September 30, 2008

ACAP Report: Improving the Auditing Profession

Remember those halcyon days when Treasury Secretary Paulson was mostly concerned about the competitiveness of the US capital markets, rather than fighting 24/7 for the survival of the US capital markets? Well, back then when the Treasury Department’s time might have been better spent worrying about the systemic risks posed by credit default swaps or the looming mortgage crisis that was beginning to show its ugly face, the Treasury Department’s Advisory Committee on the Auditing Profession (ACAP) was established. In my view, it was always a little strange that the ACAP (which was headed by Arthur Levitt and Don Nicolaisen) was a Treasury Department creation, rather than a committee established by the SEC or the PCAOB, but then again I don’t think that Treasury has been too worried about stepping on the SEC’s toes.

On Friday, Treasury announced that the ACAP had adopted its Final Report. As noted in this Fact Sheet, the three principal areas of focus in the ACAP’s recommendations were human capital, firm structure and finances, and concentration and competition. A Draft Final Report has been posted, with the Final Report expected to be posted some time this week.

One of the areas that the ACAP studied which has garnered some attention over the past year is liability reform for accounting firms, however the Subcommittee on Firm Structure and Finances was unable to reach any consensus on recommendations in this area. Rather, the final report reflects the divergent views of the committee members on that topic.

Among the areas that the ACAP asks the SEC to consider are (1) amending Form 8-K disclosure requirements to characterize appropriately and report every public company auditor change, and (2) requiring disclosure by public companies of any provisions in agreements with third parties that limit auditor choice. The ACAP also asks the SEC and the PCAOB to undertake a number of other initiatives. The PCAOB issued a statement indicating that it welcomed the Committee’s recommendations, while the SEC issued no statement about the ACAP’s Final Report.

Back to the Drawing Board on Proposed FAS 5 Amendments

Last week, the FASB approved a recommendation from its Staff to reconsider the Exposure Draft issued last June that proposed significant changes to the reporting of loss contingencies under FAS 5. In deciding to reconsider the proposals, the FASB particularly noted comments that the proposed standard would compel defendants to waive their attorney-client privilege and disclose prejudicial information, as well as comments expressing implementation concerns with a potential effective date for fiscal years ending after December 15, 2008.

Now the FASB is seeking some volunteers to “field test” two alternative proposals using disclosure about already resolved lawsuits. A roundtable is also planned for the first quarter of 2009. The expectation is that a revised Exposure Draft will be considered in the first half of 2009, with a possible effective date for fiscal years ending after December 15, 2009.

No Change for SEC Filing Fees

Yesterday, the SEC issued a fee rate advisory indicating that when the new Federal fiscal year clicks over tomorrow, filing fees will remain at their current rates. I suspect the SEC will be operating under a continuing resolution for a while. It seems unlikely that Congress will be acting on budget legislation any time soon when the House can’t even pass the bailout bill.

Posted: The SEC's Adopting Release for Cross-Border Deals

The SEC has finally posted its adopting release for cross-border deals. We have started to post memos on analyzing these rule changes.

- Dave Lynn

September 29, 2008

The Mother of All Bailouts: Off to a Vote

Based on the thankful press releases issued last night by the President and the Treasury Secretary, you would almost think that the Emergency Economic Stabilization Act of 2008 has actually been signed into law – but, in fact, it still faces a tough vote in the House today and a vote in the Senate on Wednesday. What did happen over the weekend were marathon negotiations that brought about the current bill, which Nancy Pelosi (D-CA) has described as “frozen” (as noted in this Washington Post article). As a result, we now have a clear picture of what the “TARP” program will look like if the bill is ultimately enacted.

Mark Borges has described the latest provisions of the bill directed at executive compensation and corporate governance matters in his blog. Needless to say, executive compensation limits were retained in the bill (and apparently remained a source of debate throughout the weekend), but whether these vague provisions will impose any real changes on compensation practices at participating institutions – or set a new standard for other companies to follow – remains to be seen. What does seem to be developing that may have more of a long-term impact on executive compensation is a groundswell of public outrage over executive pay in light of the financial crisis. All weekend long, I either read or watched “man on the street” type stories where people expressed disdain for a bailout of financial institutions and their executives while so many others are struggling.

Notably, the House bill also targets mark-to-market accounting, directing the SEC to conduct a study of Financial Accounting Standard No. 157, including as a minimum:

- the effects of FAS 157 on the balance sheets of financial institutions;

- the impacts of mark-to-market accounting on bank failures in 2008;

- the impact of such standards on the quality of financial information available to investors;

- the process used by the FASB in developing accounting standards;

- the advisability and feasibility of modifications to such standards; and

- alternative accounting standards to those provided in FAS 157.

The bill also restates the SEC’s authority to suspend the application of FAS 157 if the SEC determines that such a suspension is in the public interest and protects investors. I guess this goes to prove that when all else fails, blame the accounting.

I still feel like I am missing something on the financial crisis. I don’t think I have yet heard a complete explanation of what has caused such an extreme level of apparent panic among the administration’s economic policymakers that would lead to, among other things, former Master of the Universe Hank Paulson begging on his knees to Nancy Pelosi, as reported in this NY Times article from Friday.

The Plight of Short Sellers

I have sympathy for those who have routinely employed short selling strategies to not only turn a profit, but also to hedge their positions, conduct market making activities, and exploit arbitrage opportunities. Short selling has, rightly or wrongly, become the SEC’s bogeyman in the financial crisis, and lots of unintended consequences are flowing from that status. Don’t get me wrong – I am no apologist for naked short sellers or those who engage in abusive short selling activities. Rather, I have spent an enormous amount of time thinking about short sale issues over the course of my career, and I am a firm believer in the power of short selling to maintain fair, orderly and liquid markets while helping to mitigate individual risks and market exposure.

The SEC’s ban on short sales of shares of financial firms (as amended) is now more than a week old, and is set to expire this Thursday, unless further extended. The likelihood that the ban will be extended seems high, as uncertainty reigns in the marketplace, particularly for the shares of financial institutions. But, as noted in this Wachtell Lipton memo, the ban has created confusion in the marketplace, particularly with respect to the convertible bond market. Further, as recently discussed on Q&A Forum, the short sale ban may be interfering with bona fide market-making activities, as market makers seek to widen the bid/ask spread by increasing the asked price so as to avoid going short and having a “fail to deliver.” Lastly, I fear the consequences if steps are not taken to prevent a massive market slide whenever the short sale ban is ultimately lifted, as “pent up” short selling has the potential to overwhelm an already shaky equity market.

Today is the day that Section 13(f) filers will need to file new Form S-H to report information about their short positions. Due to the SEC’s flip-flop on the public availability of this information, we won’t have access to these reports on Edgar for another two weeks. Last Friday, the SEC posted an updated submission template for Form S-H and some guidance on the disclosure required by the form.

Podcast: The Latest on the SEC’s Short Sale Actions

Last week, I spoke with Larry Bergmann, who is Special Counsel at Willkie Farr & Gallagher LLP and was Senior Associate Director in the SEC’s Division of Trading & Markets, about the emergency actions targeting short sellers and what the future might hold for short sale regulation. In this podcast, Larry discusses:

- What has the SEC done recently to target short sales?
- How are the SEC's new rules being implemented on such short notice?
- What impact might the SEC's recent actions have on the market?
- What else can the SEC do to address abusive short selling?

- Dave Lynn

September 26, 2008

The Senate's "Agreement in Principles"

We've posted a copy of the US Senate's "agreement in principles" that was reached yesterday for the bailout legislation (this WSJ article analyzes the odds of passage - and Dominic Jones explains the importance of retail investors for passage). Here is the very first principle:

Requires Treasury Secretary to set standards to prevent excessive or inappropriate executive compensation for participating companies.

The notion that a group of government staffers may be setting the parameters for a number of CEO pay packages is nearly incomprehensible. I'm glad it isn't me.

What are "Appropriate Standards" for "Shareholder Disclosure"?

From Will Anderson of Bracewell & Giuliani: The draft language in the Senate bill released earlier this week contains what I view as a potentially significant "sleeper" issue that seems to have escaped the attention of the media, commentators and the Congress (although I confess that I have had trouble keeping up with the flow of information). The Senate draft provides that the Treasury Secretary require sellers to meet "appropriate standards" for "shareholder disclosure." The draft from the House Financial Services Committee includes the same requirement for "corporate governance".

It's not clear to me what the Senate's "shareholder disclosure" requirement means, but it could be read to grant very broad and virtually unlimited authority to Treasury to establish a disclosure system for participating financial institutions. Or perhaps this language is limited to only executive compensation disclosure, although that is not what the language says. Or maybe it means something entirely different – one lawyer I spoke with thought it could be read to mean disclosure of the identity of the shareholders of financial institutions, but I doubt that is the intent (but who knows).

Hopefully, the shareholder disclosure language will simply be deleted from the bill that comes out over the next few days – or at least add a "related thereto" after the words "shareholder disclosure" so that it is limited to executive compensation. Perhaps the House has it right and it will be replaced with "corporate governance", although that requirement presents a host of issues that are better left for another day. Here is the Senate's most recent text (emphasis added):


The Secretary shall require that all entities seeking to sell assets through a program established under this Act meet appropriate standards for executive compensation and shareholder disclosure in order to be eligible, which standards shall include—

Here is the House Financial Services Committee's most recent text (emphasis added):


(a) IN GENERAL.—The Secretary shall require that all financial institutions seeking to sell assets through the program under this Act meet appropriate standards for executive compensation and corporate governance in order to be eligible.

The Short-Sleeve Culture: Celebrating Twenty Years

Twenty years ago, fresh off the bar exam, I started my professional career as a junior lawyer in Corp Fin. Five other lawyers started that day with me, including Bill Tolbert, Mark Coller and Larry Spaccasi (folks like Marty Dunn, Scott Freed, Celia Spiritos and Todd Schiffman started a few weeks before). Back then, more lawyers were hired right out of school - rather than the laterals that get into the SEC today - so a new batch always started in the Fall.

After a half-day of fingerprinting and general orientation, my branch chief, Steve Duvall, handed me a set of CCH books (ie. the rules) and told me to read them. That was my task for the week - a straight read of the rules. Ken Tabach was riding out his last week on the Staff before splitting for a law firm and he gave me some loose guidance about how to read a registration statement and write up comments.

Those comments that passed muster were read over the phone to an outside lawyer, who taped them and had them transcribed into a comment letter (eventually, we had a SEC secretary type the letter too - but that would take weeks as six or seven lawyers shared each secretary).

