroix, here’s some British humor dealing with investment bankers, subprime, etc. Gobble, gobble!
Yesterday, RiskMetrics’ ISS Governance Services unit issued updates for its US, Canadian, International and UK proxy voting policies. These new policies will be applied to all companies with shareholder meeting dates starting February 1st. RiskMetrics intends to release summary policy guidelines in mid-December and its full proxy manual after the new year. We have posted the policy updates in our “Proxy Advisors” Practice Area.
Among other topics, the policy updates deal with the following (note these brief descriptions were written by ISS):
1. Say on Pay – With several U.S. companies having committed to shareholder advisory votes on executive compensation, and several successful shareholder resolutions and the possibility of legislative action on the subject, the Say on Pay issue has arrived in the US. ISS has developed a framework for evaluating remuneration reports according to five global principles that emphasize linking pay and performance, board independence in the pay-setting process – and sufficient disclosure to allow shareholders to evaluate both the package and the process. From these global principles, we have developed market-specific guidelines that reflect local best practices in the U.S. and internationally.
2. Poor Pay Practices – Our U.S. Poor Pay Practices policy has been updated to reflect the better information available in new compensation disclosures – identifying specific poor compensation practices that may trigger withhold recommendations, including egregious employment contracts, severance and make-whole provisions, perks and retirement benefits, and poor disclosure practices.
3. Equity Plan Costs – A majority of our Policy Survey respondents indicated support for plans where employees have been holding vested in-the-money options for a significant amount of time. As such, ISS Governance Services will consider carving out a portion of cost attributable to overhang for companies with sustained positive stock performance and high overhang cost attributable to in-the-money options outstanding in excess of six years. ISS will adopt a case-by-case approach considering the following criteria: company performance, overhang disclosure, dilution, and compensation practices.
4. Independent Chairs – Since over 45% of companies in our Board Practices study now separate the chair and CEO positions, and investors show strong support for separation of CEO/chair positions, ISS will continue to support shareholder resolutions calling for an independent chair at U.S. companies. However, if a company meets certain performance tests and good governance practices, including the appointment of an independent lead director, we will recommend on a case-by-case basis. We are also adding two additional factors for consideration in this analysis: first, the disclosed comparison of the specific duties of the lead director and chair, and second, the company’s disclosed rationale for combining the two positions. These additional disclosures will aid in evaluating board independence in the case there is a combined CEO/chair.
5. Product Safety – Heightened attention to product safety, plus strong investor interest for companies to disclose their social and environmental practices led us to enhance our policy to support shareholder proposals requesting that companies report on policies and oversight mechanisms related to toxic materials across their supply chains. In fact, 66-75 percent of Policy Survey respondents believe it is very important or somewhat important to report performance on social and environmental criteria to shareholders as part of routine disclosure.
Latest Rumors: Democratic Commissioner Nominees?
We try to stay away from rumors on this blog – as they often don’t pan out – but it’s noteworthy that the Washington Post ran this article last week noting that Luis Aguilar and Elisse Walter may be tapped to fill the SEC Commissioner vacancies since the shareholder access proposals are so controversial and there won’t be any Democratic Commissioners once Annette Nazareth leaves her post (which is expected next month). Some members of Congress (and a score of investors) have asked SEC Chairman Cox to hold off on acting on shareholder access – since it appears that the current Cox plan is to hold a meeting on November 28th to deal with the AFSCME decision and then revisit shareholder access next year.
Citing unnamed sources, the Post reports that Senate Majority Leader Harry Reid has submitted both names to the White House for approval. Under federal law, two of the SEC’s five Commissioner spots must be filled by members of the political party that doesn’t control the White House.
Luis Aguilar is a securities lawyer at McKenna Long & Aldridge in Atlanta and a former SEC Staffer. Elisse Walters rose through the Corp Fin ranks to serve as Deputy Director and also served in the SEC’s Office of the General Counsel and has been the General Counsel of the CFTC; for quite some time, she has worked at the NASD (now FINRA), where she now serves as Senior Executive Vice President, Regulatory Policy & Programs.