There were no computers and no voicemail for the phones. People could smoke in their offices if so inclined - and the old-timers followed an informal policy that they could wear short-sleeves if it was hotter than 90 degrees. And there were government-sponsored keg parties - or is that my vivid imagination playing tricks on me? Right after I started, Market Reg sponsored a party at a local bar to note the one-year anniversary of the '87 "market break" (that was a day when the market crashed at record levels for a day).

When I returned for my second tour of duty in Corp Fin years later, Bill, Mark and I would grab a morning donut together every year on this date to commemorate our anniversary. For those guys, I'm having two today...

- Broc Romanek

September 25, 2008

Year Two for the CD&A: Our "3rd Annual Proxy Disclosure Conference"

With executive pay a key negotiation point in the bailout bill, rest assured that next year's executive compensation disclosures will be more important than even. Last week, Mike Melbinger blogged three times about how the SEC Staff is now commenting on CD&A and other compensation disclosures as part of its Year Two review under the SEC's new rules. Don't forget that Corp Fin Director John White will serve as the keynote speaker for our upcoming "Tackling Your 2009 Compensation Disclosures: The 3rd Annual Proxy Disclosure Conference." If you can't make it to New Orleans on October 21st-22nd, you can still catch this important conference by video webcast.

So act now for both the "16th Annual Naspp Conference" and the combined "Tackling Your 2009 Compensation Disclosures: The 3rd Annual Proxy Disclosure Conference" & "5th Annual Executive Compensation Conference."

Stock Repurchase Programs: Full Speed Ahead?

Last Friday, as part of its temporary emergency actions, the SEC issued an emergency order temporarily suspending the timing restrictions and significantly increasing the volume limitation for issuer repurchases under Rule 10b-18. Since then, I've seen a few announcement of stock repurchase programs from companies of all shapes and sizes, including Microsoft ($40 billion) and 3Com ($100 million). The SEC's order expires next Thursday.

South Dakota's Short-Selling Ballot Initiative

Below is an excerpt from a Morrison & Foerster memo on short-selling:

Some contend that the SEC’s actions are too little, too late. This November, voters in South Dakota will consider a ballot initiative called Measure 9 that could impact short selling across the United States. Promoted by American Entrepreneurs for Securities Reform, or ESR, a non-profit organization backed by small businesses, Measure 9 would amend sections of the South Dakota Uniform Securities Act of 2002.

The initiative is cast by ESR as a consumer protection measure that will protect South Dakota’s small investors by curbing naked short selling. Opponents of Measure 9 argue that the initiative is unnecessary, impractical, poorly drafted and unconstitutional, with the potential to halt all legitimate short selling activity in the U.S.

Several commentators oppose Measure 9 on the grounds that, as written, the ballot measure would effectively ban short selling altogether. The proposed law would permit the state to take action against a seller of stock in a publicly traded company if that seller engaged in a pattern of commercially unreasonable delay in the delivery of securities sold, or “has sold securities that the person did not own or have a bona fide contract to purchase.” This language tracks the definition of a short sale in Regulation SHO. The law would apply to any brokerage registered in South Dakota even if it does not have an office there.

If interpreted to ban short sales altogether, a broker that transacts short sales with investors in South Dakota would violate the law, regardless of where the transaction takes place or whether the transaction takes place or whether the transaction complies with federal law. Because a broker-dealer’s South Dakota registration is all that would be required to trigger liability under the law, some have predicted that Measure 9 would result in broker-dealers leaving the state or, alternatively, ceasing all short selling activities.

ESR and its supporters contend that the SEC’s efforts to restrict naked shorting have been ineffective and support additional regulation at the state level. From their perspective, the purpose of Measure 9 is to ban naked short selling by permitting South Dakota regulators to take action against broker-dealers engaged in a pattern of fails-to-deliver. Opponents of Measure 9 argue that the trading of securities occurs on a national market and accordingly, should be regulated solely by federal law to preserve consistency, making additional state regulation both unnecessary and impractical.

They predict that the introduction of additional legislation in various states will result in a confusing patchwork of inconsistent and contradictory rules, choking the very markets they are designed to protect. Additionally, they contend that proposed law would be preempted by the National Securities Market Improvement Act (and thus would be unconstitutional). These opponents point out that litigation over the law after it has been adopted (on preemption grounds) would be costly and time-consuming for the parties opposing it, as well as for South Dakota taxpayers.


Measure 9 is not the first proposal of its kind. Measures seeking to limit shorting have popped up in other states such as Virginia and Arizona, where legislation was introduced and quickly withdrawn, and Utah, where such a measure was overturned. Despite setbacks for these similar proposals, ESR plans to lobby for similar legislation in 19 additional states. Opponents of Measure 9 are concerned that the initiative, which addresses relatively sophisticated matters of securities law, will pass due to a lack of voter understanding, leading to unintended consequences in the national markets. Even if Measure 9 is not approved by South Dakota voters or is subsequently overturned, it, and similar proposals, as well as continuing market pressures, will place additional pressure on the SEC to demonstrate that it is proactive in its efforts to curb abusive short-selling practices. The impact of the SEC’s newest regulations on shorting activities, legitimate or otherwise, and whether the results will satisfy activist groups like ESR remains to be seen.

- Broc Romanek

September 24, 2008

What We Really Need from a Bailout Bill: 58 Trillion Reasons

Predictably, the bare-boned Treasury proposal for a bailout bill - fraught with Constitutional problems - is receiving backlash on the Hill. Also predictable - given that elections are coming up - many key Republicans have come around to the notion that the bailout bill should include limits on executive pay (see this Washington Post article and NY Times' article).

However, the bailout plan is missing a strategy to fix the problems that caused all the problems that the market faces. Without a going-forward plan, I don't see an end to shoveling money to the bailout. Simply banning short sales ain't gonna do it. Yesterday, SEC Chairman Cox testified about some of these problems before the Senate Banking Committee - here is an excerpt:

The failure of the Gramm-Leach-Bliley Act to give regulatory authority over investment bank holding companies to any agency of government was, based on the experience of the last several months, a costly mistake. There is another similar regulatory hole that must be immediately addressed to avoid similar consequences. The $58 trillion notional market in credit default swaps - double the amount outstanding in 2006 - is regulated by no one. Neither the SEC nor any regulator has authority over the CDS market, even to require minimal disclosure to the market.

Economically, a CDS buyer is tantamount to a short seller of the bond underlying the CDS. Whereas a person who owns a bond profits when its issuer is in a position to repay the bond, a short seller profits when, among other things, the bond goes into default. Importantly, CDS buyers do not have to own the bond or other debt instrument upon which a CDS contract is based. This means CDS buyers can “naked short” the debt of companies without restriction. This potential for unfettered naked shorting and the lack of regulation in this market are cause for great concern. As the Congress considers fundamental reform of the financial system, I urge you to provide in statute the authority to regulate these products to enhance investor protection and ensure the operation of fair and orderly markets.

What Companies are Disclosing: Form 8-Ks Filed in Response to the Crisis

With the market in crisis, it would be expected that some companies would be be filing Form 8-Ks to disclose material developments. Here are just a few of the many Form 8-Ks filed regarding potential fallout due to exposure from Lehman Brothers and/or AIG:

- Primus Guaranty

- Ambac Financial Group

- Protective Life Insurance Company

- Dynegy

- Ford Motor

- Conseco

- Magellan Health Services

- Portland General Electric

- Commonwealth Edison

- Humana

- New York Community Bancorp

A Classic Cousin of the "Nigerian Loan Scam"

I received this classic email yesterday:

Dear American:

I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.

I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of 800 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.

I am working with Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of the Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transactin is 100% safe.

This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for a reliable and trustworthy person who will act as a next of kin so the funds can be transferred.

Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to so that we may transfer your commission for this transaction. After I receive that information, I will respond with detailed information about safeguards that will be used to protect the funds.

Yours Faithfully Minister of Treasury Paulson

- Broc Romanek

September 23, 2008

Draft House Version of Bailout Bill: Includes "Say on Pay" and Shareholder Access

The latest version of the House "bailout" legislation includes provisions for a "say on pay" vote, limits on severance, clawbacks and shareholder access to the proxy for those companies involved in the bailout. See Section 9 on pages 11-13. The Senate version of a bailout bill contains the executive compensation provisions (see Section 17 on pages 30-31), but not the shareholder access one.

Bear in mind that both of these are just drafts and that they likely are just the Democratic versions of a bill. Media reports indicate that the bailout plans changes from hour to hour. In fact, I can't even be sure I have linked to the latest drafts...

The World is Changing: Why Can't CEO Pay?

With the very real possibility of executive compensation constraints being part of the Congressional bailout legislation, it seems like a good time to examine why executive compensation practices haven't changed - even though 99% of this country believes they should. With Wall Street and our financial markets undergoing a complete transformation and the regulatory framework certain to be reformed in ways we never imagined, why does CEO pay remain "untouchable" for many boards and their advisors?

Here are a few of my thoughts:

1. Lots of Lip Service - Personally, I am tired of having conversations with colleagues who tell me that compensation committee meetings really have changed. I believe that. The problem is it's just the committee processes that have changed - to pass judicial muster after Disney - but the committee's actions remain the same. When I have these conversations, it's telling how perfunctory committee meetings used to be!

2. When There is Responsible Change, It's Driven by the CEO - Most often when I talk to someone who regularly advises boards, I hear that the few companies that really make responsible changes are the ones where the CEO speaks up and voluntarily asks for the change. Sadly, boards and compensation committees are not the ones driving responsible change.

3. Debunking "Everyone Else is Doing It" - How often has this justification lead us down the garden path? Just because everyone is using peer group benchmarking instead of alternative benchmarking - like internal pay equity - doesn't make it right. In fact, some plaintiff lawyers may argue that it's now widely known that 15 years of broken peer group benchmarking has made that methodology unreliable - and that boards that continue to heavily rely on that broken database are not fulfilling their fiduciary duty to be reasonably informed. (And remember that today's excessive CEO pay packages are a relatively new phenomenon, only about 15 years old as I've explained before).

4. You Won't Lose Your CEO If You Trim $10 Million - Probably the most frequent justification to maintain the status quo is that the CEO will walk if the pay package is cut from $20 million to $10 million. I find this an empty argument in most cases (and for the many really hurting in today's economy, even the $10 million produces anger). Sure, the grass is always greener - but the reality is the grass is brown all over right now.

I realize that having a pay-cutting conversation is hard - but there are baby steps that can be taken to bring executive compensation back in line. Start with implementing a clawback provision with teeth, eliminate severance arrangements that have no purpose and require executives to hold-til-retirement. Use better tools to ensure a fairer process, like internal pay equity and wealth accumulation analyses.

5. Congressional Solution Not Preferred, But Perhaps Inevitable - I don't believe Congressional intervention into pay practices is a sound idea, but the failure of boards to fix pay practices on their own has brought us to where we are today. And it shouldn't be a surprise that Congress is now focusing on this topic - the House has held hearings on CEO pay repeatedly this year and both Presidential candidates have stated their intention to pass "say on pay" legislation next year. I believe we are at a "last chance" stage for boards to truly get their act together or else we will wind up with laws that do it for them.

What Can You Do? You can be informed and learn as much about responsible practices as possible. Our upcoming "5th Annual Executive Compensation Conference" can help you get started by providing a roadmap of practical tools and processes that you - and your board - can use to make things right. If you can't make it to New Orleans on October 21st-22nd, you can still catch this important conference by video webcast.

If times are tight and your company doesn't have the budget to cover the full cost of registration, send me an email and we'll accommodate you. We are far more interested in getting CEO practices back on the right track than making money from the Conference. Note that when you register for the "5th Annual Executive Compensation Conference," you also get access to the "Tackling Your 2009 Compensation Disclosures: The 3rd Annual Proxy Disclosure Conference" as these two practical Conferences are bundled together. The two Conferences are being held on successive dates.

Fixing the "No Short List": The SEC Punts to Stock Exchanges

In my rush to blog before I left for a speaking engagement yesterday morning, I had missed the part of the SEC's revised emergency order that now requires each stock exchange to post a list of the financial institutions that should be covered by the SEC's temporary short-selling ban. Last night, the exchanges posted their lists with additional companies on them (here is the NYSE list and Nasdaq list), which are subject to further refinement.

This is probably a wise move given the snafus made by the SEC so far - but pretty embarrassing given that the SEC went through the exercise of creating a "No Short List" for financial institutions just a month ago (read some of the quotes at the end of this WSJ article). As a SEC Staff alumni, this Bloomberg article makes me cringe and I worry that the SEC will be made a scapegoat for the ongoing crisis and that Congress will fold it into another federal agency...

- Broc Romanek

September 22, 2008

Dear Treasury: Will $700 Billion Cover It?

The US Treasury's initial draft of Congressional legislation to provide Treasury with authority to purchase up to $700 billion in mortgage-related assets is unbelievably simple, providing broad authority for the Treasury to set their own guidelines about how to spend the money. So simple that I think it was drafted on the back of a napkin. However, there is much Congressional haggling to be done over the next few days and the final product likely will look much different.

Here is a Davis Polk memo that summarizes the legislation pretty nicely - and here are some articles on the proposed legislation:

- WSJ's "Lawmakers Battle Over Rescue Plan"

- NY Times' "Democrats Set Terms as Bailout Debate Begins"

- Washington Post's "As Hill Debates Bailout, Wall St. Shifts Continue"

- WSJ's "Paulson Presses Congress to Act On $700 Billion Bailout Plan"

- NY Times' "A Bailout Plan, but Will It All Work?"

- NY Times' "Bipartisan Support for Wall St. Rescue Plan Emerges"

- Bloomberg's "Treasury Seeks Authority to Buy Mortgages Unchecked by Courts"

Between the time I drafted this blog last night and this morning, things were already changing. Things are moving so fast. One of the key bones of contention regarding the legislation is whether there should be limits on CEO pay - including severance pay - at those companies that benefit from the legislation. Last night, Mark Borges covered this story in his "Proxy Disclosure" Blog.

Patching Up the SEC's Temporary Emergency Actions

Wow, what a wild week last week was. And I imagine this week will be more of the same as Congress seeks to act. In the SEC's haste to take action, its temporary emergency actions had holes in them, some of which were addressed by clean-up amendments adopted on Sunday - see this SEC press release. In addition to making technical amendments, the SEC's revised order provides that the information disclosed by investment managers on new Form SH will be nonpublic initially, but will publicly available on Edgar two weeks after it is filed with the SEC (see footnote 8 of the revised order).

Here is a WSJ article describing some of the holes and below is an excerpt from a Davis Polk alert:

"Unlike a similar action taken by the U.K. Financial Services Authority on September 18th, the prohibition is not limited to the active creation or increase of net short positions. Without this exception, it would appear that financial institutions (including those the SEC is trying to protect) and other market participants who hold convertible securities, options and other equity derivatives, cannot adjust their delta hedge positions in the underlying common stock that hedge their risk of owning the equity derivatives. Therefore, contrary to its intent, the SEC action may significantly limit the ability of the indentified financial institutions to access the convertible and equity derivative markets.

The SEC has been addressing a number of specific questions and concerns that have been noted. For example, we understand that the SEC staff has informally advised market participants that, despite the reference to 'publicly traded security' in the order, the order is not intended to cover debt securities."

A few members were not happy with my dig against McCain on Friday, about his jab against SEC Chairman Cox. I just want the record to show that I had written that piece before I had read this op-ed entitled "McCain's Scapegoat" in Friday's WSJ, which expressed a similar sentiment. Don't worry, I'm not gonna start blogging about politics - but that one was too hard to resist.

The Importance of Your SIC Code

On Friday morning, the SEC took temporary emergency action to prohibit short selling in 799 financial companies. These actions were effective immediately and will expire at the end of the day on October 2nd (unless extended by the SEC). For its "No Short List" (see Appendix A for the list), the SEC selected the 799 companies based on their Standard Industrial Classification code (known as a "SIC" code; these codes are a US government system for classifying industries by assigning a four-digit code to each company). A total of 31 SIC codes were included in the list.

I received a number of emails from panicky members whose financial service companies were not part on the SEC's list. Some of these companies have SIC codes covered by the SEC's emergency order, but they were not listed by name in the SEC's order. For example, this situation applies to AllianceBernstein Holding, Invesco and Legg Mason. They've all filed Form 8-Ks stating that they believe they should be on the list since they were covered by the SIC code used by the SEC (eg. Legg Mason's 8-K).

Others believe their companies are financial services companies and should be on the list, but their companies don't have SIC codes - at least, as they show up in the SEC's database (however, EDGAR shows their SIC code) - that correspond to the range of SIC codes covered by the SEC's "No Short List." To illustrate, CNBC reported that several companies - like General Electric - may be added to the list because their financial services businesses are substantial. GE's SIC code in the EDGAR database shows up as "SIC: 3600 - Electronic & Other Electrical Equipment (No Computer Equip)." CNBC mentioned several other financial service companies not on the SEC's list, including CIT Group and American Express. Watch this CNBC video, which points out the problems and quirks with the list (egs. there aren't 799 names on the list and at least four non-trading companies were inadvertently included).

Note in the SEC's order, the SEC took pains to say that its list was prepared on a "best efforts basis." I've heard that the SEC expects to post an amended list soon.

Lesson learned? Re-consider your company's SIC code to ensure it properly fits your company. Remember that companies pick their own SIC code when they file their Form S-1 to go public - there is a spot on the facing page - and the SEC has no input (although in theory, the Staff could question your choice). The SIC code also is submitted as part of the header when the filing is Edgarized (note a SIC code isn't solicited on the Form ID).

Note that the SEC is one of the few - if not the only - government agency that still uses SIC codes (probably because those codes are so hard-wired into much of the SEC’s disclosure framework). The more recent - and widely used - identification system is the North American Industry Classification System (NAICS), which has largely replaced SIC codes in other contexts.

- Broc Romanek

September 19, 2008

McCain vs. Cox

Yesterday, Senator John McCain stated that he would fire SEC Chairman Cox if he were President. In response, Cox issued this press release in his defense.

Both of these actions are breathtaking. McCain obviously is looking for a scapegoat in his efforts to win the Presidency. And Cox looks wildly paranoid - and stooping low to engage in politics when he is supposed to be managing an independent federal agency in the midst of the biggest financial crisis of our lifetime.

I've blogged over six years and haven't blogged a single item that could be considered partisan politics. But with McCain's unbelievable flip-flopping of late, I can't help it. I guess that means next week McCain will say that Cox will be named Treasurer if he gets elected. On Wednesday, McCain was saying that the government should let AIG fail - but by Thursday, he was touting the opposite (see this video).

Meanwhile, Paulson continues to socialize our economy. The US Treasury just set aside $50 billion to guarantee money market funds (see this press release). I could sit here and blog all day about the unbelievable string of events this week - by the end of next week, it looks likely that our entire financial system will be completely revamped before our very eyes. I'm sure glad people are taking their time to debate the course of action and closely consider all the long-term ramifications of these actions...

I do believe Cox could have done a whole lot more during this financial crisis - for starters, he should have been on the bully pulpit trying to maintain calm. I'm not the only one who thinks more could have been done: check out this blog that criticizes Cox for demoralizing the Enforcement staff - and listen to this story from Chicago public radio's This American Life called "Now You SEC Me, Now You Don't," which talks about how noticeably absent SEC Chair Cox has been in the midst of the meltdown. This podcast is just free for this week - and the story starts at 36 minutes into the program. Minute 54 is particularly amusing.

Parsing the SEC's Authority to Adopt Its Short-Selling Emergency Order

Yesterday, I noted in passing that Professor Jay Brown had analyzed in his "Race to the Bottom" blog, whether the SEC's emergency order violates the Administrative Procedures Act.

Jack Katz, the SEC's long-time former Secretary, saw that and noted there was something weird at first glance. Under Section 12(k)(2)(C), when the SEC takes emergency action, it's exempt from the APA, including the Section 553 notice and comment period as well as the 30-day waiting period for effectiveness. However, the SEC's press release explicitly says that the action is taken under the APA. In comparison, the SEC's emergency order is silent on the APA.

For example, under the APA, a federal agency can skip both the notice and comment period and 30-day waiting period for effectiveness if it makes a finding that the action is unnecessary, impracticable or contrary to the public interest (for notice and comment) and a finding of good cause (30-day period for effectiveness). You may recall that the December 2006 executive compensation amendments were adopted under that standard as interim final rules.

I think the discrepancy can be explained - there likely was a shift in the SEC's thinking between the time of issuance of the press release and the later issuance of the emergency order, when the SEC decided to issue its new rules in the form of an emergency order from interim final rules, probably due to the fact that they just didn't have the time to crank out a full-blown release. The whole thing happened very quickly.