FINRA Looking for Marketing Bang?
I couldn’t resist repeating the following entry from Mark Astarita’s “SECLaw Blog“:
“In what some believe is a marketing ploy and an attempt to increase its Google search ranking, FINRA is requiring all member firms to provide a hyperlink to www.finra.org. The deadline for compliance is November 17, so get your web designers moving. While I am certain that this is not a Google-driven event, but rather an attempt to brand their corporate identity, it is a bit strange. The NTM simply requires a link, not any special language, or the logo, and it is not an attempt to educate customers of the existence of a regulator.
It appears that FINRA is spending way too much time worrying about its name. At a SIFMA conference yesterday, a senior FINRA executive repeatedly referred to “legacy-NASD” every time he referred to the NASD. It was so cumbersome and silly, that he had to explain that if he didn’t do that, he would “have to put a dollar in the jar” indicating that the organization thinks “NASD” is a bad word. Seems to me that the time could be better spent addressing a new rule book, or investigating firms that caused this massive $400 billion subprime scandal. How long before that filters down to investors?”
This “Auditing Profession Discussion Outline” from the Treasury Department’s Advisory Committee on the Auditing Profession (co-chaired by Arthur Levitt and Donald Nicolaisen) is an eye-opening list of topics that the Committee expects to take up, obtain comment and issue a report on next summer. Among other broad topics, the Committee will consider: how to improve the quality of audits; whether auditors should be provided caps on their legal liability; whether auditors should be able to organize in structures that would seek private or public capital; governance and transparency of the firms; independence rules; how to attract more students into accounting as opposed to seeing them go into other professions; the dwindling supply of college professors; and how to improve the competitiveness among the small and large firms. The Committee seeks input for its outline, with comments due by November 30th.
Meanwhile, the SEC’s Advisory Committee on Improvements to Financial Reporting continues to plug along, holding its latest meeting a few weeks ago. The SEC has posted a host of reports from various subcommittees (scroll down to November 2nd meeting). There are some pretty interesting ideas being kicked around – particularly those in this report on restatements.
Restatements: Timing and Disclosure Issues
Speaking of restatements, a recent study from the Huron Consulting Group found:
- average filing time between initial filing of a Form 8-K and restated financial statements was 7 weeks (and the median was 3 weeks)
- One out of every 6 restatements analyzed was filed within one day of a Form 8-K being filed (while one-third of the restatements were filed within two weeks of the initial Form 8-K filing)
- 20% of the companies reviewed took more than 4 months to complete the process (typically missing at least one timely filing of a Form 10-K or Form 10-Q)
- 4 out of 5 restatements are filed within 4 months of the initial filing of the Form 8-K announcing the existence of a material error
- Most prevalent accounting issues were: Equity and Debt; Capitalization and Expense of Assets; Reserves/Accruals/Contingencies; Revenue Recognition; and Taxes
- Neither company size nor industry appeared to be significant factors in the length of the restatement process
- 19% of Form 8-K filings announcing the existence of a material error reported fewer accounting issues than were ultimately included in the restated financial statements.
SEC’s Concept Release: Disclosure of Business Activities in Terrorist Countries
On Friday, the SEC issued a concept release regarding how the public should access disclosures about material business activities in the five countries on the State Department’s list of State Sponsors of Terrorism. This is a follow-up to the SEC’s discontinued practice of listing companies that disclosed certain matters relating to the countries (the concept release explains the filters that the Staff had used before – long story).
Given the topic, we might see more comments than one would think – even though this potential rulemaking only impacts how the SEC would list information filed through Edgar and not require companies to do anything differently than they already do. Personally, I think the reputational stakes are too high if a mistake is made by the SEC and a company is inadvertantly placed on this type of a list. Let the media and others do Edgar searches to create their own list…
At yesterday’s open meeting, the SEC adopted the most significant amendments to Rule 144 in over a decade, largely as they were proposed. The SEC decided not to combine Form 4 and Form 144 at this time – even though the concept was favorably received by commenters – but the Staff did say that they will continue to consider the issue and may take it up soon as a separate project. The final rules will not include the proposed provision that would have tolled the holding period for up to six months while a security holder is engaged in hedging transactions. Here are Corp Fin’s opening remarks.
As noted in this press release, under the final rule amendments (to be effective 60 days after publication), the holding period for restricted securities of reporting companies will be shortened to six months. In addition, under the substantially simplified conditions of the amended rule, non-affiliates of reporting companies will be able to freely resell restricted securities after satisfying a six-month holding period (subject only to the Rule 144(c) public information requirement until the securities have been held for one year), while non-affiliates of non-reporting companies will be able to freely resell restricted securities after satisfying a 12-month holding period.
For affiliates’ sales, the SEC amended the manner of sale requirements for equity securities – while eliminating them for debt securities – and relaxed the volume limitations for debt securities. In addition, the Form 144 filing requirements for affiliates’ sales will be raised to 5,000 shares or $50,000. A number of Staff interpretations will be codified as proposed, and the preliminary note to Rule 144 will be streamlined.
In connection with the Rule 144 amendments, Rule 145 will be changed to eliminate the presumptive underwriter provision – except with respect to transactions involving blank check or shell companies. The resale provisions of Rule 145(d) will also be revised.
While the revisions to Rules 144 and 145 will certainly provide much needed relief in terms of liquidity for those purchasing restricted securities, the opening up of the rules may also potentially increase the possibility for non-compliance. As a result, issuers, brokers and transfer agents will need to significantly change – and tighten – their procedures.
We will be providing detailed guidance in The Corporate Counsel over the next few issues on everything you will need to know to address these changes to Rules 144 and 145. Stay tuned…
Smaller Public Company Reporting System and Compensatory Options Exemption Adopted
The SEC also adopted two other components of its efforts to improve the small business regulatory regime. The proposals to drop Regulation S-B – and to expand the universe of smaller reporting companies that may use a scaled reporting regime – were adopted largely as proposed. As a result of these changes, an additional 1,500 smaller companies will now be able to utilize, on an “a la carte” basis, the “scaled” disclosure requirements incorporated into Regulation S-K. The SEC Staff said that it plans to issue a short guide on how to prepare filings under this new regime. These rule changes will be effective 30 days after publication.
Amendments to Exchange Act Rule 12h-1 were also adopted to provide an exemption for private non-reporting issuers from the registration requirements under Exchange Act Section 12(g) for compensatory employee stock options issued under employee stock option plans, as well as an exemption for reporting issuers from Section 12(g) registration for compensatory employee stock options. These rules will be effective immediately upon publication, so that the exemptions can be in place by the end of 2007 for calendar year-end companies. Here is the Staff’s opening statement on all of the small business proposals, including Rule 144.
The Staff indicated that the other small business-oriented proposals are still being actively considered and should come up for adoption soon.
GAAP Reconciliation Eliminated for IFRS Financial Statements
The SEC eliminated the requirement for a US GAAP reconciliation when foreign private issuers file financial statements prepared using International Financial Reporting Standards as issued by the International Accounting Standards Board. Here are Chief Accountant Hewitt’s opening remarks.
As noted in this press release, Chairman Cox also announced that the SEC will hold two roundtables on December 13th and 17th to discuss the concept of permitting US issuers to use either IFRS or US GAAP. For an in-depth discussion of yesterday’s proceedings on the IFRS changes, take a look at Edith Orenstein’s FEI Financial Reporting Blog.
Yesterday, the Senate Committee on Banking, Housing and Urban Affairs conducted a hearing on shareholder rights and proxy access. SEC Chairman Cox testified at the hearing, as did representatives of business and shareholder groups.