By the way, the SEC just banned all short selling in financial companies, similar to what the United Kingdom did yesterday.

The SEC's Investor Education Efforts During the Crisis: Ummmm

On Tuesday - the day that AIG was being bought by the government and the world felt like it was ending - the SEC retooled its home page to provide much more information directed towards the retail investor. I got excited because I had already fielded four calls from my mom and several of her friends about the annuities they had bought from AIG. Naturally, they were freaking out. A quick search online showed that the same question was being asked by millions around the country. No surprise there.

So what does the SEC do? It devotes the top half of its home page to market its "3rd Annual Senior Summit," an event to help seniors spot fraud (note that on Wednesday, nearly half of the SEC's home page was devoted to this summit; now, it's much less but it still is the top item). Normally that wouldn't even give me pause. I wondered to myself - this is what the SEC focuses on in the face of the gravest financial crisis of our lifetime?

But wait, maybe I'm saved as I spot this link on the right side of the home page: "What to Know About Equity-Indexed Annuities." You can read it for yourself to see if it would truly answer the types of questions being asked by those in distress right now. I guess this is what they mean by deregulation.

- Broc Romanek

September 18, 2008

The SEC Acts: Short-Selling and Rumor-Mongering

Yesterday, facing a cry to adopt a market-wide rule on naked short sales and rumor-mongering (see this Wachtell Lipton memo entitled "Today the SEC Must Step Up" from Tuesday), the SEC took several coordinated actions against “naked” short selling. This came in the form of an emergency order, thereby avoiding the typical notice and comment period of government rulemakings. The SEC's new actions became effective at midnight. Here is a statement from Chairman Cox and Enforcement Director Thomsen.

These actions apply to the securities of all public companies; compared to the SEC's temporary Emergency Order (that lapsed a month ago) which only applied to companies in the financial sector. Wachtell's new memo? "Too Little, Too Late."

In his "Race to the Bottom" blog, Professor Jay Brown provides some nice analysis of whether the SEC's emergency order violates the Administrative Procedures Act...

AIG to Be Renamed "NOSLAUP II, LLC"? Hint: "Paulson" Spelled Backwards

Some members wonder why the Federal Reserve only purchased 79.9% of AIG - was there any magic to it not going over 80%? As noted in this DealBook blog by Prof. Davidoff, the government can't purchase more than 80% of a company "because if it goes over the magical number of 80 percent, the company’s debts are then required to be consolidated onto the federal government’s balance sheet. Keeping it at 79.9 percent allows the government to maintain the fiction that it is still not responsible for the company’s solvency." Thanks to Tom Conaghan of McDermott Will for tracking this down.

A nice off-balance sheet play by the Feds. I guess they are trying to be like Enron. Maybe they should rename Fannie Mae "Raptor 6" and AIG "NOSLAUP II, LLC" (ie. "Paulson" spelled backwards).

Anyways, I can't wait to see the Fed file their Schedule 13D and all of their Section 16 reports.

Your Views on the Financial Crisis

- Broc Romanek

September 17, 2008

Completed! Lynn, Romanek and Borges' "The Executive Compensation Disclosure Treatise & Reporting Guide"

Broc and I are more than excited to be finally done with our comprehensive treatise of executive compensation disclosures: Lynn, Romanek and Borges' "The Executive Compensation Disclosure Treatise & Reporting Guide". This thing is massive, over 1000 pages long and it wouldn't have been possible without the help of our new co-author Mark Borges and our two co-editors, Julie Hoffman and Dan Greenspan.

It's great to have Mr. Borges as part of our Treatise team since he was able to lend his well-known experience and wisdom to the project. And of course, we thank the many of you that have sent us encouraging words (and ordered a copy).

We hope to have the online version of the Treatise up over the next week or so and it will take about a month to typeset and print the hard copy of the book. Remember that when you order the Treatise, you not only get the hard copy of the book - but you also get access to an online version of the Treatise. We'll let you know when the Treatise is online - as well as when we mail. Here are FAQs about the Treatise.

Order your Treatise now so we can rush it to you right after it's printed; remember there is a reduced rate if you are attending any of our Conferences.

Order online - or here is an order form if you want to order by fax/mail. If at any time you are not completely satisfied with the Treatise, simply return it and we will refund the entire cost.

Is it Friday Already? The AIG Bailout

Apparently AIG couldn’t wait around for the typical flurry of weekend meetings at the New York Federal Reserve and had to be bailed out on, of all days, a Tuesday. It just doesn’t seem to have quite the same dramatic flair as when the announcements are made on Sunday. But the bailout of AIG is quite dramatic, involving an $85 billion bridge loan and the nationalization of one of the largest insurance companies in the world. Under the terms announced last night, AIG has access to up to $85 billion through a Fed liquidity facility with a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. The government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders. Not the best of terms for AIG or its shareholders, but I guess beggars can’t be choosers. I note that $85 billion is more than twice the amount that AIG was seeking over weekend.

Why backstop AIG but not Lehman? It is certainly hard to say, other than apparently it was thought that Lehman could be unwound in an orderly fashion under Chapter 11, while AIG was at risk for a “disorderly failure.” At this point, there doesn’t seem to be a whole lot of consistency in the government’s approach, which could only spell more uncertainty for those institutions still standing.

Kevin LaCroix has provided a great summary of what we know so far in The D&O Diary blog. Kevin notes: “The problem for AIG is that sale of its non-core subsidiaries alone may not be sufficient to pay back even half of $85 billion. The Deal Journal blog estimates (here) that sales of AIG’s non-core subsidiaries and minority interests might raise ‘as much as $42 billion’ – and that, I might add, is before taxes. (I think Uncle Sam will insist on the payment of all applicable taxes.) Which raises the question whether the sale of ‘businesses’ specifically contemplates the sale of some or all of AIG’s core insurance operations?

Left unanswered in the Fed press release is the question of what this development means for AIG’s continuing business operations. The primary goal of the Fed facility is the orderly sale (as opposed to the ‘disorderly failure,’ as the Fed statement put it) of AIG’s businesses. What does this imply about the future of AIG’s operating companies? And what will be left of AIG after the ‘orderly sale’?”

Kevin raises a number of excellent questions that we will only know the answers to as the situation unfolds. Chief among the questions for me is why is the government now the majority owner of a major insurance company and what does it intend to do with its ownership interest?

Shell Companies and Rule 144

New paragraph (i) of Rule 144 has provided a framework for Rule 144 sales of shell company securities, but it has raised a number of questions and concerns for practitioners.

In this podcast, David Feldman of Feldman Weinstein & Smith discusses the latest developments with Rule 144(i), including:

- What are the principal concerns that have come up so far in implementing Rule 144(i)?
- What guidance did you seek from the SEC Staff and what did they say?
- What are some practical considerations for issuers now?
- What further adjustments to Rule 144(i) might be possible at this point?

- Dave Lynn

September 16, 2008

Xcel Energy’s Climate Change Disclosure Agreement

Late last month, New York Attorney General Andrew Cuomo announced that Xcel Energy has reached an agreement with the State of New York to provide more disclosure about risks that the company faces as a result of climate change. In the press release announcing the agreement, Cuomo is quoted as saying “[t]his landmark agreement sets a new industry-wide precedent that will force companies to disclose the true financial risks that climate change poses to their investors.” The agreement with Xcel comes out of an effort launched by Attorney General Cuomo last September, when his office issued subpoenas to Xcel and four other energy firms – AES Corp., Dominion Resources, Dynegy and Peabody Energy.

As I noted in the blog a year ago, a group of state officials, state pension fund managers and environmental organizations had submitted a petition to the SEC (which was supplemented in June 2008), asking for interpretive guidance clarifying that, under existing law, companies are required to disclose material information related to climate change. To date, it does not appear that the SEC has acted on this petition. Now, the New York Attorney General has sought to compel climate change disclosure in a company’s SEC filings without the help of the SEC. There is no doubt that the precedent of the New York agreement with Xcel may push other utilities - as well as companies in other industries who face similar climate change issues - toward more disclosure regarding climate changes risks.

Under the terms of the “Assurance of Discontinuance” with New York, Xcel has agreed to provide specific disclosures in its Form 10-K, including an analysis of financial risks from climate change related to:

- present and probable future climate change regulation and legislation;

- climate-change related litigation; and

- physical impacts of climate change.

Xcel also agreed to beef up its climate change disclosures in a number of other areas, including:

- current carbon emissions;

- projected increases in carbon emissions from planned coal-fired power plants;

- company strategies for reducing, offsetting, limiting, or otherwise managing its global warming pollution emissions and expected global warming emissions reductions from these actions; and

- corporate governance actions related to climate change, including whether environmental performance is incorporated into officer compensation.

It remains to be seen whether the New York action will prompt the SEC to move forward with any sort of rulemaking or interpretive guidance as suggested in the petition filed last year. It always strikes me as interesting when some entity other than the SEC is prescribing specific disclosures to be included in periodic or current reports. What happens if the SEC or the SEC Staff disagrees with the New York Attorney General on the materiality of this information and whether it is necessary for investors? It could put Xcel and other companies that follow Xcel's lead in a bind with Corp Fin when comments may be raised in the course of a Form 10-K review seeking to cut back or modify this sort of “mandatory” disclosure.

For more on this topic, be sure to check out our “Climate Change” Practice Area.

Big PIPEs: The New Weil Gotshal Survey

Weil Gotshal & Manges just published an inaugural survey of private investment in public equity (PIPE) transactions in which private equity sponsors, sovereign wealth funds and other financial investors invested $100 million or more, covering a total of 63 transactions (including 24 in the United States, 9 in Europe and 30 in Asia). The survey notes that 25% of the surveyed US transactions involved aggregate investments of greater than a whopping $5 billion, while almost half of the surveyed transactions involved aggregate investments of greater than $500 million! Many of the largest PIPEs were for investments in financial institutions seeking to bolster their capital. Interestingly enough, I notice that these very large transactions are rarely characterized as “PIPEs” when they are announced.

Of the United States deals surveyed, it is clear that PIPEs have served in some cases as vehicles for private equity sponsors to acquire significant (and sometimes controlling stakes) in companies. In this regard, some features of going private transactions have “migrated” to PIPE transactions. The survey notes that four recent PIPEs featured the retention of a “fiduciary out” by the board of the public company to accept a superior bid, and two included a “go-shop provision,” which permitted the board to solicit other bidders. While one of the transactions with a go-shop involved private equity sponsors acquiring a majority equity interest in the target company, another transaction only involved the acquisition of a significant minority interest.

At the other end of the PIPEs spectrum, US District Court Judge Graham Mullen in the Western District of North Carolina recently granted summary judgment to the defendant in SEC v. John F. Mangan, Jr., making things worse for the SEC in its cases against funds who sold short in anticipation of PIPE offerings. After the Securities Act Section 5 claims were dismissed last year, the case proceeded on insider trading claims that have now been shot down in this court. No word yet on the other two litigated PIPEs cases that remain out there.

Foreign Corrupt Practices Act: Latest Compliance and Investigation Developments

Tomorrow, catch our webcast - "Foreign Corrupt Practices Act: Latest Compliance and Investigation Developments" - to hear these panelists discuss all the latest developments regarding the FCPA:

- Paul McNulty, Partner, Baker & McKenzie, LLP, former Deputy Attorney General, U.S. Department of Justice
- John Soriano, Vice President-Compliance and Deputy General Counsel, Ingersoll Rand Company
- Jeffrey Kaplan, Partner, Kaplan & Walker LLP

- Dave Lynn

September 15, 2008

This Could Get Ugly: Lehman’s Bankruptcy and Systemic Risk

Late last night, Lehman Brothers announced that it intends to file for Chapter 11 bankruptcy protection of the parent company, Lehman Brothers Holdings, capping off a tumultuous weekend of negotiations to sell the bank, which ultimately failed when the government decided that it would not back-stop any deal. Apparently, the concept of “too big to fail” has its limits. It seemed only a matter of time for the government bailouts to reach an end, and unfortunately for one of the most storied investment banks on Wall Street, that time is now. If Lehman is liquidated as many seem to expect, it is truly a tragic end for an institution known for being capable of surviving many ups and downs over its 158-year history.

As noted in this WSJ article, the two leading contenders to save Lehman, Barclays and Bank of America, walked away when the government refused to provide financial support to any potential buyers. Bank of America didn’t walk away empty-handed though, picking up Merrill Lynch along the way for $50 billion – apparently Merrill Lynch saw the handwriting on the wall that it could be next. Meanwhile, AIG is struggling to raise capital as it faces a possible downgrade of its credit rating, taking the unprecedented step of trying to convince the Federal Reserve to lend it some of the $40 billion that it needs to survive.

Lehman’s imminent bankruptcy filing looked relatively certain by Sunday afternoon as no willing buyers emerged. The firm’s huge exposure in the credit derivatives market and in other derivatives led the ISDA to announce a “netting trading session” between 2 p.m. and 6 p.m. on Sunday. Under the protocol for the session, firms could seek other counterparties to take Lehman’s place on outstanding contracts as a means of beginning to unwind Lehman’s positions. But it appears that few contracts were offset through this process, and trades were conditioned on Lehman filing for bankruptcy before 11:59 pm New York time on Sunday. The SEC put out a statement last night, just a few hours before Lehman’s announcement, noting that it was taking steps to protect customers of Lehman’s broker-dealer subsidiaries. And the Federal Reserve announced some initiatives designed to increase liquidity, including allowing lower-rated collateral to be pledged to the Fed for borrowings.

While Lehman’s failure will certainly have an effect on the already jittery equity markets, I think that the big concern will be the extent to which the Lehman bankruptcy will damage the credit and derivatives markets, where Lehman’s exposures were huge. Presumably those same reasons that drove the government to push Bear Stearns into its shotgun wedding with JP Morgan are present with Lehman, including the potential for a shock to the credit default swap market of unprecedented proportions, as traders seek to unwind trades with Lehman in an environment where pricing may be difficult and where few counterparties may be willing (or able) to participate. Further, a back-to-back failure of AIG or another massive financial institution may have become more likely, now that it has been made abundantly clear that the government is not going to stand behind every deal. With many other Wall Street firms, commercial banks and presumably hedge funds facing capital crunches of their own, the large-scale orderly unwinding of Lehman’s positions that the Federal Reserve and Treasury appear to expect may prove difficult to pull off, raising the level of systemic risk in the financial system to what I think are unprecedented heights.

Now Effective: Changes to Form D

The amendments to Form D that the SEC adopted earlier this year are now effective, although electronic filing will remain optional until March 16, 2009. On Friday, the Corp Fin Staff put out a Small Business Compliance Guide on filing and amending a Form D, highlighting in particular the specific circumstances for when an amendment to Form D is – and is not - necessary. Under revised Rule 503 and the Form D instructions effective today, amendments to the Form D notice are required in the following three instances only:

(1) to correct a material mistake of fact or error in the previously filed notice (as soon as practicable after discovery of the mistake or error);

(2) to reflect a change in the information provided in a previously filed notice (as soon as practicable after the change), except that no amendment is required to reflect a change that occurs after the offering terminates or a change that occurs solely in the following information:

- the address or relationship to the issuer of a related person identified in response to Item 3 of Form D;
- an issuer’s revenues or aggregate net asset value;
- the minimum investment amount, if the change is an increase, or if the change, together with all other changes in that amount since the previously filed notice, does not result in a decrease of more than 10%;
- any address or state(s) of solicitation for a person receiving sales compensation;
- the total offering amount, if the change is a decrease, or if the change, together with all other changes in that amount since the previously filed notice, does not result in an increase of more than 10%;
- the amount of securities sold in the offering or the amount remaining to be sold;
- the number of non-accredited investors who have invested in the offering, as long as the change does not increase the number to more than 35;
- the total number of investors who have invested in the offering;
- the amount of sales commissions, finders’ fees or use of proceeds for payments to executive officers, directors or promoters, if the change is a decrease, or if the change, together with all other changes in that amount since the previously filed notice, does not result in an increase of more than 10%; and

(3) beginning March 16, 2009, annually, on or before the first anniversary of the filing of the Form D or the filing of the most recent amendment, if the offering is continuing at that time.

If you wish to try your hand at electronic filing over the next six months, it is necessary to first obtain a CIK and CCC number (otherwise known as a log in and password) in order to access the EDGAR system. If you choose to file in paper until electronic filing is mandatory, you can either use the old Form D, which has been revised slightly and is called “Temporary Form D,” or you can use the new Form D that contains all of changes to the information requirements adopted earlier this year.

The Staff has also provided this additional guidance on the Form D filing process.

- Dave Lynn

September 12, 2008

The Need for Hold-Til-Retirement Provisions

In the September-October issue of The Corporate Executive - which was just mailed - the primary focus of the issue was on the need for companies to implement hold-til-retirement provisions for equity awards and how to pick what's right for your company. With much help from Marc Trevino and Joseph Hearn of Sullivan & Cromwell, this issue contains a roadmap of the considerations you need to analyze when adopting these provisions.

In connection with this issue, we have updated our list of companies that we have identified as having hold-til-retirement requirements and the total is now over 40 companies (thanks to Equilar for helping spot some new companies). In comparison, at least two-thirds of S&P companies have some form of traditional stock ownership guideline, whereby executives are required to acquire and retain a certain value of company stock (usually a multiple of salary).

Thanks to Marc and Joseph, we have posted a slew of new sample documents in our "Hold-Til-Retirement" Practice Area on, including:

- Sample Reports to Shareholders Describing HTR Requirements

- Sample Proxy Disclosure of HTR Requirements

- Sample HTR Requirement Policies

- Sample Letters to Executives Announcing HTR Requirements

- Sample Agreements Incorporating HTR Requirements

In addition, we have posted a number of other illustrative documents courtesy of ExxonMobil.

The September-October issue of The Corporate Executive specifically includes articles on:

- "Hold 'Til Retirement" Requirements for Equity Awards: How to Pick and Implement What's Right for Your Company
- Forms of HTR Requirements
- Reasons to Adopt
- Addressing Potential Criticisms
- Ten Steps to Designing the Program That Is Right for You
- An Additional Comment on ExxonMobil's Approach
- Proposed Regulations for Section 6039 Returns
- Proposed Regulations for ESPPs
- A Roadmap to Comply with the SEC's New Regulation FD Guidance

Take advantage of a "Rest of '08 for Free" no-risk trial to have this issue sent to you immediately.

House Passes the Securities Act of 2008

Seventy-five years after passage of the “original” Securities Act, the House passed a bill yesterday titled the “Securities Act of 2008.” In a statement, SEC Chairman Cox applauded the House for passing legislation that seeks to enhance investor protections and provide more tools for the SEC’s enforcement program, noting that the bill incorporates recommendations that the SEC made to Congress. The bill was introduced earlier this summer by Representative Paul Kanjorski (D-PA).

It appears that the principal aim of the bill is to add provisions to the federal securities laws that would permit the SEC to assess and impose civil penalties in cease and desist proceedings, ranging in amount under a three-tier system from $65,000 to $650,000.

The remainder of the bill includes tweaks to a wide variety of provisions. For instance, the bill would authorize the SEC to censure, place limitations on the activities or functions of, or investigate any person who at the time of specified alleged misconduct was: (1) a member or employee of the Municipal Securities Rulemaking Board; (2) a person associated or seeking to become associated with a government securities broker or dealer; (3) a person associated with a member of a national securities exchange or registered securities association; (4) a participant of a registered clearing agency; (5) an officer or director of a self-regulatory organization; and (6) an officer or director of an investment company. In addition, the bill would amend the Exchange Act and the Investment Advisers Act to permit the SEC to bar certain persons from being associated with a broker, dealer, investment adviser, municipal securities dealer, or transfer agent who has engaged in alleged misconduct.

On the Corp Fin side of things, the bill would amend the Securities Act of 1933 to exempt from blue sky regulation any warrants or rights to subscribe to or purchase covered securities.

In addition to making amendments to the Securities Investor Protection Act, fingerprinting requirements and provisions relating to the nationwide service of subpoenas, the bill seeks to make a large number of technical corrections, some of which arising from the repeal of the Public Utility Holding Company Act. The bill would enhance protections for the confidentiality of material submitted to the SEC. Finally, a provision in the bill would require the SEC, the FASB, and the PCAOB to give oral testimony annually to the House Financial Services Committee on efforts to reduce the complexity in financial reporting.

- Dave Lynn

September 11, 2008

Just Posted: Notes from the 2008 JCEB Meeting with the SEC Staff

Be sure to check out these notes from the May 2008 meeting between the ABA’s Joint Committee on Employee Benefits and the SEC Staff. Mark Borges previously noted a number of the notable executive compensation disclosure interpretations coming out of this meeting in his blog, and several interpretations discussed at the May meeting were included in the Regulation S-K Compliance and Disclosure Interpretations posted in July.