In his testimony, Chairman Cox indicated that while the SEC would go back to the drawing board on the broader question of establishing a means for shareholders to nominate directors and get them on the company’s ballot, action was still needed before the upcoming proxy season to deal with the uncertainty arising from last year’s AIG v. AFSCME decision. Based on these remarks (and similar remarks over the past few months), it now appears likely that the proposed amendments to Rule 14a-8(i)(8) seeking to clarify the SEC’s interpretation of that rule will be adopted in the coming weeks, probably during the week after Thanksgiving. If adopted, then the Staff could again express the view during the proxy season that shareholder proposals seeking to establish an access procedure are excludable from the proxy statement under Rule 14a-8(i)(8). As noted in the Bloomberg article, “Democrats on the banking panel criticized Cox for saying the agency might pass a rule this year and revise it in 2008. Senator Robert Menendez, a New Jersey Democrat, said he was ‘perplexed and deeply disturbed’ by that possibility.”
Chairman Cox noted in his testimony that “there is a widespread assumption that having published the two proposals, the Commission has only a binary choice — that we must adopt one of them, or do nothing. But in fact we may also adopt a rule that is different than either of those proposed. The only requirement is that the proposed rule, and the questions the agency has asked, provide fair notice to the public of what the Commission is contemplating and the issues involved. So long as the final rule or rules are a logical outgrowth of what was proposed, we are free to amend the proposals and to consider improvements that the public comment process has brought to our attention.” That is true enough, but it raises the question of whether there is really that much wiggle room with the access proposals to address all of the concerns coming from the shareholder and business groups sitting at opposite ends of the spectrum. Cox told reporters after the hearing that the much-maligned 5% threshold contemplated in the proposal was one of the “fundamental” areas that needed to be addressed.
Interestingly, at the end of his prepared testimony, Chairman Cox noted that “none of the 22 SEC Chairmen since the agency first looked at this issue in 1942 has successfully taken this step” of going back to the drawing board and taking a fresh look. That is an awful lot of history to overcome.
And Now We Are Off to See the Wizard
At last week’s PLI Annual Institute on Securities Regulation, Professor Joseph Grundfest gave this entertaining speech advocating for majority voting over shareholder access. Just as Dorothy learned from Glinda the Good Witch of the North, the solution to our governance problems may already be in our own backyard. Grundfest notes that at least 63% of the S&P 500 have already adopted bylaws or board guidelines that either implement or come reasonably close to implementing what is effectively the same as the “advice and consent” model for appointments under Article II, Section 2 of the US Constitution. [For the 63% figure, Grundfest cites the RiskMetrics Group 2007 Postseason Report at 17.] Under Grundfest’s analogy to the federal government system, shareholders can be cast in the role of the Senate and the incumbent board can be cast in the role of the Executive. The resulting set of checks and balances “forces incumbent boards to pay careful attention to shareholder concerns, and induces incumbent directors to reflect the shareholder sensitivities as the price of re-election.”
Grundfest argues that we should give majority voting a chance before going down the road of shareholder access. He notes that if there are recalcitrant companies out there that do not voluntarily adopt majority voting, then the SEC could adopt regulations that impose additional disclosure requirements and filing liabilities on corporations that fail to implement effective advice and consent regimes – and these regulations could replace the flawed shareholder access proposals that are currently pending.
In the immortal words of the melting Wicked Witch of the West: “Ohhhhh… What a world! What a world!”
Market Reg Goes Retro: Re-Introducing the Division of Trading and Markets
The SEC announced that it has changed the name of the Division of Market Regulation to the Division of Trading and Markets, in an effort to “better reflect the Division’s full range of responsibilities.” This “new” name is actually the Division’s old name, which was changed in connection with a restructuring back in 1972.
Floyd Norris of the NY Times notes in his blog that it is odd how the word “regulation” is being removed from the Division’s title, amidst the announcements of huge losses at major broker-dealers that the Division regulates and at a time when the bond rating agencies that the Division oversees are being blamed for the collapse of some securitization markets.
Will Corp Fin be next? Perhaps in the near future your 10-K might be reviewed by the Division of Registration, which was Corp Fin’s name from 1935 to 1941.