The topics covered by the JCEB and the Staff go beyond Item 402 of Regulation S-K, and not all of the interpretations from the meeting make it into the Compliance and Disclosure Interpretations. The topics covered at this year’s meeting included Form S-8, Regulation S, Rule 701, Rule 144, Section 16 and the new Rule 12h-1(g) exemption.

On the Form 8-K front, the Staff noted that an Item 5.02(b) Form 8-K is not required when an executive officer is moved to a different executive officer position, unless the executive officer is moving into or out of one of the specified “principal officer” positions or is being demoted to a non-executive officer position. Further, the Staff confirmed that an Item 5.02(c) Form 8-K announcing the appointment of one of the specified officers must include disclosure about “any grant or award” made in connection with the event, even if it is a non-material, routine equity grant made to the officer at the time of appointment to the position.

The Freddie Mac and Fannie Mae Exit Packages

From Broc: As could be expected, the phone started ringing off the hook when it was announced that the government would be taking over Fannie Mae and Freddie Mac. These journalists posed the big question: what would the departing CEOs be taking home with them?

And they are not the only one posing the question - as this WSJ article notes, the Presidential candidates and some US Senators have weighed in by writing letters urging the Federal Housing Finance Agency to stop payment (the GSEs have their own regulator, the FHFA). Under a new law enacted in July, the FHFA has the authority to approve pay packages and prohibit or limit severance pay.

It's too early to tell what will happen - although some outsiders have made calculations regarding what they are entitled to. According to the WSJ article, in an interview with the PBS "Nightly Business Report" on Monday, the FHFA Director James Lockhart said, "We're not going to try to get part of the money back." According to media reports, it seems like one CEO seems willing to rein in his own package (and has hired his own lawyer with his own money) whereas the other doesn't appear as willing (and has hired his own lawyer with his former employer's money).

It is noteworthy that the new Freddie and Fannie CEOs "will have salary and benefits significantly lower than the old CEOs," which is great news since it's the type of leadership that Corporate America has been sorely lacking. Someone stepping up and not demanding the excessive pay of peers.

And what am I telling the journalists who call me? I explain how to implement a clawback provision with "teeth" - as laid out in our Winter 2008 issue of Compensation Standards. The WSJ article cites statistics of the growing numbers of companies with clawback provisions - but I wonder how many of those really have teeth to avoid the sort of media crisis that happens when a company falls in the toilet and the CEO heads off to the links.

By the way, check out the investor relations' home pages for Fannie Mae and Freddie Mac. Not a word - or link to something that mentions - the government takeover. And the IR profession wonders why it's importance is diminishing...

Establishing GAPP: Principles for Sovereign Wealth Funds

The recently-formed International Working Group of Sovereign Wealth Funds announced last week that it has reached a preliminary agreement on a draft set of Generally Accepted Principles and Practices (GAPP), otherwise known by the catchier name of the “Santiago Principles.” The IWG was set up back in May to establish a set of voluntary standards for governance, accountability and investment practices of sovereign wealth funds. Now, the group has come up with principles and practices that the group says will “promote a clearer understanding of the institutional framework, governance, and investment operations of SWFs, thereby fostering trust and confidence in the international financial system.”

As noted in this transcript of the press conference announcing the Santiago Principles, the governance and accountability arrangements are geared toward providing comfort that sovereign wealth funds are separate from their owners, and that “the investment policies and risk management together with other things are intended to make it clear that sovereign wealth funds act from a commercial motive and not other motives.”

The GAPP will be presented to the Internal Monetary Fund’s International Monetary and Financial Committee on October 11th, once the respective governments with funds making up the IWG have had a chance to consider the preliminary recommendations. After that, the group expects to make the principles publicly available.

Tune into the webcast – “The Rise of Sovereign Fund Investing” – on October 2nd to find out about the latest strategies and investment techniques used by sovereign funds, as well as the latest issues raised in doing these types of deals.

- Dave Lynn

September 10, 2008

An Insider’s Perspective: How to Avoid a Yahoo-Like Tabulation Nightmare

As part of the Fall issue of, I got to spend some quality time with my good friend, the independent inspector Carl Hagberg to conduct an interview entitled, "An Insider’s Perspective: How to Avoid a Yahoo-Like Tabulation Nightmare." In the interview, we get access to Carl's many years of experience to better understand how the tabulation and inspection processes work. As borne out by the media attention to the voting result snafu at last month's Yahoo annual meeting, this could be wisdom that saves you from a needless crisis at your own shareholder meeting. In Yahoo's case, Carl explains how that snafu could have been easily avoided.

If you try a no-risk trial for for 2009, you get access to this Fall issue for free. Note that membership rates are very reasonable, starting at $295 for a single user through the end of '09. And membership gets you free admission to the upcoming webconference: "The SEC's New Corporate Website Guidance: Everything You Need to Know – And Do NOW."

If you already have received an ID/password for this year, you can renew your membership for 2009 now (and get free access to this webconference, etc. for another year).

Survey Results: Disclosure Committees

Back in mid-2004, we conducted a survey on disclosure committees (here are those older results) - we recently canvassed folks again on this topic and here are the results:

1. Our company:
- has a disclosure committee - 97.8%
- doesn't have a disclosure committee - 2.2%

2. Our disclosure committee has:
- more than 10 members - 37.2%
- between 8-9 members - 27.9%
- between 6-7 members - 27.9%
- between 4-5 members - 6.9%
- has less than 4 members - 0.0%

3. Our disclosure committee has the following types of members:
- CEO - 18.2%
- CFO - 70.5%
- Controller - 93.2%
- General Counsel - 75.0%
- Securities Counsel - 79.6%
- Compliance or Risk Management - 36.4%
- Investor Relations Officer - 77.3%
- Internal Auditor - 68.2%
- Officer from a Business Unit - 50.0%
- Other - 63.6%

Comparing the two surveys, it looks like the size of the disclosure committee has grown slightly (not surprising given the SEC's 2006 exec comp rule changes that likely brought in some new members) - and more internal auditors joining the committee and some CEOs dropping off...

Please take a moment to take this "Quick Survey on CEO Succession Planning."

- Broc Romanek

September 9, 2008

Our Roadmap: How to Comply with the SEC’s New Regulation FD Guidance

I just wrapped up the Fall issue of, which includes an article entitled, "Our Roadmap: How to Comply with the SEC’s New Regulation FD Guidance." The article doesn't merely summarize what the SEC just issued - it goes far beyond that. It includes numerous specific examples of what you should - and should not - be doing to comply with the SEC's new guidance.

In particular, the article provides detailed implementation guidance about how you can build a “recognized channel of distribution” and “broadly disseminate” under the SEC's new guidance. Among other topics, I address:

- Website Marketing and Maintenance: The Disclosure Committee’s Role
- The IR Web Pages: Search, Design and Accessibility
- The Challenges of Media Awareness
- Web 2.0: Pushing It Out

If you try a no-risk trial for for 2009, you get access to this Fall issue for free. Note that membership rates are very reasonable, starting at $295 for a single user through the end of '09. And membership gets you free admission to the upcoming webconference: "The SEC's New Corporate Website Guidance: Everything You Need to Know – And Do NOW."

If you already have received an ID/password for this year, you can renew your membership for 2009 now (and get free access to this webconference, etc. for another year).

Did Bill Gates Wiggle His Tush? That's Some Nonverbal Communication

Not many marketing types think highly of the new Microsoft advertisement featuring Bill Gates and Jerry Seinfeld (see this WSJ article). Personally, I liked it - particularly when Jerry fitted Bill's feet for shoes. A size ten!

If you haven't seen it, the TV commercial ends with Jerry soliciting nonpublic material information from Bill regarding whether Microsoft will be launching edible personal computers that are moist and chewy in the future. He asks Bill to give him a "sign" if something big is on the horizon, something like adjusting his shorts. And then Bill wiggles his tush.

This presents a perfect example of the type of nonverbal communication that Regulation FD applies to. I'm sure some of you remember the SEC's 2003 enforcement case against Schering-Plough which focused on nonverbal cues. In that case, the company's then-CEO disclosed "negative and material, nonpublic information regarding the company's earnings prospects" at private meetings "through a combination of spoken language, tone, emphasis, and demeanor." Bill, keep those hips in check!

The Impact of Regulation FD on the Flow of Information

A while back, ran this article that described a 2007 study on Regulation FD, which concluded that investors received less information after the adoption of the disclosure rule compared to before it. Given that growing numbers of companies are foregoing earnings forecasts, I can believe the report's findings.

- Broc Romanek

September 8, 2008

21st Century Disclosure: Grundfest and Beller Weigh In with "Evergreen" Questionnaire

Back when the SEC announced its new "21st Century Disclosure Initiative" at the end of June, Chairman Cox credited former SEC Commissioner Joe Grundfest and former Corp Fin Director Alan Beller with originating the idea (which was named "Project Alpha" back in the day). Now, Joe and Alan have published a brief 8-page summary of their model for reinventing the SEC’s disclosure system (they plan to expand it into a more extensive article later).

With a somewhat dramatic flourish, Grundfest and Beller suggest that the SEC should abandon “all vestiges of the world of paper-based filings” in favor of a Web-based questionnaire. This questionnaire would replace the forms-based filing framework that currently exists (and could be accomplished without any legislative action or change to liability standards). Here is a summary of their summary:

- On-line questionnaire would be comprised of a combination of yes/no responses, pull-down menus, predefined fields and narrative responses; many of the questions would require "free form" narrative disclosure (e.g. MD&A).

- Going forward, companies would only need to update any items that have changed since the last reporting period - there would no longer be a need to repeat unchanged information.

- When a change occurs, this would be highlighted - so period-to-period comparisons would be possible.

- All exhibits would be centralized in a single location.

- Companies wouldn't need to file their questionnaire responses directly with the SEC - rather they would post the responses either on an SEC website or on their own websites, with a ‘hash' that authenticates the document as well as the date and time of posting.

The notion of "company-based disclosure" rather than periodic or current reporting is not a new one. It's been battered around for quite a while. But with the Web facilitating things, it's exciting to see that the SEC is seriously considering such a radical change. The SEC will be holding its first roundtable on the "21st Century Disclosure Initiative" in October.

My Ten Cents: "21st Century Disclosure Initiative"

Here are a few of my thoughts on the general notion of reforming the periodic/current reporting regime (note these do not relate to the Grundfest/Beller model specifically):

1. Don't Overpromise Savings - Whatever ideas are floated to change the reporting regime, don't sell it as a cost-saver. Even if you cut out the financial printers, etc., there will be new vendors that will have to be paid. And the time that lawyers haggle over language will continue to exist in bountiful numbers.

2. Don't Underestimate Technological Challenges - If my memory serves, some of these ideas were kicked around back in the mid-90s when I was at the SEC. One hurdle that continued to pose insurmountable problems was how to enable companies to avoid filing all of their disclosure with the SEC. One of these concerns was security - can companies (or their vendors) post information on their own websites in a manner that couldn't be hacked? Another type of example - Dominic Jones recently wrote about a possible tech snafu with the SEC's XBRL proposal.

3. The Tricky Issue of Duty to Update - If a new regime requires companies to post their disclosure on their IR web pages rather than in the form of a Form 10-K and Form 10-Q, consider what investors will expect? Even if the SEC adopts rules clearly stating that this disclosure is not subject to a duty to update except on a quarterly basis (or more frequently for Form 8-K-like items), investors won't necessarily know - or care - about that - particularly retail investors. They will be expecting the information they read on a company's site to be current.

4. Cut to the Chase for Investors - This point really is the bottom line. If the SEC is gonna bother to rework their reporting regime, I think the focus should first be on delivering the type of information that investors covet most - i.e. forward-looking information, what is the company's strategy going-forward, how is employee morale, a sense of what management is really like, do the directors really kick the tires, etc.

In other words, only a few discrete pieces of Reg S-K have been updated since the movement to integrated disclosure thirty years ago. Why not focus on whether the required information is still material in this day and age and whether the information is what investors truly want, rather than keep tinkering around with how the information gets delivered?

These are really tough issues to parse and have been tackled before. But this should be the starting point for the discussion and debate. I fear that the SEC may focus on "form" rather than "substance"...

- Broc Romanek

September 5, 2008

The Other Side(s) of the FAS 5 Coin: Auditor and Investor Viewpoints

A few weeks ago, I blogged about how lawyers were not happy about the FASB's proposal to reform FAS 5. Now that the comment period has expired, the views of the auditors and investors are available - some of which side with lawyers (and management) and most of which that don't. For example, ran this article that summarized some of the objections.

Former SEC Chief Accountant Lynn Turner tells me: "The comments from the investor community are solidly in the camp favoring complete and timely information on loss contingencies. Now it is the unenviable task of the FASB to decide which camp they are in as their proposed statement was strongly supported by investors, and is consistent with their own conceptual framework. The question is whether the FASB will now water down what they have proposed.

As several of the investor comment letters note, it appears some companies are not currently complying with the current standards which raise the question of where is the enforcement. This issue also highlights that is probably not correct to say that there is an "expectation gap" difference between companies and their auditors and those in the investment community, as much as there is an out right ideological difference on what management of companies should have to report and disclose to the owners of the business.

And in the past, when on statements addressing such issues as off balance sheet SPEs, derivatives (No. 133), stock options (No. 123) and leasing, and the FASB chose to give companies what they asked for, it always seemed to come back to kick them on the backside when those standards had significant shortcomings or outright failures as a result of the compromises made."

Here are other notable comments and analysis:

- CFA Institute

- Deloitte & Touche

- PricewaterhouseCoopers


- BDO Seidman

- Grant Thornton

- AICPA's Accounting Standards Executive Committee

- AICPA's Private Companies Section



- Investors Technical Advisory Committee

- John Feeney's " Blog"

- Francine McKenna's "Re: The Auditors" Blog

The Intersection of Rule 701 and Section 409A

Getting lots of great feedback on the new "The Advisors' Blog" on, with new content from the 30-plus experts being posted daily. Yesterday, Gregory Schick of Sheppard Mullin blogged a great piece on the intersection of Rule 701 and Section 409A. Below is an excerpt from that blog:

The potential securities law compliance issue that is the source of my musings relates to Rule 701 of the Securities Act of 1933. Rule 701 is the easiest and primary way that companies obtain exemption from the registration requirements of the Act with respect to their compensatory stock options. Rule 701 imposes numerical limitations on the magnitude of equity securities that can be issued in reliance on Rule 701 in a twelve month period.

In particular, the aggregate sales price or amount of securities sold in a twelve month period cannot exceed the greater of: (i) $1 million, (ii) 15% of total assets or (iii) 15% of outstanding securities. Moreover, if relying on either (ii) or (iii) and the aggregate sales price of Rule 701-issued securities exceeds $5 million, then Rule 701 requires that additional disclosures (in essence, a prospectus) be provided to grantees. Such additional disclosures need to have been provided to grantees before they exercised their Rule 701 options and acquired shares.

The sales price for stock options awarded for purposes of these numerical tests is computed at the time of option grant and is calculated by multiplying the number of option shares by the per share exercise price. The SEC's April 1999 adopting release of amendments to Rule 701 provides that "In the event that exercise prices are later changed or repriced, a recalculation will have to be made under Rule 701."

Normally, such a recalculation would be performed (with favorable results) when there is an option repricing to lower the exercise price to equal a share fair market value that has declined since the grant date. But, what about if the option is repriced upwards in order to accommodate 409A? Presumably, options whose exercise price is increased to avoid being treated as a discounted option under 409A must also be recalculated for purposes of Rule 701 using the higher option exercise price. Would the recalculation be retroactively performed for the period when the initial grant was made or would the value of the amended option be included in Rule 701 numerical analysis as of the date of the amendment?

In either case, the effect of such an upward adjustment could result in the aggregate sales price exceeding the $1 million and/or total assets thresholds of Rule 701 whereas computations applying the pre-adjusted exercise prices did not. And, perhaps even more troubling, if the Rule 701 $5 million threshold was breached as a result of the recalculation, it could be problematic or even impossible for the company to comply with the additional disclosure requirements imposed by Rule 701 since it is quite possible that some grantees may have already exercised their stock options absent the benefit of the requisite additional disclosure.

Private companies that have increased their option exercise prices in order to comply with 409A may want to also re-examine their compliance with the numerical limitations of Rule 701 particularly if they are considering going public or being acquired since their historical securities law compliance will come under closer scrutiny. While it is possible that the company may be able to avail itself of another exemption under the Act (e.g., Regulation D for certain qualifying option grants), will these recurring 409A-related headaches never end?

The Battle Over Online Ratings

A while back, I blogged about the initial unhappiness over Avvo's rating system - that service has evolved since then and seems to be doing well with consumers (and the litigation has been dropped). Now, the "Wired GC" Blog describes the latest dust-up regarding ratings involving TheFunded, a site that purports to offer information on VC firms and deal terms from anonymous entrepreneurs. This dispute involves anonymous online feedback...

- Broc Romanek

September 4, 2008

The SEC's New Corporate Website Guidance: Everything You Need to Know – And Do NOW

I'm pretty excited about our upcoming webconference for "The SEC's New Corporate Website Guidance: Everything You Need to Know – And Do NOW." The agenda is jam-packed, ranging from the SEC's Corp Fin Chief Counsel Tom Kim - to online experts Dominic Jones and Ryan Lejbak - to legal wunderkinds John Huber and Stan Keller, and many more.

This webconference will not just parrot the SEC's new guidance (as most firm memos have done). Instead, all of the panels will provide detailed analysis and guidance about how to implement the SEC's new positions. They will explore what the possibilities now are for companies - and how you can (and should) leverage them.

If you try a no-risk trial for for 2009, you get access to this webconference for free (including the upcoming Fall issue of our quarterly newsletter, in which I provide a detailed roadmap of how you can comply with Regulation FD under the SEC's new guidance). Note that membership rates are very reasonable, starting at $295 for a single user through the end of '09 (this gets you this webconference as well as the quarterly newsletter, and more to come on the site).

If you already have received an ID/password for this year, you can renew your membership for 2009 now (and get free access to this webconference, etc. for another year).

Here Come the E-Forums!

It appears that some companies intend to take advantage of the SEC's new rules clarifying how to apply the securities laws to e-forums. This will be surprising to many who predicted that only investors would be sponsoring e-forums.

For example, Amerco has used an e-forum for its annual shareholders' meeting the past two proxy seasons (see this description from the first year). And Michael O'Brien of iMiners (who will be speaking at our webconference) notes in his blog that Oxygen Biotherapeutics will soon be launching an e-forum via iMiners’ turnkey eShareholderForum solution. Looks like the smaller companies will be leading the way here.

Broadridge's New Social Network?

Kudos to Dominic Jones of IR Web Report for catching Broadridge's announcement about a proposed social network/e-forum called "Investor Network" during the company's August analyst conference call. Chuck Callan of Broadridge will be explaining what this is all about at our upcoming webconference.

Below is an excerpt from an unofficial transcript of the conference call; scroll down for the portion that deals with the social network since I included additional comments at the top because they seemed interesting as well:

Rich Daly (CEO of Broadridge): Now, let's move on to the business segment overview. I'll start with our largest segment, Investor Communication Solutions. As I mentioned earlier, the ICS segment represents over 70% of Broadridge's revenue and operating profits. We anticipate fee revenue growth for this segment in a range of 5% to 9% which feels great. Overall revenue growth will be in a range of 2% to 4%, but that's just given the decline in postage.

We are anticipating close sales in a range of $100 million to $110 million, of which 50% is expected to be recurring and 50% is expected to be event-driven. Event-driven sales will primarily be related to mutual fund proxies. For the second year in a row, we're expecting solid sales for both registered equity proxy and transaction reporting, which we expect will drive our recurring sales activity.

Our strategic leadership around Notice & Access in the core communications business has increased the chasm between Broadridge and our competitors. Our leadership in Notice & Access has resulted in industry-wide savings of an additional $140 million. The 600 or so companies that took advantage of the program realized significant savings in postage and print costs. Our industry leading Notice & Access solution gave us entre to sell our registered proxy services to over 350 new companies increasing our client count by 45% to approximately 1,200 public companies.

Despite the industry's financial success from Notice & Access, the reduced rate of voter participation by retail shareholders that resulted remains an industry challenge, but it's an opportunity for Broadridge to once again provide industry leadership. Notice & Access has had a slightly better financial impact on Broadridge than we originally anticipated. This was primarily due to winning new clients for our registered proxy services as well as selling a greater percentage of the ancillary services that are required to support Notice & Access.

Although other vendors offer these ancillary services, we believe we had a higher win ratio because of our strong one-stop shop value proposition and our subject matter expertise. In fiscal year 2009, we're anticipating a 40% adoption rate for Notice & Access. The fact that we ended a full year with an adoption rate of 28% and we had an adoption rate during our fourth quarter proxy season of 31%, lead us to believe that 40% is a reasonable estimate.

Event-driven revenues are anticipated to be virtually flat to slightly down this year given the current economic environment we're still in. Although we're in a down market, we don't expect to see the fall off in event-driven revenues that we experienced in fiscal year 2003, when it was down 30%. In fiscal year 2008, we did see a decline in proxy contest and M&A activity. However, the changes in mutual fund regulatory focus requiring more activity, our market share gains and our new products in the mutual fund space lead us to believe that there will be less volatility than we experienced in the past. As we exit this down market, we anticipate we'll get back to realizing the greater than 10% CAGRs and event-driven revenue we experienced before in the past.

Now, I'll talk about a few other product opportunities in this segment. Summary prospectus is a pending regulatory change related to how investment companies communicate with investors. It could result in mutual fund prospectuses going from 20 plus pages today down to, say, five or so pages. Although the regulatory change would most likely have a negative impact on our pick-and-pack fulfillment business, the change could drive opportunities for our print-on-demand business. Directionally, we view it similarly to the way we saw the Notice & Access regulatory change.

Our Investor Mailbox product which is part of our e-delivery solution is designed to streamline multiple delivery channels into a single visit financial portal that investors find on their broker's Web site. This product is having a positive impact by converting investors from traditional hard copy delivery to electronic delivery. Investor Mailbox has been the primary driver for increasing our electronic delivery rate for proxies from 47% to 52% this fiscal year.

I believe one of the new and exciting opportunities is around what we're calling the Investor Network. It's really unusual for us to be talking about something so early in its development, but the range of this opportunity could be anything from negligible to a unique and meaningful financial social network which could be really big. The Investor Network is an online electronic form that will facilitate shareholder to shareholder communications with a unique feature that will differentiate it from the chat rooms in existence today. Investors who use our Investor Network will be validated as real shareholders. This feature will not only enhance shareholder to shareholder communications, but it will provide a new channel of communication between shareholders and companies.

When the SEC expressed a desire to enable better communications between shareholders using today's online technology, Broadridge stepped up to help provide a workable solution by leveraging our unique capabilities. The Investor Network will validate shareholders through the core plumbing of the Investor Communications segment while allowing institutional, retail and professional investors to remain anonymous. We are uniquely positioned to create a vibrant social network that validates real shareholders while allowing both anonymity and accountability for any statements made online.

Through providing industry-wide technology-based solutions for Notice & Access, summary prospectus and the new Investor Networks, we continue to demonstrate that we are in the communications solution business and it's so much more than merely an ink on paper or physical distribution business.

Operator: Our next question will come from Leo Schmidt with the Chubb Corp.

Leo Schmidt - Chubb Corp: First of all, very good quarter gentlemen. Could you give us a little more insight into this new product you’ve been talking about? I know you’ve been talking about growing sales through acquisitions and then through products you invest to networks. Could you give us some insight how big that you think you could grow that? Could you explain a little bit how that works? Would that be something that investors would pay for, companies would pay for, would this be mandated by the SEC? Would you page your goal or could you give us a little sense of how that works and I’m assuming the incremental cost would not be that much bigger additive to revenues? Could you give us some sense to that?

Rich Daly: Okay. Well, the first thing I’m going to give you the sense of, is really hard to say this early. I took the unusual step and we actually talked about it internally here, but I took the step of talking about it now since we will be meeting with so many new entities out there on this topic. I really had a need to make it public completely. So far, the experts we are working with view it as on a range as – some of them think, well, maybe it will work, maybe it won't, maybe it will just be another social network. To some of them, their eyes bulge open and say, wow, this could really be a game changer.

The activity here is really going to be driven by, is the SEC going to deem that this is something that shareholders need to have the right to. And if that was the case, then I can't imagine at getting done any other way than through the plumbing we have in place, and again that's a chasm between us and any one else, no one else is close to connecting every investor to every public company.

If this is going to be something where it's on a shareholder opt-in basis only, then the validation process becomes a little more complicated, but again we are uniquely positioned to create that validation. And that would be, I'll called it, a more evolutionary process where we take longer for the network to gain hold.

Now, depending on which way it happens is depending on who will pay and what the model will be. If it's an opt-in model, I expect it's going to be probably similar to an eyeball model where there is going to be advertising, et cetera. If it’s a right of shareholders, then it could be a combination of fees and banner advertising or other related activities. We have a significant number of people internally and externally working on this. We are looking to use the best mind on this activity outside of here. But let me be very clear. I think it's upside, I think there's very little downside, but we're certainly not putting anything in any numbers we are representing to you to related to the future as it relates to this activity. But it is meaningful enough that if it was to become a real deal, we would be uniquely positioned with a high quality social network with real investors who are validated accountable and have an amenity, and I will call it a place where serious people could have serious conversations about their investments.

Leo Schmidt - Chubb Corp: I am assuming that some regulator somewhere has made noise about how making this happen and this is part of the reason why you have interest in this. This is not -- is that a fair assumption?

Rich Daly: I have had meetings with the SEC staff and the chairman of the SEC on this topic.

- Broc Romanek

September 3, 2008

The Mad Rush: Changing Your Advance Notice Bylaws

Now that the Delaware Supreme Court has affirmed the Chancery Court's decision in Jana Partners (as well as the holdings in the Office Depot and CSX cases), as noted in this article, a number of companies are now crafting bylaws designed to flush out the actual size of activist stakes.

In the article, Professor Charles Elson notes that he wouldn't be surprised if more than half of all US companies revise their advance notice bylaws in time for the 2009 proxy season. Tune in on Thursday for this webcast - "How to Change Your Advance Notice Bylaws" - so that you will be able to fully evaluate what you should be doing now.

This webcast is important because advance bylaw provisions are not boilerplate. Even if two companies have identical language in their advance notice bylaws, they may operate differently because companies in their shark repellent arsenal may (or may not) allow shareholders to call special meetings or act by written consent, etc., and because many companies have adopted a majority voting standard.

Here are a dozen questions that the panelists will be addressing during the webcast:

- Should companies that have their bylaws tied to the mailing of the prior year's proxy statement consider revising their bylaws?
- What do the Delaware cases say about how long the advance notice period can be?
- How should companies deal with the interplay between Rule 14a-8 and their advance notice bylaws?
- In the wake of the CNET and CSX cases, are companies starting to incorporate the concept of "cash-settle only" and similar derivative instruments into their advance notice bylaw provisions?
- If so, how broadly are such concepts applied in their bylaws?
- Are you seeing companies incorporate the swap and derivatives concept into their poison pills?
- Are there any loopholes in these organic shark repellent provisions that the courts have not addressed?
- Are you seeing hedge funds and their investment banking and other institutional counterparties starting to shy away from total return swaps and similar derivatives arrangements in view of the CSX case?
- Apart from the recent judicial decisions, what mistakes do targets sometimes make with respect to their advance notice bylaws?
- What are the SEC Staff's views on what is happening?
- At the end of the day, are the decisions in Openwave, C-Net and Office Depot contract construction and drafting error cases - or do they speak more broadly to Delaware corporate policy?
- Are folks over-reacting to all of this?

How Common are Rule 10b5-1 Plans that Buy?

In Bruce Carton's new "Securities Docket," he carries this item about a founder and chair of a company that has set up a 10b5-1 plan to buy his company's stock because he believes it's undervalued.

It's not uncommon for companies to set up 10b5-1 plans to buy, but it is for executives. In talking this over with Alan Dye and Dave, this certainly isn't a "first of its kind," but it is rare. Slightly more common are 10b5-1 plans for directors to help them meet their stock ownership guidelines.

Our September Eminders is Posted!

We have posted the September issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!

- Broc Romanek

September 2, 2008

With Much Applause: DOJ Revises Attorney-Client Privilege Guidelines

Last Thursday, the DOJ released a new set of guidelines regarding how it would charge companies. The new guidelines are effective immediately and they revoke earlier - and heavily criticized - guidelines issued under then-Deputy Attorney General Larry Thompson, which were then subsequently revised by then-Deputy Attorney General Paul McNulty. Here is the DOJ press release - and remarks from Deputy Attorney General Mark Filip.

The new guidelines parallel the legislative proposals contained in the reborn "Attorney-Client Privilege Protection Act of 2008," which has passed in the House and pending in the Senate. So we ponder the big question: whether the new guidance sufficently protects the attorney-client privilege and work product protection, or whether congressional legislation is still desirable?

Apparently, the sponsor of the legislation thinks so. Sen. Arlen Specter issued a statement Thursday that says: “The revised guidelines are a step in the right direction but they leave many problems unresolved so that legislation will still be necessary. For example, there is no change in the benefit to corporations to waive the privilege by giving facts obtained by the corporate attorneys from the individuals in order to escape prosecution or to have a deferred prosecution agreement. The new guidelines expressly encourage corporations to comply with the waiver and disclosure programs of other agencies including the SEC and EPA. Legislation, of course, would bind all federal agencies and could not be changed except by an Act of Congress.”

Potential Ramifications for Tandy Language?

In his statement approving the DOJ's actions, ABA President Thomas Wells noted that the SEC was among the agencies with policies that pressure companies to waive their legal privileges. Others have expressed the same sentiment.

In talking to Dave, I think what they are talking about is the SEC's "cooperation" policies as articulated in the Seaboard case - but it does raise an interesting question about the Tandy language that companies are "required" to include in their comment letter responses. That language is asking the company to waive a potential defense basically in return for processing the filing - which isn't much different from making things easier on a defendant on the enforcement side for waiving attorney-client privilege. Might this spell the end of Tandy language in comment letter responses?

2nd Circuit's Decision: Advancement of Legal Fees Protected

By coincidence, the Second Circuit Court of Appeals rendered its decision in US v. Stein also on Thursday, upholding Judge Kaplan's dismissal of the indictments against thirteen defendants. The Court of Appeals upheld Judge Kaplan's ruling that the government deprived the defendants of their right to counsel under the Sixth Amendment by causing KPMG to place conditions on the advancement of legal fees to defendants-appellees, and to cap the fees and ultimately end them.

SEC Adopts Changes for Cross-Border Business Combinations, Exchange Offers and Rights Offerings

Last Wednesday, the SEC approved a host of changes to the exemptions for M&A transactions and rights offerings at an open Commission meeting; here are opening remarks from Tina Chalk of Corp Fin. On our " Blog," we posted a summary of these changes last week.

- Broc Romanek